Bold Move or Blunder? Analyzing El Salvador’s Bitcoin Adoption

Nayib Bukele bought the dip. He tweeted about it. No big deal. Most savvy crypto investors saw the Bitcoin mini crash this week and chose to buy in rather than sell out. Of course, none of those other folks are leaders of a sovereign nation, entrusted with the health of their economy and the welfare of their people. Nayib Bukele is the president of El Salvador.

On September 7th, El Salvador become the first nation to adopt Bitcoin (BTC) as a legal currency. They passed a law requiring that all businesses accept Bitcoin, in addition to their other recognized currency, the US dollar, as a form of payment. It was the first move by the young president that was not overwhelmingly supported by his people. Many of them opposed it.

Is this a bold move or a blunder? Insiders in the DeFi world aren’t sure. El Salvador’s economy is estimated at $17.24 billion. Daily trading volume for Bitcoin is currently at $9.2 billion. Will mass adoption in the Central American nation cause a disruption? Heavier transaction volume could increase volatility. It could also drive Bitcoin prices higher.

The Ripple Effect: Who Benefits the Most?

Bukele launched the initiative by purchasing $21 million in Bitcoin. El Salvador has its own crypto wallet, an application called Chivo (slang for “cool”) which was developed by the state. The core crypto services are being provided by Mexico-based Bitso in conjunction with Silvergate Bank in California, which will support automated bitcoin to dollar conversions.

Chivo is run by the state and Bitso is a private company, at least for now. They raised $250 million in a Series C round of funding back in May and processed $1.2 billion in international payments in 2020. An IPO at some point is possible, but it hasn’t been discussed openly. There really isn’t anything there for investors to sink their teeth into.

Silvergate Bank is another story. They’re owned by Silvergate Capital Corp (SI), a holding company that specializes in digital currency investments. SI is up 73.78% year-to-date and the El Salvador deal should push that share price higher by year’s end. That’s where I’m putting my money. I also “bought the dip” in Bitcoin earlier this week.

Bitcoin Mining with Volcanic Energy in El Salvador

The Los Angeles Times recently compared Nayib Bukele to former Venezuelan leader Hugo Chavez, claiming that his most recent political moves are “dismantling democracy.” It’s a well-written article with a misleading headline. They briefly gloss over the Bitcoin move, then launch into a political rant. I’m thinking they’re not seeing the forest through the trees.

President Bukele announced back in June that he had instructed LaGeoSV, the state-run geothermal energy agency, to come up with a plan to provide low-cost crypto mining facilities that are powered by volcanic energy. Blockstream, a $3.2 billion Bitcoin infrastructure company, has already offered the bonds to float the state-run mining operations.

El Salvador’s charismatic young president has called this a “leap forward for humanity.” He’s hoping to attract outsiders by eliminating capital gains tax on crypto and offering free transactions and currency conversions through a state-run crypto wallet. He fully expects the country to become a Bitcoin mining hub that attracts investors and tourists.

It all sounds great on paper, but I’m not seeing enough openings for private industry to establish a foothold in El Salvador. Ray Youssef, CEO of Paxful, thinks that these recent changes will help make El Salvador the “Switzerland” of Latin America. I disagree. Nayib Bukele made a bold move. Let’s see what the rest of the world does in response to it.

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About the Author

Bold Move or Blunder? Analyzing El Salvador’s Bitcoin Adoption

Kevin Flynn

Kevin D. Flynn is InvestorsPrism's Editor-Financial Markets. A former financial professional and founder of AdvisorScale Financial Writing, Kevin lives in Leominster, Massachusetts with his wife Evelyn, two cats, and nine wonderful grandchildren.