Big bet on bitcoin backfiring
El Salvador’s move to digital currency shows gap between hopes and economic realities
Bitcoin was meant to transform El Salvador’s economy, catapulting the poor Central American nation into an unlikely harbinger of a financial revolution.
But nearly a year after the country’s president, Nayib Bukele, shocked the financial world by making its most popular digital coin a national currency, his bet appears to be backfiring, highlighting the gap between the Utopian promises of cryptocurrency’s proponents and economic realities.
The government’s bitcoin holdings have lost about 60% of their presumed value during the recent market plunge. The use of bitcoin among Salvadorans has collapsed, and the country is running out of cash after Bukele failed to raise fresh funds from cryptocurrency investors.
Still, the setbacks have failed to dent Bukele’s popularity. Polls show more than 8 of 10 Salvadorans continue backing the president, thanks in part to his widely supported crackdown on criminal gangs and on fuel subsidies that have lessened the sting of global inflation.
But the failure of Bukele’s stated objectives for bitcoin — to bring investment to the country and financial services to the poor — has exposed the shortcomings of his authoritarian, image-focused style of governance, critics say. It has also raised questions about the financial sustainability of his ambitious plan to modernize El Salvador at the expense of democratic governance.
Last year, his government allocated the equivalent of 15% of its annual investment budget to try ingraining bitcoin into the national economy.
It offered $30 — nearly 1% of what an average Salvadoran earns in a year — to every citizen who downloaded a government-backed cryptocurrency payment app called Chivo Wallet; chivo means “cool” in local slang.
Bukele claims that nearly 3 million Salvadorans, or 60% of adults, heeded his call.
Yet, after the initial uptake, the use of cryptocurrency has plunged.
Only 10% of Chivo users continued making bitcoin transactions on the app after spending their $30 stipend, according to a survey conducted by three U.S.-based economists in February and published by the National Bureau of Economic Research. Almost no new customers downloaded the app this year, the researchers found.
“The government gave this project as much push as you could hope for, and it still failed,” said Fernando Alvarez, a University of Chicago economist and an author of the study.
A separate survey by El Salvador’s Chamber of Commerce in March found that only 14% of the country’s businesses made bitcoin transactions since it was introduced in September, and only 3% said they perceived any business value in it.
The price collapse has also not deterred Bukele’s enthusiasm for bitcoin, which has earned him the adulation of the global cryptocurrency community.
In a series of Twitter posts over the past year, Bukele announced that he had bought a total of nearly 2,400 bitcoin tokens since September, in deals valued at an estimated $100 million. When critics accused him of financial irresponsibility, he responded by saying that he conducts transactions on his phone while naked.
“Bitcoin is the future!” he said in a Twitter post June 30 after announcing his latest purchase amid an ongoing cryptocurrency sell-off. “Thank you for selling cheap.”
It is unclear where the bitcoin assets are held, what they are worth, how they were paid for or even who holds the codes that prove their ownership.
Bukele’s press office, his finance minister and his bitcoin adviser did not respond to requests for comment.