When El Salvador first announced the adoption of Bitcoin as legal tender in 2021, critics worldwide questioned the decision. The International Monetary Fund urged the country to reconsider, economists warned of fiscal disaster, and crypto sceptics decried the move as reckless. But as Bitcoin recently surged past the $1,00,000-mark, the small Latin American nation's gamble is back in the spotlight.
President Nayib Bukele, who was at the centre of the nation's cryptocurrency experiment, posted a screenshot on X showing El Salvador's Bitcoin holdings doubling in value, just a day before the crypto hit the psychological benchmark.
https://t.co/QVvFbQ7woa pic.twitter.com/WiOAYg6Ztx
December 5, 2024According to the post, the country's government had invested approximately $269 million in Bitcoin about four years back. And now, it sits on a treasure chest worth over $600 million—an unrealised profit of more than $330 million.
Bitcoin's rise to six figures has drawn global attention, not just for its astronomical valuation but also for how it could reshape an economy. The cryptocurrency has gone from a speculative asset to a cornerstone of El Salvador's investment strategy.
AdvertisementThe Bitcoin Experiment
El Salvador's Bitcoin journey began with audacity. Bukele pitched the idea as a solution to systemic problems. "In the short term, this will generate jobs and help provide financial inclusion to thousands outside the formal economy," he said at the Bitcoin 2021 conference in Miami.
By legalising Bitcoin alongside the US dollar, El Salvador aimed to leapfrog the traditional banking structures and empower its unbanked population, which, according to the World Bank, constitutes over 60% of the country's population today.
AdvertisementThe government even launched a state-backed wallet offering $30 worth of Bitcoin to every citizen as an incentive to join the experiment. It was called the Chivo, which is slang for 'cool' in El Salvador. Bitcoin ATMs sprouted across the country, and businesses were mandated to accept the cryptocurrency wherever possible.
But the road was rocky. Bitcoin's notorious volatility brought sharp losses as its price plummeted during the crypto winter of 2022. Fitch Ratings downgraded El Salvador's creditworthiness to junk in Feb. 2022.
"Adoption of Bitcoin as legal tender has added uncertainty about the potential for an IMF program that would unlock financing for 2022-2023," the rating agency's statement read.
In the previous year, Moody's Investors Service had also downgraded the country, expressing concerns about the use of Bitcoin.
Yet Bukele remained steadfast, adopting a "buy the dip" strategy to acquire more Bitcoin during price slumps.
The next year, El Salvador passed a legislation enabling the government to raise capital via the first-ever sovereign blockchain bond.
This legislation established a legal foundation for Bukele's initiative to issue bonds backed by Bitcoin. The proceeds, totaling $500 million, are earmarked for constructing Bitcoin City—a proposed tax-free coastal hub powered by geothermal energy from a nearby volcano to support cryptocurrency mining.
Bitcoin At $1,00,000
The virtual coin's recent surge past the $1,00,000-mark comes at a critical juncture, fuelled by global political shifts and institutional interest. Bitcoin's rally has been bolstered by market optimism surrounding a friendlier regulatory landscape in the US, as crypto-friendly Donald Trump is set to take charge of the White House.
AdvertisementFor El Salvador, the timing couldn't be better. The government's Bitcoin holdings have doubled on the back of a strong market sentiment. Yet, the government has resisted selling, which hints at the country's long-term confidence in Bitcoin's trajectory.
'Bitcoin Is The future'
As the token jumped past the $1,00,000-mark on Wednesday, El Salvador's government bonds due 2035 and 2041 jumped to their highest levels in three years, according to Bloomberg data.
And while the IMF, in its talks with the government over a lending programme, recommended narrowing the scope of the Bitcoin law and increasing oversight of the crypto ecosystem, El Salvador's Bitcoin website shows the government holds nearly 6,000 BTC.
Bukele's confidence in the token today seems to be the same as it was two years ago, where in an X post he had said, "Bitcoin is the future."
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