In September 2021, . After barely four months, it seems that the risky plan of President Nayib Bukele is not reaping the expected results. Given the fall in bitcoin in recent months, the State’s direct investment in the cryptocurrency is hurting public coffers, while its bond issues linked to the digital currency could lead to a problem of defaults in the medium term.
During this time, the country would have disbursed some 71 million dollars of public funds in the purchase of at least 1,391 bitcoins, according to Bloomberg calculations based on the tweets of the Salvadoran president. Given the fluctuations in the price of the cryptocurrency, which on January 10 marked a three-month low of up to $39,000, his portfolio would have suffered a loss of approximately 14%, up to $61 million.
The adoption of bitcoin as legal tender and the unorthodox measures implemented by the new Legislative Assembly would also have caused El Salvador’s bonds to register “the worst performance in the world” in 2021, with losses of almost 30%. Some data that worries investors, who believe that the country will not be able to pay the bonds that mature in 2023. According to the International Monetary Fund, gross indebtedness could reach 98.6% of gross domestic product in the next five years.
For its part, Moody’s warned a few days ago that bitcoin operations in El Salvador have become an additional risk for the country’s already weak credit outlook. For the time being, however, the Central American country’s current bitcoin portfolio is not large enough to pose a threat to the government’s ability to meet its obligations, the ratings agency noted.
Despite all this, President Nayib Bukele maintains his commitment to bitcoin. In early 2022, Finance Minister Alejandro Zelaya announced that El Salvador plans to issue $1 billion worth of bitcoin-linked bonds between February and March of this year. The bonds will be issued through Blockstream, instead of conventional channels, and will be used, in part, to finance “Bitcoin City”, which will be located in the city of Conchagua and will have the form of a currency.
According to Moody’s, said bond issue could represent an opportunity to alleviate the pressure on the country’s liquidity. However, unless the bonds are very well received, El Salvador will have no choice but to restructure its traditional market bonds.
El Salvador, the new world mining center
The internet blackout ordered by the government of the authoritarian Kassym-Jomart Tokayev last week as a result of the protests in Kazakhstan has put El Salvador in the crosshairs of cryptocurrency investors.
In recent times, Kazakhstan’s authoritarianism, its energy resources and little regulation have made the country the ideal place to establish the largest mining center in the world. However, all that changed when the protests broke out. Now, investors see El Salvador and Nayib Bukele’s policies as his new promised land.
Bukele already announced a few months ago his intention to turn El Salvador into a large virtual currency mining center through the “Bitcoin City” project. Attracted by the proposal of the Salvadoran president, Paolo Ardoino, the head of technology of the Bitfinex Securities platform, domiciled in Kazakhstan, has expressed to the president his interest in making it a reality. The company has made its platform for the issuance of bitcoin-linked bonds available to the Salvadoran government. As a previous step, the Executive must grant them a license, such as the one issued by Kazakhstan based on UK regulations, in addition to creating a legal framework that regulates such issuance.
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