The rise and fall of bitcoin: what happened in the state that invested in it

Renowned entrepreneur and investment advisor Robert Kiyosaki, best-selling author of Rich Dad Poor Dad and co-author of former President Trump, recently tweeted: “A giant crash is coming. Possible depression. The Fed was forced to print billions of counterfeit money. By 2025, gold at $5,000, silver at $500, and bitcoin at $500,000. Why? Because faith in US dollars, counterfeit money, will be destroyed. Gold and silver are the money of the gods. Bitcoin is the money of the people. Take care of yourself”. And I must say, the content of this tweet expresses the opinion of a significant number of Western private investors.

To be frank, it is difficult to argue with most of his statements. The Federal Reserve is indeed printing billions of dollars, the US national debt threshold has been raised once again, the recent flagships of the global digital economy – Apple, Microsoft, Google – are cutting jobs en masse. The global precious metals market is seriously suffering due to the sanctions frenzy: for example, the price of palladium mined in the Russian Federation and South Africa has skyrocketed 10 times. Only the thesis that “Bitcoin is the people’s money” raises doubts. Why? The fact is that for two years now there has been a whole country in the world that has accepted bitcoin as a legal state means of payment, that is, a national settlement currency used everywhere: even for paying taxes, even for shopping in a store. This state is called El Salvador.

The history of this country has developed in such a way that by 2001 El Salvador was the poorest state in Latin America, in 2004 it lost its own currency and switched to the US dollar. This decision, which in a more developed country would have helped to stabilize the economy, turned out to be wrong in the conditions of El Salvador. The state lost the last instruments of influence on the only export item, agricultural production, and finally lost the competition to its neighbors, who, due to the devaluation of their own currencies, could flexibly manipulate the prices of coffee and raw sugar. The main source of income for Salvadorans was money transfers from abroad, primarily from the United States, from legal and illegal citizens of the country working there.

In 2019, a young independent candidate, the mayor of the capital of San Salvador, Naib Bukele, was elected president of the country, promising economic reforms and the fight against criminal groups. And although the introduction of bitcoin as legal tender was not among his promises, legalization in the second year of Bukele’s rule seemed like a good idea to improve the economic situation. The introduction of bitcoin into foreign exchange reserves, according to assumptions, would make it possible to partially abandon the US dollar in an environment where the country’s relations with America are not in the best condition. Bitcoin seemed like a good investment, as it was on the rise after a significant fall in 2018, and experts predicted its further growth. In addition, it was assumed that the country would become attractive for crypto enthusiasts who would invest in the economy of the state, since the cryptocurrency would become legal here. Plus, there was a hope that the digitalization of payments would increase the financial literacy of the population and reduce corruption. Based on these expectations, in the early summer of 2021, the country’s government adopted the national “Bitcoin Law” and allocated $150 million for the purchase of cryptocurrency. To stimulate the use of bitcoin by the population as an element of the payment infrastructure, the Chivo electronic wallet is being introduced, and everyone who opened an account in it was given an amount equal to 30 US dollars in cryptocurrency. Athena Bitcoin, a private company, agreed to invest $1 million in the project and install 1,500 dollar-to-bitcoin ATMs in the country.

On paper, the Bitcoin legalization program looked great. But almost immediately I ran into problems. The main lender of infrastructure projects in El Salvador, the World Bank, refused to help implement the program, citing two main reasons: the opacity of bitcoin for the global financial system and the harmful impact of cryptocurrency on the environment. International experts drew attention to the fact that the Chivo crypto wallet was developed and owned by a private company, not the state, and the composition of the beneficiaries of this private company is a state secret. The adoption of the “Bitcoin Law” caused quite massive protests in the capital of the state. The protesters demanded its abolition, based on the fact that the taxpayers’ money allocated for bitcoin could be spent much more efficiently, and low Internet penetration and low digital literacy of the population would prevent most citizens from taking advantage of crypto money. A big blow to the government was the Moody’s downgrade of the country’s sovereign credit rating due to the adoption of cryptocurrency. Analysts of the agency proceeded from the fact that with the legalization of bitcoin as a legal means, it would be very easy for large taxpayers of the state not to pay taxes, which are already low in El Salvador.

Despite this, the government and Bukele personally confirmed their commitment to bitcoin and continued the project. In September 2021, El Salvador purchased the first 400 bitcoins at a price of $52,000 per coin. Alas, on the same day, the bitcoin rate fell to 43 thousand. The launch of the Chivo wallet did not go smoothly either. The Apple and Huawei app stores refused to host this application, and on the first official day of the launch of the application server, they could not cope with those who wanted to register and stopped working. In order to convince international lenders of the correctness of the chosen course of cryptocurrency legalization, Naib Bukele in November 2022 proposed the megaproject “Bitcoin Cities” for implementation on the picturesque coast of the Gulf of Fonseca at the foot of the Conchagua volcano, which, as planned, should supply the city (and bitcoin mining power) cheap and environmentally friendly geothermal energy. To finance the project and purchase additional bitcoins for the treasury, the government planned to issue “volcanic bonds” for $1 billion. As reported by the government, investors from Eastern Europe were very interested in these bonds. Alas, this announcement instantly resulted in a 30% drop in the price of El Salvador’s standard international bonds.

By January 2022, Bitcoin had lost 45% of its value, and El Salvador’s treasury had lost $22 million in direct losses. Moreover, the International Monetary Fund delivered an ultimatum to Bukele: if the country does not stop supporting bitcoin, the IMF will not issue a $1.5 billion loan to the country. In March, it became clear that the issue of “volcanic bonds” would not take place “due to the events in Ukraine.” Meanwhile, bitcoin continued to fall: by November 2022, it had already lost 70% of its value, and direct losses to the treasury amounted to $150 million. Meanwhile, the time has come to pay interest on the sovereign debt of the state, which amounted to about 600 million euros. To pay it off, the government had to cut funding for government programs and empty national reserves.

El Salvador’s macroeconomic problems that have occurred can be viewed from different points of view. And as a very short-sighted policy of “the coolest dictator on the planet” (as Bukele calls himself), and as a struggle of a popular people’s leader (Bukele’s approval rating in the country is about 80% thanks to the successful fight against local crime) with world financial imperialism. If we proceed from the thesis that the dollar and the euro are candy wrappers, and bitcoin is the currency of the future, then Bukele is doing everything right. We are more interested in the question of whether bitcoins have become “people’s money”, a popular means of payment. Alas, definitely not. An analysis by the US National Bureau of Economic Research found that during the first year of use, 20% of people who downloaded the Chivo app never used their $30 gift, and 60% of those who downloaded it after spending their gift dollars never opened the app again. . Despite all the efforts to introduce bitcoin into commercial enterprises, only 20% of the country’s business accepts cryptocurrency. Only 14% of commercial organizations conducted at least one bitcoin transaction between September 2021 and June 2022, and only 3% of companies consider the ability to accept cryptocurrency an important feature. Perhaps, of all the predictions regarding the introduction of bitcoin as a state currency, only one more or less came true – a visit to El Salvador by crypto enthusiasts really increased international tourism to the country by 30%. But given that the country is not touristy, it’s not so much…

So what can we learn from the history of El Salvador, the first country to legalize bitcoin? The fact that bitcoin, alas, is a bad tool for macroeconomics and a completely unsuitable tool for microeconomics. El Salvador’s experience led most countries that considered legalizing cryptocurrencies to eventually abandon the move.

Published in the newspaper “Moskovsky Komsomolets” No. 28988 dated March 14, 2023

Newspaper headline:
The Rise and Fall of Bitcoin