The Bitcoin Experiment: Will Crypto Save El Salvador? [2024 Update]

Few countries are as crypto-friendly as El Salvador. Far from all-time highs, the Government continues its efforts to make Bitcoin more accessible to its citizens. More ATMs, crypto payments for businesses, and a $30 sign-up bonus for Salvadorans who download their wallet app.

All this Bitcoin “experiment” started in September 2021, when President Nayib Bukele bought 410 BTC (+$20M). El Salvador also became the first country to accept Bitcoin as legal tender. All these helped Bitcoin reach new all-time highs. Briefly.

No one said that crypto adoption would be profitable. 

But after losing 50% of value, Salvadorans aren’t as positive as their President. The average citizen has either abandoned the wallet, sold Bitcoin for dollars, or lost it in identity theft scams. El Salvador is nowhere to be found on the crypto adoption index after two years and 2600 BTC bought.

Was it all in vain, or will Bitcoin save El Salvador?

El Salvador: First Bitcoin-Legal-Tender Nation

It seems developing countries are the most open to new technologies. One of them, El Salvador, wants to become a worldwide hub for crypto innovation and investment. As the youngest president ever elected, Nayib Bukele is running ambitious campaigns to address the long history of street violence, a 25% poverty rate, 25% of the population with Internet access, and ~65% of unbanked citizens.

It also has one of the highest emigration rates in Latin America, with $7.5B coming from remittances. 

Despite these issues, El Salvador has an increasing annual Gross Domestic Product (GDP) of ~$32B (2023) with ~6.5M of population. It might not be the ideal country for crypto adoption. But Bitcoin can be the opportunity to support the financially underserved majority.

The first week of September 2021:

• The Legislative Assembly approves Bitcoin as legal tender
• Several protesters showed disapproval against new crypto laws
• Nayib makes the first of many BTC purchases to come
• Chivo wallet goes live

On the brink of economic disaster, Bukele hopes that pro-Bitcoin policies help the country attract more investors and entrepreneurs. He also plans to build a self-sustainable, crypto-powered “Bitcoin City,” or at least a crypto tax haven. And in the event of a dollar collapse, Bitcoin should make El Salvador less dependent.

As for 2023, only one country has followed El Salvador’s legal tender decision… Central African Republic (CAR) in April 2022. Both countries share similar problems regarding history, Internet access, and income inequality. It’s unlikely that a third country joins anytime soon given the results of the Bitcoin experiment.

The Bitcoin Experiment 2023 Results

This Nayib Tracker shows all publicly announced purchases by El Salvador’s President. There are at least 2500 BTC across tens of orders, half of which happened before the Bitcoin 2021 ATH from ~$40,000 to $69,045. It’s going to need a long bull run just to break even with the current P/L:

From a glance, Nayib’s Bitcoin experiment has lost about half of the $111 million invested from September 2021 to March 2023. The average investor may not see it as a failure under the HODL mentality. But how does that work for a country with already great debt and financial hardship?

It might have not cost much money— probably less than 1% of the government’s funds— but it definitely compromised trust. Both from the citizens against the pro-crypto culture and international lenders. Credit agencies like Moody’s and Fitch have downgraded El Salvador’s ratings to Caa3 and CC (3rd and 4th lowest).

Without “adequate progress,” also S&P could downgrade El Salvador from CCC+ in 6-18 months. 

Perhaps the most alarming reaction is the request from the International Monetary Fund (IMF). The IMF provides counseling, training, and financial assistance to its member countries, especially those with economic instability, crisis, and payment difficulties. It lent nearly $400M during the 2020 pandemic, most of which is repaid.

One year into the Bitcoin experiment, El Salvador became one of the most likely countries to default on debt obligations in America. In January 2022, the IMF requested to revert the Bitcoin legal tender status. But Bukele is too committed to taking it seriously.

After all, how much worse can it get? Bitcoin has been on a bearish trend since December 2021. Prices slowly moved from the $40,000s to $20,000s, and Bukele kept buying. After 15 months, it might be high time for a bull market reset.

So not all ~2600 Bitcoins were bought above $40,000. We neither know when Bukele sells Bitcoin (if he ever did), as he only announces purchases on Twitter. He stopped counting the total Bitcoins held since the 3rd purchase at Bitcoin’s peak (2021).

Other than tweets, we neither received a public wallet address. All those Bitcoins could be perfectly a lie to influence prices. But if there are, are they just sitting in a cold wallet? Could they be staked as other tokens (e.g., WBTC)? And will El Salvador’s economy hold up until Bitcoin crosses the $42,905 break-even?

Despite harsh criticism— and public debt over 80% of GDP— El Salvador did not default on debt obligations on January 24th, 2023. President Bukele announced the repayment of an $800M bond maturing that day, interest included.

For now, El Salvador recovers a rating of CC (Fitch) or Caa3 with a stable outlook (Moody’s). But will it recover the Salvadorans’ trust?

Salvadorans Oppose Pro-Bitcoin Government

Even at the peak of the 2021 crypto hype, Salvadorans had no intention to adopt Bitcoin. You’d be surprised at how few locals use or accept Bitcoin compared to the social media image. Many believe the legal tender decision was approved without public consent without vote or referendum— and so was the 2600 Bitcoin Experiment.

The most accurate description of social opinion is this survey from the Central American University’s Institute of Public Opinion (2021):

From December 7th for eleven days, coordinators surveyed in person at least 1,298 locals selected randomly.

According to statistics, 7 out of 10 citizens disagree with the Bitcoin legal decision. It’s correlated with the fact that 90% of Salvadorans didn’t know what Bitcoin is. A majority believes the decision only favors foreign investors and businessmen.

The problem? You HAVE to accept Bitcoin as a business. Except for those who lack the technology/infrastructure, the Government will fine stores that refuse Bitcoin payments. As a result, 80% of businesses have looked for legal loopholes not to accept crypto. 

Most Salvadorans also agree on the following:

• Bitcoin shouldn’t be necessarily removed but should be voluntary
• Bitcoin as legal tender has barely changed their financial situation
• Chivo wallet is rarely used more than once a month, if not only for the $30 sign-up bonus

Before the survey, Salvadorans had already been protesting since the day the Bitcoin Law was official. 

But even if they wanted to adopt Bitcoin with a Chivo wallet, they would find an unpleasant surprise…

To open a Chivo wallet account, you need to take a picture of the Salvadoran DUI (ID Card) and a selfie. It’s supposed to work as KYC, but apparently, they didn’t test its reliability enough. Pretty much anything you screenshot will be accepted, whether it’s a card photocopy or a coffee mug.

Bukele didn’t know that 10-20% of the +2M app registrations were fraudulent. Identity thieves also claimed other citizens’ DUIs. So they couldn’t ever register because of the already-taken number.

That’s where ~$24M in taxpayer funds went, except this time Bitcoin was not to blame. And if these funds are the same Bitcoins as in the investment chart, Bukele is going to need far more than $42K to break even. But there’s another way…

Nayib Bukele Doubles Down

Assuming El Salvador still has spare dollars to invest, 2022-2023 has brought some of the best buying opportunities in a long time. As we approach the Bitcoin halving 2024 event, there’s a great chance that prices return above $50,000. This time, Bukele’s plan is more conservative: dollar-cost-average (DCA) one Bitcoin a day.

That’s about 120 BTC at the time of writing and another ~400 BTC by April 2024 and cross 3,000 BTC. Or sooner. As Bitcoin shows signs of recovery, it wouldn’t be surprising if Bukele made more big purchases as well.

Now with lower debt and better price potential, it’s realistic that El Salvador at least recovers the investment within two years. The Bitcoin experiment closes 2022 as a failure, but for Bukele, it’s only begun. There were no announcements to sell Bitcoin, so where does it end?

What’s clear is that Bukele is reducing his Bitcoin average cost, and crypto markets would look much worse without his continued investment.

Another well-known Bitcoin holder, Microstrategy (+130,000 BTC), sold ~704 Bitcoin for the first time in December 2022. Bukele’s Bitcoin portfolio can recover, but will he repeat the same mistakes of 2021?

Bukele’s approach is far from “hold-and-hope.” He’s doubling down in infrastructure to include Bitcoin in their economy. The Government installed 200 Bitcoin ATMs out of the 1500 target. Most have the usual 5-20% cost, but Chivo users don’t pay fees for Bitcoin-USD conversions or withdrawals.

Bukele also announced the first-ever $1B Bitcoin-backed bonds in May 2022— dubbed Volcano Bonds. Proceeds will go to fund the still-on-hold Bitcoin City, sovereign debt, and mining facilities.

New Crypto Regulations in El Salvador

For a foreign investor, crypto regulations seem very favorable in El Salvador in 2023. 

The only tax to pay was about 13% value-added tax (VAT) when buying goods and services. Bitcoin was exempt from both income and capital gains tax (now at a flat 10%). If that’s not enticing enough, Bukele wants to make the future Bitcoin City absolutely tax-free.

The Government’s tax revenue would go for building this city, public services, and energy production infrastructure for Bitcoin mining. El Salvador is a sunny country with lots of rivers and volcanoes. Over half of the energy production already comes from geothermal and hydroelectric facilities.

Both renewable energy sources should reduce electricity prices and make Bitcoin mining more sustainable.

An alternative regulation method is Central Bank Digital Currencies (CBDCs)— a centralized form of cryptocurrency influenced by central banks and governments. The custodial Chivo wallet is similar in that the Government might restrict accounts based on citizens’ actions, although it’s voluntary.

It’s curious how El Salvador hasn’t even looked into CBDCs. It’s more involved in cryptocurrencies than any neighboring countries. Honduras, Guatemala, and some Caribbean islands already have CBDCs under research. For good or for bad, Bukele stays focused on Bitcoin.

As for business regulations, owners still have to accept Bitcoin as payment, display prices in both BTC and USD, allow refunds in USD, and other consumer protection measures. KYC and AML regulations, both for sellers and customers, are extra steps that keep Bitcoin unpopular compared to cash payments.

As a developing country, taxes and mining regulations are more likely to change short-term as opposed to potential CBDCs or Bitcoin City.

Sunk Cost Fallacy or Matter of Time?

The Bitcoin experiment is far from successful in 2023. After thousands of Bitcoins and losing money for over a year, it cost the little trust Salvadorans had in cryptocurrencies. One may argue that they’re just reacting to a bear market, that rallies and all-time highs could happen anytime.

And that’s why long-term it can succeed. But it’s not that simple.

The Bitcoin experiment and legal tender status was a bold move for a country that might not be ready yet. It’s one of the rare cases where the population rejects a pro-crypto government. Not because of cryptocurrencies but their enforcement.

El Salvador shares similar issues with its neighbors in Central America. As a country, there’s debt, inflation, and too much emigration. As a society, there’s too much poverty, street violence, and not enough Internet access.

It’s no surprise a lot of Salvadorans don’t care about cryptocurrencies (yet). With such pressing issues, maybe they don’t want their tax dollars to go to a -$50M Bitcoin portfolio, Bitcoin City, broken ATMs, or Chivo wallet rewards only to be exploited. They certainly don’t want Bitcoin to be legal tender by obligation but by choice. The Bukele administration might have gone too far.

It’s not whether the Bukele portfolio goes green or red, because it will do both as the market changes. Long-term, what drives the Bitcoin price is adoption, favorable regulation, and technology. Crypto education, basic infrastructure, and flexible regulations are all El Salvador really needs to achieve the adoption that its pro-Bitcoin laws ironically repelled.