One Year Later – Is the El Salvador Experiment Success or Failure?

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Twelve months ago, El Salvador made the shocking decision to adopt Bitcoin as legal tender. It was a highly controversial move criticized by everyone from the IMF to the country’s residents. El Salvador’s president Nayib Bukele stuck with it, though, buying more BTC when the price dipped. He also promised the development of the Bitcoin volcano bonds and the world’s first Bitcoin-powered city.

The plan lies all but in tatters. While El Salvador got BTC at a good price, the latest price dips went too far. The president hoped that adopting Bitcoin would result in foreign investment, helping the country avoid the debt it amassed.

A year on, it seems that the experiment failed. El Salvador is not in a better position than the time it made the controversial decision, meaning it was a cautionary crypto tale.

Making the Switch

Bitcoin was already bordering on legal in El Salvador before it was adopted as legal currency. In a move to reduce dependence on the US Dollar, Bukele made it legal tender, meaning all companies and merchants had to accept Bitcoin as a payment method. To encourage its use, the government built the Chivo app and wallet where you could trade USD to BTC. It came with a pre-loaded $30, which is about 10% of the median weekly income in the country.

The Chivo wallet wasn’t a hit. Only about 20% of El Salvadorians used it, and a big part of them took it just to claim the 30 bucks. Bitcoin transactions were on the rise, but that was a result of the “must-have” policy set by the government, not by choice. A year ago, Bitcoin’s price was over 2.5 times higher than today. Life was great for Bukele, who made gains for the country every time the price dipped. But, following the latest price dips, it’s clear that the experiment hasn’t succeeded.

Cautionary Crypto Tale

In many ways, the tale of Bitcoin adoption in El Salvador is a cautionary tale for crypto. It worked for a while, but is now a spectacular failure. Luckily, Bukele didn’t have time to launch the $1 billion volcano bonds, which would have ravaged the country’s already fragile economic system. However, the government still spent over $100 million, which is worth half the price now.

It was a flawed analysis by Bukele. He seemed to think of it as an investment fund, misinterpreting how it works. It showed that he doesn’t understand how GDP works too, and he massively miscalculated the expected price jump for crypto. It didn’t take off in 2022 as we expected, probably fueled by the Russia-Ukraine war and the impending financial and energy crisis.

There’s no question that he had his heart in the right place. Many countries around the world are battling depth by moving away from traditional crypto. But, El Salvador’s gamble didn’t play off. It would take a miracle for Bitcoin to move over $50,000 again, and an even bigger one for El Salvador to actually make money.