Crypto As a National Currency

On 7 September 2021 NayibBukele, El Salvador’s young president, historicallylaunched Bitcoin as his nation’s second national currencyalongside the US dollar, which has been legal tender in the country since 2001.Bukele argued that adopting the digital currency would save Salvadorans as much as $400 million a year in bank fees normally charged for money transfers from relatives living abroad in the USA. As an incentive, the president offered any citizen $30 in Bitcoinupon downloading the government’s digital wallet calledChivo, which means “cool.” Another factor motivating the bold move to cryptocurrency was Bukele’sconcern about the effect of inflation on the dollarin the wake of President Joe Biden’s economic stimulus packages.

How things have gone since then depends on whom you ask. For one thing, the launch itself did not go exactly as Bukele had hoped, as the price of Bitcoin dropped by 17% the following day, slumping from about $50,000 to less than $43,000. A tweet by economist Peter Schiff, addressed to Salvadorans soon afterwards, read: “Your national “currency” just lost over 15% of its purchasing power in under an hour. Get used to it.” Some analysts believe the sell-off had to do with the fact that the Salvadoran government actually took their Chivo wallet offline for some time while improving their servers. But, according to Bloomberg analyst Michael McGlone, the sudden price movements were not something to be concerned about, and only signified a “wringing out” of speculative investors. Let’s take a look at the effects of this historical launch on the price of Bitcoin and on the Latin American country itself in the following couple of months. A must read if you plan to invest in cryptocurrencies with iFOREX as CFDs.

A Month Later

One of the most obvious differences on the streets of San Salvador, El Salvador’s capital city, at the beginning of October was that supermarkets and restaurant chains like Starbucks were accepting Bitcoin as a payment method. There were also reports of increasing usage of the government mobile app for speculative day-trading in Bitcoin. Not everyone was happy, though, due to the reported fact that the Chivo network was frequently out of order. There were even protests against the cryptocurrency on September 15th and then again on October 12th.

As to the price of Bitcoin, it shot up by 11% on October 1st, though it remained down about 7% since September 6th. October was a strong month for the crypto, due partly to theintroduction of the first ETF fund associated with Bitcoin futures and the publicity surrounding George Soros’ Bitcoin investments.The price of the coin rocketed up by 50% in the month. President Bukele, for his part, displayed unabashed confidence in his decision,tweeting his own purchase of 700 Bitcoins in September, and then of420 coins in late October.

One journalist, John Holman, has an optimistic view: “70% of Salvadorans don’t have bank accounts and this is a way they can save up a bit and (hopefully) watch that pile grow as Bitcoin’s value increases,” he said.Some Reuters analysts have, however, expressed the concern that “Adopting the cryptocurrency could fuel money laundering in a country with serious problems of government corruption and organized crime.” Indeed, other analysts have also pointed out the possibility that money launderers could be drawn to El Salvador’s banks as a result of the move. The overall effect of this bold changein El Salvador has not yet materialized and will only become known in the months ahead.

New Developments

Since then, El Salvador’s leader has been active in his promotion of the crypto, planning to build his own blockchain with the assistance of Algorand and also preparing to host the Latin American Bitcoin and Blockchain Conference in mid-November, which will be an opportunity for Latin Americans to “Engage with Bitcoin specialists, entrepreneurs, as well as local governments about what Bitcoin could mean for the region,” in the words of its founder Rodolpho Andragnes.Bukele even announced he is building 20 new schools from the “surplus” of the nation’s Bitcoin Trust Account.

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