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The Central American country of El Salvador has been buying bitcoin since September. However, in recent weeks, the country’s big bet on cryptocurrency has collapsed because cryptocurrency has washed away roughly a third of the value of state assets.
El Salvador is the first country to adopt bitcoin as legal tender. They also plan to create a cryptocurrency mining center using the energy of volcanoes, and issue the first sovereign bond related to bitcoins.
In addition to a significant increase in debt repayment obligations and an increase in global borrowing costs, El Salvador also faces a serious problem of the consequences of currency depreciation. However, the cryptocurrency’s collapse has closed certain potential ways out of the crisis, such as bitcoin’s deferred bond.
Ricardo Castaneda, senior economist and coordinator for El Salvador and Honduras at the Central American Institute for Financial Studies (ICEFI) think tank, said:
The government’s financial problems have been exacerbated by bitcoin. For the government, bitcoin has ceased to be the solution and has become part of the problem.
Since last September, when El Salvador officially accepted bitcoin as legal tender, the coin’s price has fallen by 45%. And since its May high, BTC has lost 26% of its value as investors have invested their money in other assets.
According to CoinMarketCap, the entire market value of cryptocurrencies has just dropped to $1.2 trillion, less than half of its peak value in November.
According to Statista, El Salvador’s debt increased to $24.4 billion last December, compared with total liabilities of $19.8 billion in December 2019.
The International Monetary Fund (IMF) estimates that the current account deficit for El Salvador’s economy, which relies heavily on money sent by people living abroad and foreign investment, will be about $2 billion annually through 2025.
Implications of Bitcoin Legalization
Legal recognition of Bitcoin by El Salvador has led to a distancing from global lenders such as the IMF, from which Finance Minister Alejandro Zelaya expected a $1.3 billion loan for 36 months last year.
The IMF advised El Salvador to completely abandon bitcoins. According to a statement by the IMF administrator, any loan approval transaction should include risks such as those associated with accepting bitcoin as legal tender and the risks associated with economic governance.”
Siobhan Morden, head of fixed income strategy for Latin America at Amherst Pierpont, commented:
If there is no potential for dividends from the growth of bitcoins or innovative financing of bitcoins, then the Bukele administration will have to prioritize spending and identify financing options.
Bitcoin is estimated to have lost nearly $36 million; the government purchased 2301 coins worth $104.2 million, and now its value has depreciated to $67.9 million due to a decrease in the market price of the coin.
Author: Anton Zaitsev, Analyst at Freedman Club Crypto News
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