Bitcoin Crash; Having Unfavourable Effect on the Economy of El Salvador

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In September 2021, the president of El Salvador, Bukele Nayib decided to adopt Bitcoin as the means of economical activities. This makes El Salvador the first country to make Bitcoin a legal tender. Bitcoin, which has been bullish until it reached its $68,000 all-time-high in November, started a down-trend to date. Now, Bitcoin is priced at about $28,404. the President of El Salvador has put much confidence in Bitcoin that he kept investing in its dip all through the time of its down-trend.

The government of El Salvador have used public funds for this investment. An amount of about $103 million has been invested to acquire 2,301 Bitcoins. Unfortunately, the total investment has devalued to about $67 million (that is about a 35% value loss). And this, by implication has raised the national Debt to $23.3 Billion. The implication of this Bitcoin adoption in El Salvador’s economy is that foreign investors will be discouraged from coming to invest in the country and those who have invested may eventually become frustrated by the volatile nature of the nation’s means of debt settlement. This will in the long run affect the nation’s Gross Domestic Product.

The Opinions of Analysts and Critics
Analysts and the IMF (International Monetary Funds) forewarned the danger of basing a nation’s economy on cryptocurrencies because it is volatile. The IMF emphasized the difficulty of obtaining a loan from the institution if the economy of El Salvador adopts Bitcoin as a legal tender. Apart from the International Monetary Funds and some critics issuing warnings, in October of last year, some of the citizens of the country came out revolting against the president’s decision. According to a survey carried out in September 2021, 1,281 people from the country disagreed with the administration’s determination to approve Bitcoin as the nation’s legal tender. These 1,281 people polling against the government formed about 68%. The majority of citizens still do transactions within the nation with the traditional physical currencies. This is making the country’s digital wallet, ‘Chivo Wallet’ yet underused since it is not widely accepted. The analysts pointed out that by tying the nation’s economy to Bitcoin, they put the nation to the fate of facing serious volatile behaviour of the cryptocurrency investment. Another implication here is that if Bitcoin keeps falling, the country could lose its national reserves.

The present Behaviour of Bitcoin has justified the forewarnings issued by the IMF and some individuals. However, the El Salvador financial administrators; the governor of the Central Bank, Rodriguez Douglas said in an interview that they don’t see any risk. The government of El Salvador is hopeful that the cryptocurrency will rise again, that is why they kept acquiring the Bitcoin dip.

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Comments

  1. Gerry says:

    How could £103 million buy 2,301 bitcoin if the price of bitcoin was between $68,ooo and $28,404 ? Also how does the loss of $36 million matter so much in a national debt of $23.3 billion?

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