Forex in this article
• El Salvador has high Bitcoin reserves
• Falling prices could have resulted in significant losses
• Nayib Bukele remains unimpressed
There was a big stir when, in September 2021, heavily indebted El Salvador became the first country in the world to make Bitcoin legal tender. Since then, every merchant has had to accept the world’s most popular digital currency as a means of payment if they are technically capable, and taxes can also be paid using cryptocurrency.
Through this approach, Nayib Bukele, now 41, wanted to reduce his country’s dependence on the US Federal Reserve. Since the US dollar had been used as an official form of payment in El Salvador instead of a local currency since 2001, people there were heavily influenced by the Monetary Policy depends on the US Fed. This should change with Bitcoin, after all the decentralized cryptocurrency is not controlled by any central bank. Another advantage has been seen in the fact that Bitcoin can also be used by that large part of the population that does not have access to traditional financial services.
But the advantages that Bitcoin El Salvador offers pale in comparison to the fact that the digital currency is subject to violent price fluctuations. It is particularly bitter for the Central American state, which has begun to stockpile bitcoins for the state budget, that it entered almost at the peak of the crypto rally. Because investors are no longer willing to take risks, Bitcoin has lost over 70% of its value in the last twelve months. The insolvency of crypto exchange FTX in particular has caused turmoil in the crypto market in recent weeks. The bankruptcy was triggered by doubts about the capitalization of subsidiary Alameda Research, which led to a massive outflow of capital and caught many investors off guard.
For a while, there were even rumors circulating in the crypto community that Bukele had parked the state-bought bitcoin at FTX and could no longer source it. But then Binance boss Changpeng “CZ” Zhao countered that speculation: He had heard from President Bukele that El Salvador hadn’t done any business with FTX and hadn’t parked Bitcoin there either.
Man, the amount of misinformation is insane.
I exchanged messages with President Nayib a few moments ago. He said “we don’t have Bitcoin in FTX and we’ve never dealt with them. Thank goodness!” https://t.co/CrM5wd24Ha
– CZ 🔶 Binance (@cz_binance) November 10, 2022
Nevertheless, the weakness of the crypto market now seems to be felt in the public treasury and the savings of the population. According to the “Handelsblatt”, El Salvador must pay international debts of 667 million dollars in January, but analysts believe that the country could then become insolvent. As the newspaper reports, Ricardo Castaneda of the Central American Institute for Fiscal Studies (ICEFI), for example, estimates the losses for state finances at around 70 million dollars – “this corresponds to the entire budget of the Ministry of Agriculture”. That is why the expert now warns of impending national bankruptcy.
Preparations for bitcoin bonds
Meanwhile, El Salvador plans to raise $1 billion in bitcoin-based government bonds to raise fresh money. According to BTC Echo, the government has now introduced a bill to the National Congress outlining the basics of bitcoin bonds. With the money from this capital injection, more bitcoins need to be bought and the Bitcoin City project – a city dedicated to bitcoin – needs to be funded.
Bukele remains unfazed
Despite all the turmoil, Head of State Bukele is sticking to his course to convert his country to Bitcoin in the future and keep buying Bitcoin: “From tomorrow, we will buy one Bitcoin every day” , he announced in a tweet in mid-November.
We buy one #Bitcoins every day from tomorrow.
– Nayib Bukele (@nayibbukele) November 17, 2022
Bukele still hopes for Bitcoin’s stability and stresses that there will never be more than 21 million coins of the original cryptocurrency. Bitcoin therefore represents the opposite of the insolvent FTX, because there investors could bet on thousands of cryptocurrencies with virtually unlimited money supply. “Some get it, some don’t,” said Nayib Bukele.
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