Why is El Salvador, the first batch of "Bitcoin Crabs", getting poorer and poorer?

Author: The Economist

Compiled by: CryptoLeo, Odaily Planet Daily

During the recent market decline, El Salvador increased its holdings of 7 and 5 BTC on February 25 and March 4, respectively, after reaching a $1.4 billion loan bailout agreement with the IMF. Judging from the agreement, the IMF has imposed regulatory restrictions on the national-level encryption status in El Salvador due to concerns about the high risk of BTC, but this has not allowed El Salvador to stop its BTC purchase plan. In fact, the IMF's concerns are unreasonable. Crypto President Nayib Bukele's obsession with cryptocurrencies and various "support" methods since taking office have not improved El Salvador's economy, and even increased the deficit. Since the implementation of the president's crypto policy, El Salvador's deficit in cryptocurrency has also intensified.

The Economist wrote an article about the cryptopath of El Salvador, which Odaily compiled as follows:

Since Nayib Bukele became president in 2019, El Salvador has been on the verge of default for most of the time. High debt and interest expenses have been intensified by huge fiscal deficits, becoming a long-term warning sign for its national economy. The dollar reserves are low, investment and GDP growth is weak, and the bailout negotiations with the International Monetary Fund are at a deadlock. Bukele's ruthless attacks on the judiciary, opponents and the media did not have much incentive to its country.

Bukele is too obsessed with cryptocurrencies. In 2021, El Salvador became the first country to use Bitcoin as a fiat currency along with the US dollar. President Bukele vowed to avoid traditional capital markets and raise billions of dollars through tokenized blockchain bonds. He will buy $500 million worth of Bitcoin, build a "Bitcoin City" and develop geothermal energy to power Bitcoin miners. But traditional markets did not pay for it, with several El Salvador bonds trading at an average price of less than 30 cents in the summer of 2022, when the government began to postpone public wages to ensure sufficient cash and investors were planning the worst.

Surprisingly, on February 26, the IMF board approved a $1.4 billion bailout loan that was reached in December after years of delay and will be issued within 40 months. To get the money, El Salvador made a regular commitment in fiscal discipline - to reduce its cryptocurrency projects. After the law was amended in January this year, taxpayers no longer paid in Bitcoin, and the private sector accepted Bitcoin payments entirely based on voluntary action.

In the process of applying for a debt agreement with the IMF, El Salvador showed a firm determination to repay the debt. Part of this is because Bukele hopes to surprise Wall Street skeptics, with bond prices in the country rebounding to par value levels, and officials use scarce dollars to buy back bonds at a significant discount, saving a large portion of future principal payments. The fiscal deficit rose to 10% of GDP in 2020 and has now returned to the level of 2-3% before the epidemic, roughly the same as other countries. Cracking down on tax evasion, large inflows of remittances and a slight recovery in the economy has increased government revenue; the gradual cancellation of energy subsidies and plans in the era of the epidemic has slowed down spending.

The loan reduces the risk of a debt default crisis, but it would be better if El Salvador could get another $2.1 billion from other multilateral lenders as one would have hoped. Despite the cuts in the deficit, the country may not last long. With high debt and slow economic growth, El Salvador continues to follow what he did in early 2024 - raising funds at a rate of 12% is unsustainable. In dollarized economies like El Salvador, the cost of sovereign debt defaults is even greater because there is no lender of last resort to avoid bank runs or financial crisis. Local bank deposits are partly supported by government debt, so defaults may "snowball" into a banking crisis, and even lead to de-dollarization.

As for the concessions made by El Salvador in Bitcoin adoption, it may be a "lost" and more of a glory than a concession. Bukele touts cryptocurrencies to provide financial services to two-thirds of adults without bank accounts and reduce remittance costs, which accounts for almost a quarter of its country's GDP, but the main obstacle to cryptocurrency HP is the size of its economy and its lower digital economy literacy. The high remittance costs are because El Salvadors like to trade through paper money, which is an expensive business in itself, and criminal activities make the cost even higher. In addition, the El Salvador government has also rushed to launch the Chivo digital wallet, which can be paid in US dollars and Bitcoin. But the reality after the wallet was launched was not ideal, with loopholes and identity thefts rampant - in order to steal a $30 Bitcoin reward when registering a wallet.

When Bitcoin was still the fiat currency of El Salvador, the IMF was cautious about providing loans to El Salvador. Bitcoin price fluctuations pose risks to financial and fiscal stability. Bitcoin may be used for money laundering and other criminal activities. The International Monetary Fund said El Salvador will restrict "bitcoin transactions and purchases." According to on-chain data, the country has actually been buying Bitcoin since the agreement was reached, but in order to comply with the loan agreement, the country may have to reduce or withdraw those purchases. El Salvador now holds 6,100 bitcoins, worth more than $500 million, and has a floating profit of about $200 million, which is also something Bukele is proud of.

Profits may seem large, but the investment cost of cryptocurrencies to El Salvador is greater than the benefits. Bukele's crypto publicity is popular, but the scale of crypto investment and crypto travel is small, and the benefits brought by financial HP and more efficient payment methods are also insignificant. Anyway, cryptocurrencies have never really become popular in El Salvador. When the hype peaked in 2022, a CID-Gallup survey found that only one in five companies accept Bitcoin and only 5% of their taxes are paid in cryptocurrency. The figure in the near future may be even lower, as El Salvadors still have a strong preference for cash and payment cards.

In addition, rating agency Moody's said that El Salvador spent a total of $375 million on the crypto experiment - including Chivo's launch, subsidized transaction fees, Bitcoin ATMs, etc., which far exceeds its current Bitcoin holdings, and these profits may still decrease as Bitcoin falls. Bukele's crypto experiment delayed El Salvador's loan agreement with the IMF, leaving El Salvador's risk premium high and his country is on the verge of default on debt.

But Bukele has extremely high approval ratings, usually over 90%. He claims to be "the most popular dictator in the world", but this is not because of his praise for cryptocurrency, but because of his severe crackdown on criminal activities, which are ignored by him during the crackdown. His obsession with cryptocurrencies has not eased El Salvador's economic hardship. Although Bitcoin may remain a reserve asset on the country's balance sheet, its days as El Salvador fiat currency are over. Bukele is just a cryptocurrency utopian whose crazy ideas collided with reality.