Equipment news Bitcoin as legal tender, is it really a good idea? Looking back on the El Salvador experience
Published on 09/09/2022 at 14:20
El Salvador has been experimenting with bitcoin as legal tender in its country for a year now – a great opportunity to take stock of this large-scale demonstration.
El Salvador: Life Size Bitcoin Quiz
The smallest country in Latin America, located between Guatemala and Honduras, is the subject of an unprecedented experiment… On September 7, 2021, President Naib Bukele issued a decree that El Salvador officially welcomes a new legal currency: bitcoin.
The creation of the bitcoin law was not entirely disinterested on the part of the president, as Naib Bukele is considered a true crypto enthusiast.
With this financial innovation, the goal was, among other things, to reduce bank fees associated with the dollar currency by $400 million per year. Due to significant migration flows, El Salvador has seen about 22% of its GDP go in the form of taxes and Salvadoran expatriate conversions.
Also, Naib Bukele intended to take advantage of the renewable energy sources offered by the country of volcanoes. To this end, the President of El Salvador has undertaken the creation of several infrastructures that allow the energy of the volcano to be used to mine bitcoins.
“We are still testing and installing, but this is officially the first bitcoin mining since the volcano,” President Nayib Bukele proudly tweeted on September 28.
Following the logic of building a new El Dorado, President Naib Bukele also promised to build “Bitcoin City”, a sort of tax haven for crypto investors and miners.
1 year later, what is left of his many promises?
The first anniversary of Bitcoin, which is in doubt
While most people in El Salvador opposed the head of state’s decision for fear of the novelty, some of them took the plunge and used Bitcoin for payments in their daily lives. Some even used it long before the bitcoin law, such as businesses close to famous surf spots. These places, which are very frequented by tourists, highlight the benefits of Bitcoin, namely that travelers can exchange value without any conversion.
However, after the massive adoption of bitcoin as legal tender in El Salvador, locals are experiencing some frustration.
In the first months, almost 4 million people out of 6.6 million inhabitants downloaded the application that allows the use of bitcoin. However, it is no longer used by the locals:
“For a while, yes, I used bitcoins. But judging by the way things are going, I no longer trust him and even deleted the app,” explains Carmen Mejia, a 22-year-old student.
Firstly, residents who bought bitcoin on the advice of the president are suffering from the fall in the price of cryptocurrency. Indeed, El Salvador adopted Bitcoin as legal tender when it was in the midst of a bull market (a bull market in cryptocurrencies). Thus, the state and residents bought bitcoin when it was worth about 40,000 euros. Today, the price of bitcoin is fixed at 20,000 euros, halving the purchasing power of Salvadorans.
As for El Salvador’s treasury, it recorded a $57 million loss after buying $106 million worth of bitcoin, according to Moody’s ratings firm.
Apart from the fall in the market, out of the President’s control, the positive effect that Bitcoin was supposed to have on immigrant remittances is still expected… And for good reason, according to the Central Bank of El Salvador, they would be “less than 2%” to use Bitcoin for this type of transaction.
Bitcoin City: Salvadoran Mirage
Despite a few encouraging elements in the context of the cryptocurrency market, El Salvador’s president nonetheless found bitcoin to be a travel asset. In any case, this is precisely what the recent statements of the Salvadoran government on Twitter testify to. With this in mind, Naib Bukele intends to be a bitcoin eldorado, and that includes building a city dedicated to cryptocurrency: Bitcoin City.
In theory, the new city was supposed to be located on the slope of the Conchagua volcano, and its architecture was supposed to form a huge circle, similar to a coin. The streets of Bitcoin City, littered with all sorts of businesses that allowed the use of bitcoins, were supposed to be mostly pedestrian with a few bike lanes.
To implement this project, the president put forward the idea of borrowing half a billion dollars in cryptocurrency. However, after a few months, the project does not seem to be very advanced…
A year after its discovery in El Salvador, Bitcoin is baffling locals. The government depends on the context of a bear market (bear market in the cryptocurrency cycle). However, to take advantage of this price drop, Naib Bukele continues to act like a true bitcoin maximalist. He recently indicated that he bought 80 bitcoins at a price of $19,000 in a Salvadoran account. So if bitcoin rallies, it could partially offset the losses inflicted earlier in the year – a very likely scenario once we know the volatile potential of bitcoin cycles.
What is bitcoin?
Bitcoin is primarily a payment network that allows users to exchange currency on a peer-to-peer basis. It is based on a digital currency called bitcoin (BTC).
Thanks to blockchain* technology, Bitcoin offers the possibility of decentralized payments, i.e. without the participation of third parties or trusted authorities. With this in mind, Bitcoin was originally created as an alternative to banks.
What is Blockchain?
Blockchain (literally block chain) is a kind of digitization of trust. Concretely, its code allows web users to exchange peer-to-peer values with a decentralized verification system. All actions performed on the blockchain are anonymous but transparent.
The mathematician Jean-Paul Delae explains that we can think of this large archive as “a very large notebook that anyone can read freely and free of charge, that anyone can write on, but which cannot be erased and which is indestructible.”
Who controls bitcoins?
If the name behind Bitcoin is known to everyone, Satoshi Nakamoto, then no one really knows the identity of the creator. Either way, it doesn’t matter since Satoshi has little power over his code.
Indeed, Bitcoin is decentralized, so it does not depend on any entity. His network belongs to no one, since the consensus of its users allows its protocol to be changed. Developers can only make changes if miners and network nodes agree with the choice.
How does bitcoin work?
The Bitcoin network is powered by its users. Bitcoin uses its own blockchain to carry out user transactions. Concretely, each miner competes with their machines (video cards, ASICs) to solve an equation in order to validate a block. In this way, the Bitcoin network guarantees the execution of secure transactions, which are carefully verified by several binary intermediaries.
How to get bitcoin?
Mining Anyone who uses their hardware computing power (video card, ASIC) gets paid in BTC depending on their participation in the network.
Exchange platforms In addition to mining, bitcoin can be obtained on cryptocurrency exchange platforms for fiduciary money, including (euro, dollars, etc.).
Where to store bitcoin?
Like cash, Bitcoin can be stored in virtual wallets, commonly referred to as wallets. There are several types of wallet:
Hot Wallet Hot wallets are internet-connected private key storage solutions. In software form, these portfolios can be apps, extensions, or even websites.
Cold Wallet Cold wallets are a safer alternative to cryptocurrencies. Indeed, the private keys of these wallets are not stored on the network, so it is much more difficult for a hacker to gain access to them. These wallets usually look like a flash drive or even paper.