People have been in despair in the last few days with crypto taking a plunge. But a country, El Salvador, is even in more turmoil. Why? Let’s find out. Nayib Bukele, the country’s president, had placed a significant risk on Bitcoin by purchasing it with taxpayers’ money during the dip.
The Central American country made bitcoin legal tender for all transactions a year before, making it the first worldwide. El Salvador’s president proposed changing the country’s legal tender to a digital asset in 2021. The government announced on Twitter that it had purchased 2,301 Bitcoins and has actively promoted the use of virtual currency as a form of investment.
However, the bitcoin price continued to fall on June 15, marking the ninth consecutive day of losses. But the enormous drop in valuation, according to Bukele, is not a concern for the country. He said on Twitter that the country’s loss from bitcoin isn’t a cause to worry about. He, on the other hand, has urged to buy more bitcoin. According to Bukele’s tweets, the country purchased another 500 bitcoin around a month ago.
Currently, the country’s Bitcoin assets are around half of what Bukele put in the digital currency. In October last year, El Salvador invested about $60,300 per Bitcoin and purchased 420 Bitcoins. Last month, Bukele decided to buy the dip and purchased another 500 Bitcoins for $30,700 per coin.
The Drawback of Bukele’s Strategy
El Salvador faces several challenges, including substantial budget deficits, an $800 million bond due in January, and a depleted cash reserve. The dollar debt of this Central American country is among the worst-performing. The country had been looking for new funding for a bitcoin-linked bond that had been stopped.
El Salvador has lost over $56 million by gambling on Bitcoin in the year since it was legalized as legal cash, according to Bloomberg calculations. That may not seem like much, but every penny counts in a country as financially distressed.
S&P Global Ratings downgraded El Salvador to CCC+ due to the country’s difficulties obtaining additional funding. In February, Fitch downgraded El Salvador’s credit rating to CCC. The country’s adoption of bitcoin as legal tender has raised uncertainty about the prospects for an IMF program that would unlock finance for 2022-2023.
Why Has Crypto Plunged?
Because its value is frequently based on market speculation, the bitcoin market has seen a good proportion of volatility. Bitcoin’s value has dropped by almost 70% in the last eight months, contrasting to an all-time high of $69,044.77 on November 10. Currently, digital currency accounts for 43.1% of the overall crypto market capitalization.
Bitcoin’s performance determines the market’s value. It’s no wonder the market, worth just over $3 trillion at the start of November, lost more than $2 trillion due to the Bitcoin crisis. Because of the overall steady decline and the extreme volatility that the crypto business experiences daily, bitcoin prices may soon go below the psychological threshold of $20,000.
However, it is necessary to mention that El Salvador is a developing country with a history of currency fluctuations. Moreover, the debt situation in the world’s most crypto-friendly country has deepened by an unprecedented fall that has wiped away about two-thirds of Bitcoin’s value. It may worsen the country’s debt problems. So how far will El Salvador go with its losses due to bitcoin investment? Well, despite all the negativity surrounding his championing of bitcoin, Bukele has hinted that his country could buy the bitcoin dip once again, stating that El Salvador’s bitcoin losses did not even account for 0.5% of its entire national budget.