Could Bitcoin crash make El Salvador BUST? Government loses $40M amid plans to build crypto city

El Salvador’s Bitcoin stake could be putting the country in jeopardy as its assets lost $40 million during a cryptocurrency crash.

The losses, equated to the Central American nation’s next bond payment, come amid a so-called “crypto winter” and the president’s plans to build a volcano-powered “crypto city” to mine coins.

President Nayib Bukele announced in September that El Salvador will become the first country in the world to accept Bitcoins as legal tender, dedicating $105 million to the digital currency.

But since then, its value has dropped 45% amid the general bursting of the crypto bubble, and the value of 2,301 Bitcoins bought by the government coffers has dropped to $66 million.

The decision to make Bitcoin legal tender has baffled bond investors, who think it exposes the government coffers to the volatility of the crypto market, thereby affecting the country’s ability to make bond payments.

“This is risky because it is an extremely volatile asset and an investment that is entirely at the discretion of the president,” said Carlos Acevedo, former Central Bank Governor of El Salvador, Bloomberg.

El Salvador’s president, Nayib Bukele (left, cover) has unveiled architecture studio FR-EE’s designs for a cryptocurrency-powered city planned to rise on the rim of a volcano in the south of the country.

President Nayib Bukele announced in September that El Salvador would become the first country in the world to accept Bitcoins as legal tender.

President Nayib Bukele announced in September that El Salvador would become the first country in the world to accept Bitcoins as legal tender.

The decision to make Bitcoin legal tender has baffled bond investors, who think it exposes the government coffers to the volatility of the crypto market, thereby affecting the country's ability to make bond payments.

The decision to make Bitcoin legal tender has baffled bond investors, who think it exposes the government coffers to the volatility of the crypto market, thereby affecting the country’s ability to make bond payments.

El Salvador President Nayib Bukele donated $105 million to the digital currency.  But since then, its value has dropped 45% amid the general bursting of the crypto bubble, and the value of 2,301 Bitcoins bought by the government coffers has dropped to $66 million.

El Salvador President Nayib Bukele donated $105 million to the digital currency. But since then, its value has dropped 45% amid the general bursting of the crypto bubble, and the value of 2,301 Bitcoins bought by the government coffers has dropped to $66 million.

The self-described 'coolest president in the world' Nayib Bukele (above) is a strong advocate of the cryptocurrency Bitcoin.

The self-described ‘coolest president in the world’ Nayib Bukele (above) is a strong advocate of the cryptocurrency Bitcoin.

‘When he wants to take advantage of the drop, he buys from his phone, but he doesn’t get it right because when he buys there is always a bigger drop.’

El Salvador owes its bondholders $382 million in interest this year, and July is the busiest month to pay, as $183 million is due.

According to the central bank, the country has $3.4 billion in reserves in April and has plans to raise $1 billion via a Bitcoin-backed bond, but this is currently doubtful given the collapse of the cryptocurrency’s value.

Despite these reserves, markets now seriously doubt El Salvador’s ability to pay off its debt due to its involvement with cryptocurrency.

Ratings agency Fitch has downgraded El Salvador’s debt to the CCC, or ‘garbage’ in the industry, fearing that rising debt to GDP levels, which is expected to reach 86.9% by 2022, ‘raises concerns about debt sustainability over the medium term’.

Bukele continued his enthusiasm for the digital currency even as its price plummeted, doubling down on May 9 by purchasing another 500 bitcoin slices for $15.5 million – now worth $14.1 million just four days later.

That same day, he tweeted lavish architectural plans for a ‘crypto city’, a lush and green sci-fi vision of a megalopolis complete with waterfront landmarks and an airport.

Bukele continued his enthusiasm for the digital currency even as its price plummeted, doubling down on May 9 by purchasing another 500 bitcoin slices for $15.5 million – now worth $14.1 million just four days later.

Bukele continued his enthusiasm for the digital currency even as its price plummeted, doubling down on May 9 by purchasing another 500 bitcoin slices for $15.5 million – now worth $14.1 million just four days later.

The flamboyant architectural plans for a 'crypto city' are a lush green sci-fi vision of a coastal megalopolis, complete with landmarks and an airport

The flamboyant architectural plans for a ‘crypto city’ are a lush green sci-fi vision of a coastal megalopolis, complete with landmarks and an airport

Plans for Bitcoin City put its construction, whose start date is uncertain, next to the Conchagua volcano in Fonseca Bay in the southeast of the Central American country.

Plans for Bitcoin City put its construction, whose start date is uncertain, next to the Conchagua volcano in Fonseca Bay in the southeast of the Central American country.

“Trees everywhere,” he said on Twitter. With a nice lookout at the volcano.

Plans for Bitcoin City put its construction – whose start date is uncertain – near the Conchagua volcano in Fonseca Bay in the southeast of the Central American country.

Nayib Bukele – The first dictator of a thousand years?

Nayib Bukele, 40, who describes himself as “the coolest president in the world”, is developing a new form of authoritarianism that other savvy democratic leaders may soon adopt.

Since the beginning of May, he and his supporters have made classic authoritarian moves to consolidate their grip on power and neutral democracy.

On May 1, he dismissed the country’s largest prosecutor and highest court, and brought both institutions together with their regulars.

Since then, it has used government agencies to harass journalists, investigate political dissidents, and overturn government checks and balances.

He is also preparing a new constitution.

He has made it clear that his task is to ensure that his opponents never return to power.

Still, he retains over 80% popular support in the vote.

It seems to achieve this by positioning itself as the antidote to El Salvador’s notorious and endemic corrupt order – the opposition it never wanted to return to power.

He deliberately appealed to the illiberal leanings of young voters disillusioned with democratic politics, which had been corrupt for decades.

They prefer to have an authoritarian leader who represents their interests.

First proposed in 2001, the city is planned to be a ‘smart’ city based entirely on the use of Bitcoin as a digital currency, with most citizens exempt from taxes.

‘We won’t have income taxes forever. Bukele announced in November that there is no income tax, no property tax, no purchase tax, zero city tax and zero CO2 emissions.

‘The only tax they will have in Bitcoin City is VAT, half will be used to pay off the municipality’s bonds, and the rest will be used for the city’s public infrastructure and maintenance.’

El Salvador has struggled over the years over which currency to use. In 2001 it abandoned its own floating fiat currency in favor of the US dollar, thereby controlling its own monetary policy.

The move to Bitcoin was intended to help citizens of the country relying on remittances from the US and other countries avoid the notorious predatory services that money had to go through.

The government has developed an app called Chivo Wallet to facilitate daily crypto transactions with a $30 gift to citizens who download it to encourage its use.

However, only 20% of users continued to use it after spending the raffle, with the volatility that made crypto such an attractive, unregulated security, along with the volatility that made it an everyday currency.

The nation was in talks with the International Monetary Fund for an expanded funding facility to help it weather the recent turmoil, but these stalled over Bukele’s decision to make Bitcoin legal tender.

Since then, spreads on the country’s credit default swaps – a form of insurance against missed payments – have increased by more than 20 percent, meaning an 87% chance of default over the next five years.

El Salvador’s woes are countered by the devaluation of digital currencies in a so-called “crypto winter” in which investors lost billions of dollars.

More than $200 billion was wiped out of the cryptocurrency market just yesterday.

During the pandemic, record low interest rates aimed at stimulating economies have prompted investors to buy riskier assets such as cryptocurrency with higher yields.

These assets are sold in favor of safer government bonds as rapidly rising inflation leads to an increase in interest rates to protect savings – which will yield better returns.

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