Just over a year after El Salvador launched its Bitcoin experiment, the country is on the verge of financial collapse and threatens to turn its cryptocurrency experiment into a costly misstep. Let’s take a look at how Bitcoin contributed to this situation and why El Salvador rejected a $1.3 billion loan from the International Monetary Fund (IMF).
Why did they use Bitcoin?
The Salvadoran government has a history of mismanaging or exploiting the country. Incumbent President Naive Bukele’s bet on Bitcoin began as an attempt to move the country forward. Instead, it looks like it could be the latest on a list of ways governments have failed the people. BTC was in the middle of a historic rally when Bukele announced that El Salvador had accepted Bitcoin as fiat. There was hope that the value of Bitcoin would rise enough to allow El Salvador to pay off some of its accumulated debt. So the “bankruptcy” the country is facing is not just about Bitcoin investment. Rather, their real financial risk is not meeting existing deficits.
What happened?
In the case of Bitcoin, the entire cryptocurrency market started to decline sharply at the end of 2021. However, Salvador’s multi-million dollar investment in BTC was a more modest investment. Currently, the country’s problems are mainly due to foreign debt. The country faces default as the International Monetary Fund (IMF) rejects a $1.3 billion loan.
The main reason is that the El Salvador government has made Bitcoin a fiat currency. The IMF is concerned about the long-term viability of Bitcoin. But now that Bitcoin has lost so much value, investors will lose interest, at least for a while. It could be argued that their plans failed twice because some of El Salvador’s bets on Bitcoin depended on attracting investors.
IMF loan rejection
The IMF rejected a $1.3 billion loan to El Salvador because El Salvador refused to issue its own BTC. It makes sense that one of the world’s largest central financial institutions is not in favor of legalizing a decentralized economy. Bitcoin, which has fallen nearly 50% in the past year, confirms the IMF’s concerns about cryptocurrency volatility. Whatever you think about the IMF’s concerns about Bitcoin, the numbers are on their side right now.
President Bukele’s double-down and continued purchase of bitcoin is not helping his country’s relationship with the IMF. Bukele seems willing to risk bankrupting his country with Bitcoin. Whether time proves Bukele right or wrong, he ignores the short and medium term future of El Salvador.
