The government of El Salvador has lost an estimated $3.1 million on its initial investment in Bitcoin within one day of the cryptocurrency becoming legal tender in the Central American country.
The adoption of Bitcoin in El Salvador became law on September 7, after months of headlines and speculation since legislation to make it legal tender was passed in June. Previously only the US dollar was accepted in El Salvador, following its adoption in 2001.
The impending implementation of the law saw the Salvadoran government announce the purchase of 400 Bitcoin on September 6 — valued at $51,924 each at the time of the announcement, for a total value of $20.77 million.
But the cryptocurrency’s value plummeted to $43,767 per coin within hours, to leave the total value of the investment at $17.51 million — wiping more than $3 million off of the value of the Salvadoran government’s initial investment in less than one day.
The news highlights one of the biggest concerns previously expressed about the adoption of Bitcoin in El Salvador — namely that the cryptocurrency’s volatility can come at significant cost — not only to the country’s coffers, but also to investors, businesses, and banks forced to adopt it.
Other concerns raised include security issues given the “transparency shortcomings” related to the difficulty of tracing the currency — which saw the World Bank refuse to help the government implement its law.
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Adoption of Bitcoin in El Salvador raises concerns, uncertainty
The government of President Nayib Bukele has doggedly pressed ahead with the adoption of Bitcoin despite widespread concerns.
The international community has expressed significant doubts about both the adoption of Bitcoin in El Salvador, as well as the speed with which it has been pushed through.
In June, Fitch Ratings highlighted serious concerns related to increased financial and regulatory risk associated with the adoption, “including the potential of violating international anti-money laundering (AML) and terrorist financing standards.”
The acceptance of Bitcoin in El Salvador has also caused widespread concern among the local population, with public protests seen in the country, owing to the cryptocurrency’s well-reported volatility, as well the risk of it being used for the likes of money laundering.
Meanwhile, concerns have been raised in neighbouring countries such as Honduras and Guatemala — both key trade partners of El Salvador — where many business leaders have expressed uncertainty about how the adoption of a currency that attracts significantly less confidence than the US dollar could affect commerce.
Crypto distracting from strong investment opportunities
One of the most unfortunate outcomes of the adoption of Bitcoin in El Salvador is the fact it has distracted attention from a currently strong investment climate, amid the Salvadoran central bank announcing anticipated GDP growth of up to 9% in 2021.
That projection was made based on a mixture of industrial production, investment, household consumption, and exports — the sort of multiple driver-based growth that investors look for.
Meanwhile, despite the concerns raised about the adoption of Bitcoin in El Salvador, banks in the country have made clear that, while they will legally have to accept the cryptocurrency, all key aspects of their operations will continue to be carried out in US dollars.
That should dampen some of the most serious concerns regarding Bitcoin, with financial institutions remaining as protected as possible from potential severe fluctuations in the currency.
Meanwhile, with Bukele now more than two years into his five-year presidential term, his political fate looks to be pinned to the success of the Bitcoin law, after the country’s top court removed a constitutional limit on re-election.
It can be assumed that, should the government continue to experience financial losses such as those seen in the first 24 hours of the law coming into force, Bukele and his party will end up paying for it at the ballot box.
Biz Latin Hub can assist you doing business in El Salvador
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