El Salvador made Bitcoin legal currency. The country is in major trouble now

El Salvador has been a pro-bitcoin country since 2021, and President Nayib Bukele was the first to nationally crown Bitcoin as an equivalent of the US dollar. But the 55% fall in Bitcoin's value is now causing people to be skeptical if the country can repay its $800 million debt by January 2023.

Global lenders are hesitating to help El Salvador because of the President's YOLO attitude & tweets, a mere 50% Bitcoin acceptance by the Salvadorans, and a lack of confidence in Salvador's debt repayment skills. 

Here's how El Salvador's Bitcoin dreams have panned out: 

When popular Youtuber Drew Binsky planned a 2-day trip to El Salvador, he was curious to know if he could survive for 48 hours by only paying through Bitcoin. It turned out that he could. There were Bitcoin ATMs made by 'Chivo' (just like ICICI Bank ATM) where he could insert his US dollars and get them automatically converted into Bitcoin as per that day's exchange rate. The Bitcoin balance would show on his phone app and every time he shopped, the business owner would ask: Will you pay in cash or Bitcoin? 

He would swish out his phone, open the app (just like Google Pay) and use this Bitcoin balance to pay for:

• Coffee in local restaurants
• Gas at petrol pumps
• Food at Mcdonald's
• Swimsuits from random local street vendors
• Heck, he could even rent a place for the night and buy real estate.   

HOW DID EL SALVADOR BECOME PRO-BITCOIN?

In September 2021, El Salvador became the first country in the world to treat Bitcoin as a ''legal currency''. This meant that residents could now use Bitcoin to:

1. Repay debt or make payments for any kinds of transactions.
2. Use it to pay for goods or services every day.
3. Pay taxes or repay previous loans etc.

The President sold this concept to the Salvadoran public as a cheaper vehicle for foreign remittances and as something that could reduce reliance on the US dollar, which is their home currency. Also, since Salvador is a cash-based economy and 70% of the population did not have bank accounts then, Bitcoin was also placed as a product to revolutionize the payments system and as a tool for those who did not have bank accounts.

THE PRESIDENT'S YOLO MOVE

• Despite strong opposition from the public, financial institutions like IMF and The World Bank, President Nayib Bukele's government rolled out a regulatory framework and a payment platform to help convert US dollars to Bitcoin and vice versa. The government created its own digital wallet called 'Chivo wallet”, which would reflect the amount of USD converted to Bitcoin, the Bitcoin present and used. The Chivo wallet is supported by the government-created trust FIDEBITCOIN. 

.@nayibbukele marches on with his crackpot Bitcoin speculation. After the President bought an initial 400 #BTC for #ElSalvador, the crypto crashed. What did Bukele proceed to do? Purchase another 150 BTC to 'buy the dip.' ELSL’s finances are at risk. Financial madness. https://t.co/PKTI0jww2K

— Steve Hanke (@steve_hanke) September 7, 2021

• The country (ie the President) has consistently purchased Bitcoin since September 2021 and holds about 2,301 Bitcoins at an average price of $45,171 each. This means an investment of about $104 million. (Btw, as of June 15, 2022, the market value of these 2,301 bitcoins stands at $51.5 million, thanks to the 55% crypto crash that has happened since Bukele's crypto experiment)
• The Chivo wallet was loaded with $30 (about Rs 2,400) of Bitcoin to encourage quicker public adoption. (This way the public could buy the government's Bitcoin in exchange for their cash and use it every day)

Welcome to El Salvador ?? #bitcoin ATM pic.twitter.com/StpUEEDJsG

— Roman Martínez??⚡️ (chimbera) (@romanmartinezc) October 18, 2021

But even after 9 months of taking the lead, Bitcoin has not really caught up with El Salvador.

WHY IS BITCOIN NOT CATCHING UP?  

In a country of 6.5 million, Chivo is said to have been downloaded by approximately 3 million people, indicating 50% acceptance. As per a Fitch report, here's why it's not being accepted by everyone:

• The people have mixed feelings because Bitcoin's value is volatile and keeps fluctuating.
• The country's banking system has a low level of financial inclusion
• There is a lack of internet availability.
• There is a lack of a properly developed supervisory framework which increases the risk of cyber and money laundering.
• Lack of tax on BTC capital gains could attract foreign inflows of Bitcoin to the country thereby increasing money laundering risks 

Even though business owners in Salvador accept Bitcoin, they immediately exchange it for US dollars to avoid the risk that comes from a price crash.  

HOW HAS THIS LED TO WORRY OVER DEBT REPAYMENT 

Imagine you have bought costly products to resell them to your audience, but no one in the audience wants to buy them because it's too confusing and risky. Plus, the audience doesn't even believe that the price of the product will increase later, but only you do. Worse, you bought those products after purchasing a loan from the bank.  And the loan lender's friends were constantly telling you to not buy those costly products (ie. Bitcoin).

1. Similarly, in the last 9 months, the country's President has increasingly sold its cash (USD) to buy crypto (the costly product), even when crypto prices were crashing. But neither the public is interested in buying crypto, nor the crypto prices are increasing. This means the government as of date has a loss of $50 million. 
2. The country's GDP has reduced in the last 12 months and its debt to GDP ratio is set to reach 87% which indicates quite a high fiscal deficit.
3. The country already has $24.4 billion worth of debt because of Covid-19 and other loans. Fitch expects that Salvador's GDP will shrink further and since Salvador has to service bonds in January 2023 worth $800 million, a financing gap can occur. 

   

4. This has led to rating agencies like Fitch to rate government bonds from ''B-'' to ''CCC'', which means these bonds are junk.
5. Financial lenders don't want to lend money to El Salvador since the country's bonds are now trash. They have exhausted their short-term borrowing limits and borrowing long terms funds is expensive, since many organizations don't want to lend below interest rates of 20-25%. Also since Salvador has not really gone by IMF's warnings of not buying crypto, it is unlikely that IMF or similar large organizations will lend money to the country.