El Salvador became the world’s first country to adopt bitcoin as legal tender today (Sept. 7).
“B-day,” as locals have dubbed it, ushers in a new era in which residents of the country can buy breakfast or pay their taxes in bitcoin: All businesses and banks must now accept bitcoin in addition to the US dollar, the country’s other legal currency.
The long-term implications of this audacious experiment remain to be seen, but critics of Nayib Bukele, El Salvador’s young president, say he is putting the country’s finances at grave risk.
Today’s debut made that crystal clear. Bitcoin’s price dropped by an unexpected 17% in mid-morning, wiping out $400 billion in minutes. Although the price had hovered around and just above US $50,000 over the weekend, it dropped to less than $43,000 at one point before rebounding to about $46,700 by 4 pm ET.
The bitcoin price pump that wasn’t
As of this morning, crypto-curious residents of the small Central American country were able to sign up for a government-issued “Chivo” wallet seeded with $30 worth of bitcoin. The government briefly took the wallets offline, however, while they scaled up their servers. That could have explained part of the sell-off; others pinned the blame on an unproven global conspiracy to derail Bitcoin’s future. But Bloomberg Intelligence commodity analyst Michael McGlone, who is generally bullish on bitcoin, said that the price fluctuations merely reflected a “wringing out” of speculative investors. McGlone expects crypto prices to go back to slowly appreciating with occasional “nuances,” like today’s short-lived plunge.
Over the weekend, several bitcoin influencers on social media sites planned a global price pump, akin to the coordinated meme-stock rallies that sent GameStop and AMC share prices soaring. In this case, bitcoiners urged retail investors and crypto-enthusiasts around the world to buy the equivalent of US $30 in bitcoin as a B-day present for El Salvador (and themselves.) One group of 3 million strong Redditors in Brazil were supposedly prepared to join the effort. According to a few messages, the coordinated buying was set to begin at the same time around the world.
However, whether or not the $30 purchases happened en masse was not obvious by today’s price action. In any case, if bitcoin’s price had soared, the artificially inflated rate would likely not have been sustainable.
An untested president bets on bitcoin
Economists and the IMF have cautioned that the nation’s longer-term macroeconomic stability is on the line for numerous reasons: Adopting bitcoin complicates the indebted country’s debt negotiations, for example, and could make its banks attractive to criminals looking to launder illegal gains. Without understanding the unregulated crypto market, everyday citizens who jump into bitcoin expecting it to gain value against other currencies could be in for a rude, or even tragic, awakening. With bitcoin, there are no guarantees that what you own today won’t be worth half as much tomorrow.
El Salvador bought 400 bitcoin ahead of Chivo’s official launch day. When the price crashed this morning, Bukele—in a show of confidence, recklessness, wishful thinking, or some combination of all of the above—decided to buy an extra 150 bitcoins at the lower price. He thanked the IMF for affording him the opportunity to save “a million in paper money” in that impromptu shopping spree.
Bukele’s presidency will be defined by how well his bitcoin plan pays off. Many fear that the 40-year-old, who favors leather jackets and comes to politics following a career in business (he is a Yamaha motorcycle distributor), appears to be most interested in appealing to moneyed foreign bitcoin entrepreneurs, as Quartz’s Nicolás Rivero reported in June. Two years into his tenure as the nation’s leader, his political opponents now question his commitment to governing with transparency and protecting democracy.
Bukele has promoted a rosy vision of widespread bitcoin adoption and tech innovation in the country. He has also claimed that taking up the digital asset will save El Salvador hundreds of millions of dollars in remittance fees annually while positioning the country to be a significant player in a new crypto-fueled world. “It’s a pretty monumental step in the evolution of bitcoin,” Garrick Hileman, head of research at Blockchain.com, a cryptocurrency transaction firm, told the Wall Street Journal.
To critics, however, the president appears to be essentially lining up at a roulette table with El Salvador’s capital and fate in his hands. Responding to the president’s gleeful message about buying the dip, Daniel Munevar, senior policy and advocacy officer on debt at Eurodad, tweeted: “El Salvador is a country in debt distress that will need multilateral support to stabilize it’s [stet] finances. Hard to justify that support when the government is busy gambling away public resources.”
Peter Schiff, the libertarian investor and longtime critic of digital currencies, also chimed in with a sarcastic message to El Salvador and bitcoin supporters during the mini-crash:
But bitcoin advocates outside El Salvador naturally expressed enthusiasm for the president. Sassy retorts to established public figures in the financial world tend to play well among cryptocurrency “hodlers.”
How do El Salvadoreans feel about bitcoin?
Bitcoin’s appraisal within El Salvador appears to be just as mixed. In time for today’s launch, Al Jazeera English reporter John Holman traveled to El Zonte, a surfing town in El Salvador that has been using bitcoin since 2018. “We met plenty of people who are fans of the cryptocurrency as a way to put aside a bit of money. 70% of Salvadorans don’t have bank accounts and this is a way they can save a bit up and (hopefully) watch that pile grow as bitcoins values increases,” he said in a Twitter thread. However many locals also described the frustrations they’ve experienced with wild swings in valuations, he explained.
Today, the government is facing protests by worried pensioners, among others. One appliance and furniture maker told the Wall Street Journal that he sees bitcoin as a smart diversification strategy for the country. “My mother believes that bitcoin is a thing of the devil, ” he said, “but bitcoin has a lot of advantages.”
Other social media pundits who claim to have received their tiny slice of bitcoin through the Chivo app or ATMs are expressing their gratitude.