Are El Salvador’s Results with Bitcoin a Reliable Indicator for the Future?

Samuel Hooton

El Salvador’s adoption of Bitcoin as legal tender promised economic benefits, but limited adoption and volatility have led to failing results. Is it a mistake, or too early to tell?

 The president of El Salvador, Nayib Bukele, shocked both the financial and technological worlds in June of 2021 with an announcement that El Salvador would establish Bitcoin as legal tender, making it the world’s first country to do so. Bukele’s announcement contributed in part to a meteoric rise in the price level of Bitcoin from $29,000 in June to $49,000 in August and another jump to an all-time high of just over $68,000 after the official law was enacted in September 2021.

El Salvador’s adoption of Bitcoin as legal tender was driven by several factors that Bukele felt would elevate the country’s economy. As a populous, 70% of Salvadorans lack access to a traditional bank or financial institution. Additionally, he believed that Bitcoin would provide financial inclusion to those otherwise constrained by limited access. Moreover, Bitcoin would serve as a useful international transfer currency due to remittances comprising a staggering 24.07% of the nation’s GDP. Bitcoin’s adoption would also combat hyperinflation and increase technological investment. Lastly, to increase investment, Bukele made El Salvador a cryptocurrency tax haven.

Though the benefits seemed promising upon announcement, the results thus far have been the opposite. Bitcoin has failed to provide the benefits Bukele promised, leading to a significant decline in the nation’s investment. Two key reasons that take the blame for the failure are: the limited widespread adoption and significant losses resulting from volatility.

The government attempted to increase adoption among the general populous by creating the “Chivo Wallet,” which allowed citizens to trade Bitcoin without transaction fees. However, Salvadorans have not embraced this new system, as only 20% of the population currently uses Chivo Wallet. Furthermore, an El Salvador Chamber of Commerce survey estimated that only 14% of businesses transacted with Bitcoin.

Another significant factor leading the failure as in El Salvador has been its high volatility, which has resulted in substantial financial losses for both private citizens and the government. In September 2022, El Salvador’s $100M (USD) investment into Bitcoin had halved. Citizens that followed the government’s advice and purchased Bitcoin for day-to-day transactions have likely suffered similar, if not greater, losses. Bitcoin’s unpredictability in value has detrimental consequences to both the government and private citizens’ financial holdings, further undermining its viability as legal tender.

However, the to-date failure does not necessarily imply that other countries should not ever adopt Bitcoin as legal tender. Various obstacles within El Salvador prove problematic in implementing this change. A 2021 World Bank report showed that only 63% of Salvadoran citizens have access to the internet, and 22.8% of households are below the poverty line. The relatively low internet access and high poverty rates in El Salvador make it impossible to achieve widespread adoption. Internet access is a necessary prerequisite to purchasing Bitcoin. Thus, 37% of the population cannot physically purchase and transact with Bitcoin. This leads to a snowball effect where business owners are less likely to offer transactions using Bitcoin because a high percentage of the population cannot engage in the transactions even if they want to.

Furthermore, the high volatility of Bitcoin scares off much of the general public, many of whom cannot afford to ride the lows that come with owning Bitcoin. The volatility and speculative nature of Bitcoin pose substantial risks for both private citizens and businesses that rely on stable currencies for everyday transactions. By switching from the USD to Bitcoin, as Bukele suggests partly doing, individuals and businesses would take a significant risk to both their families and business profitability. Additionally, the volatile and speculative nature of Bitcoin makes it difficult to establish consistent pricing for goods, services, wages, and salaries. A country like El Salvador, with a relatively high poverty rate, further exacerbates these issues. Individuals in poverty cannot afford to “gamble” with their money and hope it holds the same value as the previous day.

Adopting Bitcoin as legal tender may produce the benefits Bukele hoped for in wealthier countries with higher internet access and lower poverty. People would have a greater ability to transact and could afford to ride the volatile swings in price, which would increase adoption levels. It is also worth mentioning that since the hype has died down from the high increases in 2021, Bitcoin’s price has performed very negatively. Though some may believe this negative performance adds to the list of reasons why Bitcoin as legal tender is a bad idea, others may suggest that this is a natural bear cycle. Thus, El Salvador will be extremely wealthy when Bitcoin rises from the bear cycle to a natural bull cycle. Therefore, it may be too early to tell if El Salvador made a mistake by accepting Bitcoin as legal tender.

Although, to date, Bitcoin has failed to bring substantial benefits to El Salvador, it remains an intriguing and promising solution to many of the issues with centralized currency. More time and opportunity amongst other nations is needed to fully assess whether Bitcoin as legal tender is always a net negative.

Source: https://austriancenter.com/are-el-salvadors-results-with-bitcoin-a-reliable-indicator-for-the-future/

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2 replies on “Are El Salvador’s Results with Bitcoin a Reliable Indicator for the Future?”
  1. says: MrVeryAngry

    Or, even more betterer, tie the El Savadorian currency to gold.

    There you go. That was easy wasn’t it.

  2. says: Paul Marks

    Silver would have been a better fit for El Salvador than Bitcoin – the silver coins could have been encased in clear plastic so they did not wear away. Both gold and silver are easier to understand than Bitcoin – and silver is more suitable for small transactions (although a speck of gold could be in a clear plastic coin – with proof of gold content stamped upon it). The key thing is to get away from the legalised fraud of governments and banks and to get to something that ordinary people value apart-from and before its use as money.

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