Amid fanfare a year ago, El Salvador announced its ambitious plan to adopt Bitcoin as a national co-currency. In the following months, it declared to create Bitcoin bonds and a special Bitcoin City.
Interestingly, when the Bitcoin plans were announced on September 7, 2021, Bitcoin’s (BTC) price was $46,811.13. But exactly a year later, on Wednesday, it was down by over 50 per cent to $19,290.32, according to Coinmarketcap data.
As of July this year, El Salvador reportedly had 2381 Bitcoins at an average buying price of $45,171.
The Year-Ago Story
El Salvador announced its Bitcoin plans with much funfare. The news made waves as the crypto market was on a high and everything looked optimistic.
In September 2021, El Salvador President Nayib Bukele said the country could save about $400 million in currency remittance fees annually if it stopped using traditional remittance and payment service providers.
To do that, he adopted Bitcoin as a legal tender and launched a crypto wallet called Chivo, powered by Latin American crypto exchange Bitso. The exchange provides El Salvadorians with a commission-free transfer and payments experience both in BTC and the US dollar.
Bukele also announced plans for an ambitious Bitcoin city in November 2021, along the Gulf of Fonseca, near a volcanic mountain, the possible site of a geothermal power plant to provide energy for the Bitcoin city and Bitcoin mining. This coincided with the Bitcoin price crossing the $60,000 mark around November 2021.
To finance the plan, Bukele said his government would issue $1 billion worth of ‘Bitcoin bonds’ using a tokenized instrument solution developed by Blockstream on the liquid network. Bukele stated that he would buy Bitcoin for $500 million and use the other $500 million for Bitcoin mining and energy infrastructure building.
A Year Later: What Went Wrong?
A year later, that experiment seems to be going nowhere. According to an investigative report by Reuters, “No heavy machinery, construction workers, or raw materials to indicate any progress towards building this grand symbol to bitcoin,” referring to Bitcoin city, the biggest symbol of El Salvador’s ambitious plans.
According to Sharat Chandra, vice president of research and strategy of EarthID, a decentralised identity management company, El Salvador’s approach to Bitcoin adoption was right, but it ventured into other areas without proper planning.
“El Salvador was right in adopting Bitcoin as a medium of exchange since the country has no currency of its own and depends upon the US$. This helped them get foreign remittance from its citizens working abroad without much charge, but later decisions like Bitcoin City, Bitcoin Bonds (which saw scarce participation) were made enthusiastically and without much strategic planning. The idea was good, but the plan to execute it was done in a hurry, and hence those ideas did not get much traction,” added Chandra.
Some experts still hope for a turnaround on the strength of the idea. According to Hitesh Malviya, founder of itsblockchain.com, India’s oldest cryptocurrency,and blockchain media publication website, “El Salvador was right in using the Bitcoin city plan to attract investors and crypto economy talent in the country and promote tourism, and if the city plan does go through, it can boost El Salvador’s GDP.”
According to a report in The Fortune in August 2022, El Salvador’s $1 billion Bitcoin bonds face two key challenges: the lack of investor interest in these bonds and legal and legislative hurdles in parliament.
Bitfinex and Tether’s CTO (chief technology officer) Paolo Ardoino, who is closely working with the El Salvador government, said in the article that the government officials had told him the legislative issue could be solved by September.
What’s The Future?
What happens to the country’s future and its bitcoin bet depends on which way the crypto markets take.
“In the near future, if Bitcoin’s price goes up, to say $1,00,000 or more, then El Salvador’s Bitcoin bet does work, and other countries who have no own currency may adopt Bitcoin as a legal tender and follow El Salvador’s path,” says Malviya.
If the crypto markets remain as volatile as they are now or fall further, it goes without saying that the El Salvador case will be cited as a bad example. Even in the past, many experts have called such a move highly speculative and risky.
“Bitcoin is a volatile asset since its price is influenced by factors like geo-political crises, economic situations, and others. For example, the Russia-Ukraine war, Taiwan-US, inflation, US Fed raising interest rates, (and) others have influenced Bitcoin’s price. I feel the price may also go (up) to $10,000 in the near future if further such events occur,” added Chandra.
Malviya, though, feels the probability of such a complete fall is low. “It all depends on the time the crypto market takes to recover from the current recession, inflationary and other factors. El Salvador’s economy has to survive this hardship in market conditions to reap benefits of a possible crypto market rebound.”
It’s also a question of survival and sustaining through the bear phase in the crypto market. “El Salvador has to survive the crypto downturn, and then only its bet might bear success,” added Malviya.
Bitcoin has no bottom price level and heavily relies on global cues to judge its price. El Salvador reportedly bought 80 Bitcoins in July when the price had fallen to around $19,000.