As Crypto Corrects, What's Next for El Salvador's Bitcoin Gamble?

Bitcoin witnessed a boom in retail and institutional adoption during 2021. Among notable adopters, El Salvador became the most prominent one after the country announced the acceptance of Bitcoin as legal tender in September last year. The Central American country not only adopted the digital asset but also started accumulating for future gains.

However, El Salvador’s Bitcoin bet has now turned negative for its economy. The country, which is also suffering from rising debt, is expected to pay around $38.25 million on its foreign debt in mid-June. El Salvador spent more than $100 million on Bitcoin purchases since September 2021. With a nearly 40% plunge in Bitcoin’s price since El Salvador first purchased Bitcoin, the country has started feeling the heat of the recent market correction.

While El Salvador’s financial issues are not new, its ambitions to solve economic problems through Bitcoin are falling apart after BTC’s price dip. "El Salvador’s financial problems are not because of bitcoin, but they have gotten worse because of bitcoin," said Ricardo Castaneda, the Senior Economist and Country Coordinator for El Salvador and Honduras at the think tank Central American Institute for Fiscal Studies (ICEFI).

Bitcoin Losses

El Salvador has already lost nearly $40 million of its Bitcoin holdings since the first purchase. Simon Peters, a Market Analyst at eToro believes that the recent reduction in BTC’s price has had a substantial impact on the reserves of the Central American nation.

“Bitcoin’s price reduction has hit El Salvador’s reserves, with losses tantamount to the nation’s next expected payment to bondholders. Since becoming the world’s first government to make bitcoin a legal tender last September, President Nayib Bukele has invested around $105 million in buying BTC. Unfortunately, the crypto asset's price has declined 45% since the first purchase, reducing the value of the holding by $66 million. This has led to losses of roughly $40 million, according to Bloomberg, which is a little more than the country’s next payment on its foreign debt, with $38.25 million due in June,” Peters said.

The Debt Issue

Despite GDP growth of almost 10% in 2021, El Salvador is battling a rising debt issue. The country received criticism from global financial organizations like the World Bank and the IMF for accepting Bitcoin as legal tender. Before the adoption of BTC, the country was in talks with the International Monetary Fund for an extended fund facility. However, it seems that the country’s crypto strategy has turned out to be a hurdle in its economic relations with leading global financial institutions.

“It is worth mentioning that El Salvador’s debt stood at $24.4 billion as of December, from $19.8 billion at the end of 2019, after the Bukele administration allocated millions of dollars to deal with the COVID-19 pandemic and its economic effects over the past couple of years. The rating agencies have warned that bitcoin adoption could facilitate money laundering, and importantly, the bitcoin risk has given bond investors another reason to demand higher returns,” said Styliana Charalambous, the Head of Investments & Market Research at Pure.

“With global borrowing costs on the rise and a big debt repayment on the horizon, El Salvador has to deal with other upcoming challenges but the crypto slump has also closed some potential off-ramps from the crisis, including the now-postponed bitcoin bond,” Charalambous added.