The price of major cryptocurrencies continues to fall this week, including the billionaire losses of the largest of them, bitcoin, the value of each unit has fallen from almost R$290,000 in December 2021 to 109,000 R$ on June 16.
This collapse affected thousands of investors around the world, such as the government of El Salvador. The small Central American country has dumped millions of dollars in bitcoins, in addition to legalizing transactions nine months ago, encouraging people to use the cryptocurrency on a daily basis.
Jewelry, food, gasoline and even real estate. Yes, you can buy just about anything with bitcoin in El Salvador. Indeed, making these transactions with street vendors and major retailers in the country is a remarkable experience.
As well as illustrating how far bitcoin has come since its mysterious emergence in 2008, Salvadoran President Nayib Bukele’s decision to legalize cryptocurrency transactions represents, in practice, that all businesses must accept them in payments, as this is the case with the other currency adopted in El Salvador, the US dollar.
But falling cryptocurrency prices have heightened criticism and questions about the public policy of investing nearly US$100 million (about 505 million reais) in bitcoin, with the Salvadoran president celebrating on Twitter each acquisition.
Currently, the 2,300 bitcoins bought by the country are worth half of what was paid for them, but the finance minister countered criticism by saying there is “extremely low fiscal risk” for the country.
Despite growing criticism and pressure to reverse its cryptocurrency policy, the Salvadoran government seems determined to maintain the measure and other ambitious cryptocurrency plans in the country.
‘Praia do Bitcoin’
The place where the bitcoin movement started in El Salvador is known as El Zonte, a small surf and fishing town on the south coast of the country. Here in 2019, an anonymous donor gave a group of cryptocurrency fans the first of many large bitcoin donations.
Nobody knows for sure who the donor or donor is, but everyone knows the deal was this: the city could keep the digital currencies as long as they weren’t converted to dollars.
The idea was to create the world’s first circular bitcoin economy, where people can be paid in bitcoin and live in it.
It’s a radical idea. In the rest of the world, bitcoins can be used for online purchases, but apart from a small number of hipster cafes or specific projects, it is not possible to use them on the street.
El Zonte has so far received around $350,000 from the anonymous benefactor, a significant sum for this impoverished and touristy town now known as Bitcoin Beach.
Katerina Contreras was one of the first beneficiaries.
Two years ago, during the pandemic, she was offered a lifeguard course, and it seemed like a great deal.
The organizers paid for transport and food for the trainees in bitcoin. In addition, “for six months, we worked as lifeguards and received our salaries in bitcoins,” she says.
Some businesses in the city say they have seen a 30% increase in trade as bitcoin tourists, fueled by YouTube cryptocurrency channels, have been lured by the novelty of spending their digital currencies on vacation.
But the adoption of bitcoin as a currency remains erratic.
My travels have led me to conclude that the further you are from Bitcoin Beach, the less likely you are to be able to buy things in digital currency.
In Bitcoin Beach, just over half of the businesses I encountered accepted bitcoin, but drive 80 minutes north of the capital, San Salvador, and that rate is no more than a quarter of the trade.
The government says it has no plans to force businesses to accept bitcoin, even though they are required to do so under the country’s bitcoin law. So far, the authorities’ measures have been limited to offering incentives.
Money still rules the country, where more than half of Salvadorans do not have a bank account. But President Bukele funneled $200 million of public money into a subsidized bitcoin wallet app called Chivo.
Anyone who downloads the app receives $30 in Bitcoin for signing up, which may explain why it’s been downloaded 4 million times in a country of 6.5 million people.
But many people use the app for dollar transactions, not bitcoins. It is often used in this way, for example by people who work abroad and send money to their families, because there are no commissions or transfer fees.
And there are signs that after the initial surge of interest, people are using Chivo less.
Another incentive for its use came in late February, with the opening of the country’s most advanced veterinary hospital.
Long queues are common, with people and pets sheltering in queues in tents for care. And that’s because all animal care, even complex surgeries, costs just 25 cents, as long as it’s paid for with the Chivo app, and preferably in bitcoin.
Officials say the center is paid for from “bitcoin profits,” but government officials have not responded to requests for an explanation of how those profits were made.
The International Monetary Fund (IMF) has urged El Salvador to reverse its decision to make bitcoin legal tender, arguing that the currency is too unstable for this purpose. Moreover, local economists like Tatiana Marroquin are increasingly concerned.
She says the government doesn’t have enough money to help vulnerable people, so it shouldn’t take risks by pouring public funds into cryptocurrencies, which are considered quite risky resources due to the high price volatility.
Marroquin also points out that there is a lack of transparency in this process. “We don’t know exactly when or with what money they bought bitcoins.”
Tourism Minister Morena Valdez refutes the critics. She points out that Salvadorans have confidence in President Bukele despite the decline in bitcoin’s value. “We know that each of the president’s decisions is made at the right time. People have great confidence in his decisions and in the course of the country’s economy.”
Other countries were considering following El Salvador’s move, before the value of the cryptocurrency began to fall in recent months. The Central African Republic was the only nation to follow this path. President Faustin-Archange Touadéra announced the decision on Twitter, calling bitcoin a “universal currency”.
El Salvador now wants to go further.
The Salvadoran president announced plans for a new city, dubbed Bitcoin City, which would be built at the foot of a volcano with geothermal energy supplies to power a “giant bitcoin mine”.
He said he hoped to raise funds by selling $1 billion in Volcano Bonds. But the titles would go on sale in March and to date have not been released.
Officials say they are confident they will be able to raise funds and repay an external debt of $800 million.
The idea of a “giant bitcoin mine” comes from the fact that cryptocurrency is obtained through a “mining” process which involves many calculations carried out on computers, to verify the transactions made by the people who send or receive bitcoin.
This process involves solving puzzles, which, while not fully validating the back and forth of cryptocurrencies, provide more protection against fraud in recording transactions.
As a reward, miners often receive small amounts of bitcoins, in what is often compared to a lottery.
To increase profits, people usually connect a large number of miners to the network? sometimes entire warehouses filled with miners.
This, of course, consumes a lot of electricity, since computers are almost constantly running to solve puzzles.
It is estimated that these processes consume approximately 121.36 terawatt hours (TWh) per year, equivalent to the consumption of all of Argentina.