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El Salvador Faces Turmoil as Bitcoin Value Plunges

El Salvador’s bet on bitcoin is looking more and more risky as the cryptocurrency’s value plunges. 

Last year, the Central American country became the first in the world to make bitcoin legal tender for all transactions. 

In recent weeks, the overall crypto market’s value has fallen rapidly and is now worth $930 billion compared to $3 trillion in November.

Bitcoin, by far the most popular cryptocurrency, has lost about two thirds of its value.

In 2021, El Salvador’s president, Nayib Bukele, sought to change its legal tender to the digital asset. 

The government said on Twitter it bought 2,301 Bitcoin and has openly advocated for using the virtual currency as an investment option.

The already debt saddled country now faces a loss of about $56 million on its bitcoin holdings, according to Bloomberg’s calculations.

Bitcoin continued to plummet on June 15, the ninth consecutive day of declines. 

Volatility is not new for Bitcoin, but this is its longest streak of declines since 2014.

Bukele does not see the massive slump in valuation as a problem for the country and its coffers. He tweeted that the country’s loss from bitcoin is not a reason to avoid investing in it. Instead, Bukele suggested purchasing more of bitcoin.

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The country bought another 500 bitcoin about a month ago, based on Bukele’s tweets.

El Salvador has several obstacles, including large fiscal deficits, an $800 million bond that is due in January and a thin cash reserve. The Central American country’s dollar debt ranks as the worst performing one.

The country had sought to obtain more financing for a halted bond that was linked to bitcoin.

El Salvador was lowered to CCC+ by S&P Global Ratings since there are many challenges for the country to obtain more financing. Fitch lowered El Salvador‘s rating to CCC in February due to “heightened financing risks stemming from increased reliance on short-term debt, an USD 800 million Eurobond repayment due in January 2023, a still-high fiscal deficit, limited scope for additional local market financing, uncertain access to additional multilateral funding and external market financing given high borrowing costs.”

The country’s adoption of bitcoin “as legal tender has added uncertainty about the potential for an IMF program that would unlock financing for 2022-2023,” the ratings agency said.

William Je, CEO of institutional investment firm Hamilton Investment Management, said in December 2021 that the country’s adoption of bitcoin as legal tender remains “the exception and not the model for the future.”

The move by El Salvador’s government to adopt a second national currency is reminiscent of when it replaced its currency, the colón, with the U.S. dollar, back in 2001.

“Let’s remember that El Salvador is a developing economy and a nation with a history of currency changes,” he said. “Its adoption of bitcoin as legal tender is down to the same challenge the nation faced 20 years ago, which is that just under a quarter of the country’s GDP comes from remittances from its citizens who live and work abroad.”

The cryptocurrency market has seen its fair share of volatility since its value is often based on market speculation. During the past eight months, investors have seen bitcoin’s value decline by roughly 70% compared to an all-time high of $69,044.77 that was reached on November 10. The digital currency still accounts for 43.1% of the total crypto market valuation currently.

The valuation of the market depends on the evolution of Bitcoin. It is therefore no surprise that the market which weighed just over $3 trillion at the beginning of November lost more than $2 trillion in the Bitcoin crash. 

Prices of bitcoin could fall under the $20,000 psychological threshold soon because of the general downward trend and the immense volatility that the crypto industry faces constantly.

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