The president of El Salvador, Nayib Bukelewill go down in history as the first ruler to bet on Bitcoin as legal tender. There is still time to know if his decision was correct or not (at least with all certainty), but we do know that he has put his country in a difficult position.
Bukele, an enthusiast of the freedom and independence that cryptocurrencies promise, was a staunch defender of them in his first steps in power. Already in September 2021 he managed to convert Bitcoin and a volcanically powered cryptomine in the country’s major projects, despite global criticism.
With an all-time high price close to $69,000 in November and a low of $39,700 in September, Salvadoran government Bitcoin purchases seemed to go off the rails. Return to the future. Not long and yes some purchases later, with a price less than 29,000, they are not so spectacular.
Since September, Bukele’s government has spent some 104.2 million dollars to acquire 2,301 units that are now worth only 66.27 million dollars, according to calculations made based on the president’s posts on Twitter and the price of Bitcoin at noon on Friday (28,800 Dollars).
Caught while the perception of risk increases
Although the investment by the Central American nation in Bitcoin is a significant amount, it is not enough to break its economy, among other reasons because this loss will not be real until the moment the position is liquidated, something that a long-term project is not going to allow so easy, even if it sinks deeper.
The main problem with this decision is that it strangles the patience of citizens who are dissatisfied with the management of public resources, while at the same time it undermines confidence in the country’s debt. For this reason, it has been necessary to offer a higher return to investors that compensates for the risk.
“The decision to invest in Bitcoin has raised the level of country risk, having to pay investors more to access international financing, it also causes an imbalance in public finances that limits investment in economic development,” explained Marlin Investment Group .
This week the country risk —which contrasts the investment risks of different countries— of The Savior stood at about 25 percent. The EMBI (Emerging Markets Bond Index) of the Central American country was barely located near 5% a year ago, before the idea of its president became a reality.
Analysts are beginning to talk about the fiscal deficit and, more worryingly, about a possible default, since El Salvador must pay 329 million dollars in interest owed on international bonds this year and 800 million dollars in a bond due in January; Bukele talks about launch debt in bitcoin.
Experts have called for an end to the Bitcoin experiment, an idea shared by institutions such as the International Monetary Fund (IMF), which also warned him that he is close to failing to comply with the conditions to receive a loan. And this does not happen with countries in the region with higher debts.
misreading and misunderstanding
Bitcoin has entered a period of weakness this year, which has confirmed its character as a very sensitive risk asset in times of uncertainty. A persistent inflation in the world and the threat of a global recession have the cryptocurrency and its holders in a difficult situation.
With no ready exit in sight, citizens are concerned about investing in an asset that still lacks reliable or proven forms of valuation, since it is at the expense of the perception of other more astute speculators. And yet the price is not the biggest problem of the project Nayib Bukele.
Octavio Pacheco, analyst and experienced operator of the crypto market, affirms that the Salvadoran president’s biggest mistake is “wanting to put the cube in a hole for a sphere”, that is, not understanding the characteristics and origin of an asset that is not similar to traditional investment.
“El Salvador did not want a free adoption of Bitcoin, what it was looking for was to form a clearing house with its wallet Chivo Wallet, which by the way are few citizens who use it. It was a bad idea rejected from the beginning by the IMF”, explained this crypto expert.
Another mistake by Bukele, he stated, is his effort to launch debt over Bitcoin, because “you cannot put an asset that has valuations from less than $20,000 to more than $400,000 as an underlying asset. Macroeconomic concepts have nothing to do with this technology,” he said.
The average purchase price of Bitcoin acquired by El Salvador is 29,000 dollars, according to information from the government itself, although it admits having made purchases for more than 40,000 dollars. Your mistake for these experts would be the forms and the poor understanding of the risk.