December 4, 2023, will forever be etched into the history of El Salvador. On that day, two years after the legalisation of Bitcoin and a year into daily BTC purchases, the country’s crypto reserves turned a profit! Prior to this, global financial authorities and even local residents did not believe that a step toward legalisation would lead to anything good. Despite all concerns, the economy began to improve, which means Bitcoinization was beneficial after all.
Let's learn why El Salvador legalised Bitcoin and how the first cryptocurrency has changed the country.
How Bitcoin became the national currency of El Salvador
In June 2021, the President Nayib Bukele introduced a bill to legalise the most capitalised cryptocurrency, Bitcoin (BTC). Congress approved the proposal. On September 7, 2021, Bitcoin became the national currency of El Salvador alongside the US dollar.
Bukele believes that the legalisation of Bitcoin will boost the country’s economy, streamline financial transactions, and attract more foreign investors.
The president’s team tried to popularise Bitcoin as a payment tool:
🏷️ Citizens got discounts for paying in crypto, such as saving $0.20 per gallon by purchasing fuel in BTC.
🔄 Crypto-fiat ATMs were installed for easy conversion of Bitcoin into dollars and vice versa.
🙋 Consultation points appeared on the streets where you can ask questions about cryptocurrency.
👛 The authorities launched the national crypto-wallet, Chivo, offering $30 in BTC to all newly registered members.
🌋 Bukele announced a Bitcoin city-building program, where citizens could mine BTC using green energy from volcanoes.
The president himself is conducting exploratory work. He often answers questions about cryptocurrency on his own Twitter page.
Criticism of Bukele's decision to legalise Bitcoin
El Salvador faced criticism over the decision to legalise Bitcoin. There was a wave of protests across the country; everyone was afraid that this would provoke an inflation increase.
Large financial organisations also joined the criticism:
💸 The International Monetary Fund saw risks for El Salvador's macroeconomy.
🌱 The World Bank was also sceptical about the authorities’ actions; they believed that legalising BTC would worsen the environment (due to the carbon footprint of mining) and reduce transparency in the country’s financial market.
Let's see if the negative predictions turn out to be real.
Amid Bitcoin legalisation, El Salvador’s GDP grew from $29.4 billion in 2021 to $32.4 billion in 2022.
Gross domestic product (GDP) is the total value of goods and services produced within a country in a year. High GDP means that the economy is developing, new industries are opening, while old ones are working even better; low GDP indicates problems.
From 1965 to 2022, El Salvador's GDP grew steadily, peaking at $32.4 billion in 2022.
Along with the growth of GDP, goods and services have become more expensive in El Salvador, as evidenced by the consumer price index. It tracks price changes in a country; since they are growing, it means living there is becoming more expensive.
Prices in El Salvador began to grow actively in 2021; then the index was at 110 points, and by the beginning of 2023, it had reached 128.
It turns out that the legalisation of Bitcoin did not help tame inflation. However, El Salvadoran authorities faced the changes by increasing wages. According to Statista, from 2021 to 2022, citizens' income grew by 7%, with inflation standing at 5%. This makes up or even overcompensates for all the losses.
The authorities think that the decision was beneficial overall. Bukele claims that many new businesses have opened in the country, unemployment has fallen, and tourism has increased by 30%. Local watchdogs say the legalisation of BTC has made El Salvador more attractive to foreign investors. By the way, according to the new rules, anyone can obtain a country's citizenship by investing $1 million in Bitcoin or USDT into the country’s economy.
How many bitcoins does El Salvador have
As of the beginning of December 2023, the authorities of El Salvador had 2,381 Bitcoins worth $104.8 million. This is 0.011% of the total BTC supply (21 million coins). Only the United States (207k bitcoins), China (194k bitcoins), and Ukraine (46k bitcoins) have more.
El Salvador ranks 4th in the top 6 countries in terms of the number of Bitcoins owned.
In general, El Salvador has fewer coins than many public companies do. For example, MicroStrategy holds 174k BTC, Tesla has 10k BTC, and CleanSpark Inc., which ranks 11th among the largest companies, has 2.5k BTC.
The average price El Salvador purchased Bitcoins is $42,433. For comparison, the average purchase price from MicroStrategy is $36,785, and Tesla's is $34,000. Both companies began investing in BTC earlier, when the coin was cheaper. That circumstance made their average purchasing price lower than El Salvador's.
Has cryptocurrency become habitual in El Salvador
Although bitcoinization has benefited El Salvador's economy, travellers' experiences suggest that the authorities' plans have not been fully realised, and for good reason. Crypto-fiat transactions in the country are too expensive and time-consuming. To exchange Bitcoin for dollars or vice versa using crypto ATMs, you need to pay about a 5% fee, and the operation itself can take half an hour.
Many citizens, despite cryptocurrency propaganda, do not want to interact with digital assets. Some simply do not understand how Bitcoin works, while others do not see the point in exchanging their usual dollars for some kind of digital coin.
And only 12% of stores in El Salvador accept BTC, so you will not survive there with cryptocurrency alone.
Let's move to El Salvador?
El Salvador is definitely changing for the better: after the legalisation of Bitcoin, many new businesses have come to the country, wages increased, new foreign investors entered the market, and tourism blossomed. But you should not go there on vacation with just Bitcoins in your pocket. Most likely, you will not be able to pay for any purchases with crypto. It turns out that even in the most bitcoinized country, it is still impossible to survive without fiat.
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This article is not an investment recommendation. The financial transactions mentioned in the article are not a guide to action. Itez is not responsible for possible risks. The user should independently conduct an analysis on the basis of which it will be possible to draw conclusions and make decisions about making any operations with cryptocurrency.