The Republic of El Salvador has nearly half of its Bitcoin investment in under a year as the broader cryptocurrency market routs from its pandemic highs.
Bloomberg has kept track of El Salvador's Bitcoin holdings by tracking President Nayib Bukele's purchases for the country's crypto trust, which he regularly announced via Twitter (NYSE: TWTR). Appearing to believe strongly in "buy the dip," Bukele has continually increased the country's holdings even as Bitcoin cratered in price through January and into the spring.
With a "crypto winter" setting in and growing sovereign debt concerns tied to the country's Bitcoin adoption, buying the dip may have wider repercussions beyond the country's investment losses.
El Salvador's Investments and Losses in Numbers
El Salvador's Bitcoin trust holds 2,301 tokens, according to Bukele's tweets, since the first purchase of 200 BTC on September 9, 2021. Out of the $150 million set aside for the trust, factoring in BTC prices at each respective purchase, roughly $104 million has been invested. At the time of writing, El Salvador faces a $48 million loss.
That loss looked much worse over the weekend as the pioneering cryptocurrency slipped below $20,000. However, even the $57 million loss El Salvador faced on Saturday is barely a dent in the country's nearly $25 billion GDP. For further comparison, El Salvador's general budget is $8 billion, with the country's losses representing less than 5% of that budget.
Far from being a mere investor, El Salvador also has to contend with the costs of its adoption of BTC as legal tender. In addition to the costs of obtaining vendors to support its integration of Bitcoin and the deployment of crypto ATMs, the country offered Salvadorans $30 in BTC as an incentive to download the Chivo Wallet app.
"It doesn't seem to be a popular idea, but the plan of popularizing bitcoin in the country hasn't been successful," Julio Sevilla, associate professor at the Terry College of Business, told NPR's 'All Things Considered.' "Just around two-thirds of the population downloaded the app - and even though they were offered $30 just for signing up...just around 20% of those that signed up to the app are currently using it."
Only 20% of businesses accept BTC, despite the country's new law, reflecting a broader rejection of adoption amongst El Salvador's businesses as well. With so little adoption by the general public, the hidden costs of the government's failing Bitcoin adoption will amplify the pressure felt from investment losses.
The Sovereign Debt Problem and the Bitcoin Force Multiplier
El Salvador's investments might be small compared to its economic output, but the country's GDP faced its first drop for the first time in a decade. To make matters worse, El Salvador's public debt is 90% of its now shrinking GDP. Financing that debt is made significantly more difficult due to the country's declining relationship with the International Monetary Fund over its Bitcoin adoption.
The IMF's calls to reverse the adoption of Bitcoin went ignored, which leaves an essential loan to finance El Salvador's future bond payments in question. A missed bond payment could have widespread consequences for El Salvador that could go far beyond quashing Bukele's "Bitcoin City" ambitions, triggering a sovereign debt crisis that could kneecap the country's weakened economy.