El Salvador made history in September 2021 by becoming the first country to adopt Bitcoin as legal tender. This bold move was driven by the government’s desire to foster financial inclusion, attract foreign investment, and modernize the economy. Here’s an overview of how El Salvador started with Bitcoin, why it took this path, the public’s reaction, the impact of the bear market, and how Bitcoin is being integrated into daily life.
When and Why El Salvador Started with Bitcoin
In June 2021, President Nayib Bukele announced his plan to make Bitcoin legal tender. The Bitcoin Law, passed by El Salvador’s congress, went into effect on September 7, 2021. The primary objectives were to provide financial services to the unbanked population, reduce remittance costs, and attract investment by positioning El Salvador as a global hub for cryptocurrency innovation.
Public Opinion and Adoption Challenges
The reaction among Salvadorans has been mixed. While the government incentivized adoption by giving away $30 worth of Bitcoin to those who downloaded the Chivo Wallet, widespread adoption has been limited. A significant portion of the population remains skeptical or indifferent to Bitcoin, primarily due to a lack of understanding and trust in the cryptocurrency. Surveys indicate that many who initially downloaded the wallet did so for the free Bitcoin and have not continued to use it regularly for transactions.
Impact of the Bear Market
The cryptocurrency market crash in 2021-2022 severely impacted the value of El Salvador’s Bitcoin holdings. The government had invested about $150 million in Bitcoin, which lost approximately 70% of its value at one point. Despite these losses, President Bukele remained optimistic, frequently announcing additional Bitcoin purchases during market dips. The bear market also led to economic challenges, prompting the government to cut public spending in other areas.
Day-to-Day Implementation and Handling Volatility
Bitcoin’s integration into daily life in El Salvador has been facilitated through the Chivo Wallet, which allows users to send and receive Bitcoin, pay for goods and services, and even pay taxes. The government has installed numerous Bitcoin ATMs across the country to support these transactions. However, the use of Bitcoin for everyday purchases remains limited, and most businesses still prefer transactions in U.S. dollars.
To handle Bitcoin’s volatility, the Chivo Wallet offers instant conversion of Bitcoin to U.S. dollars at the time of transaction, reducing the risk for merchants and consumers. This feature has been crucial in mitigating concerns about price fluctuations.
State Investment in Bitcoin
By mid-2022, the Salvadoran government had purchased around 2,300 bitcoins, valued at approximately $76.5 million as of September 2023. Despite the initial losses during the bear market, the value of these holdings has fluctuated with market conditions. As of early 2024, the government’s Bitcoin investments had reportedly turned a profit, with the overall strategy viewed as a long-term investment in the country’s economic future.
Conclusion
El Salvador’s experiment with Bitcoin is unprecedented and has garnered significant global attention. While the initiative has faced numerous challenges, including public skepticism and market volatility, it also holds the potential to transform the nation’s financial landscape. The long-term success of this bold move will depend on continued education, technological infrastructure development, and global economic conditions.
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Written by Lorena Billi
