Almost year ago Sunday (June 5), President Nayib Bukele announced El Salvador would make bitcoin a legal tender, on par with the U.S. dollar.
With bitcoin at $36,000 on that day, things looked even better on the morning of Sept. 7, when the law went into effect, with the cryptocurrency over $52,600. That evening, not so much. Bitcoin dropped almost $10,000 during the day, rebounding to $46,800, and popping up past $68,000 two months later. On its anniversary, bitcoin was hovering below $30,000.
That’s the least of El Salvador’s problems with its national cryptocurrency. Plans for a highly touted $1 billion bitcoin-backed bond — at rates well below traditional sovereign debt and incorporating a mechanism that would pay well if bitcoin blew up — have fizzled.
And with it, the country’s chances of making the $800 million eurobond payment coming due in January 2023 without the help of the International Monetary Fund (IMF).
The IMF had been relatively close to agreeing to a $1 billion loan to cover the bond payment before the decision to make a highly volatile digital asset legal tender. But it immediately made clear it considered the decision foolhardy and that the loan would not happen while bitcoin remains on an equal footing — legally — with the U.S. dollar that El Salvador also uses.
Read more: Bitcoin’s Still a Major Sticking Point in Talks With IMF
Along the way, the floor fell out from under El Salvador’s traditional bonds — which carried a high rate of interest pre-bitcoin — as rating agencies Fitch’s and Moody’s slashed the nation’s credit rating far below junk status, citing the bitcoin experiment as a large part of the reason.
The yield on its three-year notes has quintupled in the past 12 months, reaching past 42%. Factoring in the yields on other bonds and financial instruments, which haven’t done quite as badly, means that there has been “a decrease of more than 50%” in the price of its securities, according to El Economista.
Never-enthusiastic citizens, meanwhile, have voted with their feet. The state-issued Chivo digital wallet had virtually no new adopters in the first quarter of 2022, with less than 20% using it after getting the initial $30 incentive, according to the National Bureau of Economic Research (NBER). That group also found that only 20% of merchants accept bitcoin, 5% of sales are in bitcoin, and a dismal 2% of remittances are in bitcoin.
See more: Crypto Might Not Be Savior Developing World’s Looking For. Here’s Why
A President as Popular as Bitcoin Isn’t
Bukele’s popularity is an extraordinary 86.8% according to La Prensa Gráfica, even as the country responds to a wave of gang violence that he met with a massive round-up and detention of suspected gang members.
One of the only areas in which he is unpopular, according to a survey by Central American University (UCA) is bitcoin, which 83.9% of respondents said has brought little if any benefit to their families.
“We see that it is one of the decisions … one of the main ones, that people realize have been taken behind their backs, in which they do not mostly agree,” said Laura Andrade, president of the UCA’s University Institute of Public Opinion (IUDOP), which conducted the survey.
Bitcoin City Water Worries
Considering that the Bitcoin City the president revealed would be built with some of the bitcoin bond proceeds was to be powered largely by clean geothermal energy — it’s also known as the volcano bond — it sure does seem to be upsetting a lot of environmentalists.
“Bitcoin City is going to have a severe impact because it is going to demand drinking water and in the east of the country that is a problem,” said demonstrator march leader Rodolfo Calles, according to ElSalvador.com. “In addition, where it will be built, it will have an environmental impact on natural resources.”
It doesn’t seem like it’s that urgent an issue, as the bitcoin bond isn’t likely to be issued anytime soon, with the cryptocurrency stuck at $30,000 for months and the world economy in very shaky shape.
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