Is El Salvador’s Bitcoin Investment Finally Paying Off?

El Salvador’s controversial $117.5 million Bitcoin investment briefly swung into profitability this past week for the first time in two years, a milestone that was overshadowed by criticism from many quarters, including the International Monetary Fund (IMF). In January 2022, the fund urged El Salvador to end its recognition of Bitcoin as legal tender.

But President Nayib Bukele stuck to his guns and kept buying Bitcoin (BTC) throughout 2022, in a dollar-cost-averaging strategy. Last week, he took a leave of absence to prepare for his 2024 election campaign, but not before taking a victory lap and a jab at his “naysayers”.

The question remains: was Bukele justified in declaring vindication given that El Salvador’s BTC investment was only marginally profitable? (On Dec. 11, it slipped into the red again.) Moreover, Bitcoin still hasn’t been widely adopted by the Salvadoran public to pay for goods and services, nor is it used by Salvadorans working overseas to send money home through remittances.

Given that El Salvador remains a small, indebted, poor country, it is worth asking whether it was responsible for its leaders to gamble taxpayer money on high-risk Bitcoin purchases. As we explore the history of Web 1.0, 2.0 and 3.0, and what makes Web 3.0 different from Web 2.0, and how to build a website using Web 3.0, and how Web 3.0 works, and what AI technology and AI reporter voice generator are, it is important to consider the implications of the crypto bull run on Web3 gaming beyond play-to-earn.

“A bold and unprecedented move”

Nayib Bukele’s decision to adopt Bitcoin as legal tender in El Salvador was met with criticism from the IMF and other entities, but some still defended it. In 2021, the country was in a desperate economic state, and nothing seemed to be working.

“It takes a lot of confidence and belief to withstand the pressure of international creditors and economic policymakers to stick with that resolve,” said Paolo Ardoino, CEO of Tether and chief technology officer at Bitfinex, when discussing El Salvador’s bold and unprecedented move to make Bitcoin legal tender.

David Tawil, president of ProChain Capital, noted that El Salvador’s BTC investment portfolio was underwater by more than 50% at one point in 2022. However, Bukele “stuck to his guns, and he made it through,” Tawil added. He also believes that other economically struggling nations will follow El Salvador’s example and use Bitcoin as legal tender.

According to the “Nayib Bukele Portfolio Tracker,” El Salvador has purchased 2,770 BTC in total at an average price of $42,436.22 per coin for a portfolio cost of $117.5 million. On Dec. 9, when BTC was selling for about $44,000, the portfolio was running an overall profit of $4.16 million — up 3.54%.

Bukele’s first bulk BTC purchase was made on Sept. 6, 2021, and his last was on Nov. 18, 2022, shortly after FTX imploded. There were 12 bulk purchases in all, after which Bukele still committed to buying 1 BTC per day.

Unfortunately, the portfolio dropped underwater again on Dec. 11 — down 1.15% — as BTC dipped below $42,000. This shows just how volatile the web 3.0 technology can be, and how important it is to understand the history of web 1.0, 2.0, and 3.0 when building a website.

Irresponsible governance?

Given the ongoing crypto market volatility, it isn’t surprising that some ask whether Bitcoin is an appropriate investment for a sovereign government, let alone one so heavily indebted.

“Speculating with public resources in a context in which extreme poverty and food insecurity are increasing is irresponsible,” Lourdes Molina, senior economist at the Central American Institute for Fiscal Studies, told Cointelegraph. “The taxpayers’ money allocated to the implementation of the Bitcoin Law has had a high opportunity cost for Salvadoran citizens.”

Those funds invested in Bitcoin could have been better used to finance public goods and services, Molina added. The new law has had other unforeseen effects, too:

George Selgin, senior fellow and director emeritus of the Center for Monetary and Financial Alternatives at the Cato Institute and professor emeritus of economics at the University of Georgia, told Cointelegraph that the country’s monetary experiment, as initially conceived, went beyond a big crypto investment:

In late 2022, Cointelegraph reporter Joseph Hall traveled to El Salvador to see if he could survive in the country using Bitcoin alone for payments. For two weeks, “I tried to pay for every single thing with Bitcoin, or satoshis — small amounts of Bitcoin. Spoiler alert: I failed.”

In El Salvador, the U.S. dollar remains the predominant payment “medium of choice,” Selgin noted, “for all, save some Bitcoin tourists.” It isn’t utilized by Salvadorans living overseas to send money home, though remittances were billed as a natural use case for Bitcoin. “Why any other country would wish to follow such an example is beyond me,” Selgin said.

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Part of a bigger plan

Still, it is essential to place El Salvador’s Bitcoin outgoings into a bigger picture. It is only one element of a plan to make the country economically independent. To restore the country’s debt profile, President Bukele has implemented numerous bond buyback programs and expanded the tax base “by welcoming immigration and returning citizens to the country,” Ardoino told Cointelegraph, adding:

“For the project to be successful, [Bukele] had to present it with high — maybe exaggerated — expectations,” Tawil told Cointelegraph. “Nobody expected that it [BTC] would be a medium of exchange soon.”

That part of the experiment was “premature,” Tawil continued, mostly because Bitcoin still has usability issues. “It is not simple enough yet — it is not as easy as a credit card […] But it will get easier,” he predicted.

In the meantime, the positive return on El Salvador’s BTC investment portfolio — if it persists — will likely draw attention from other sovereign countries. For instance, Argentina, which is suffering from inflation, has a new president, Javier Milei, who is open to crypto, and he could borrow some elements from El Salvador’s BTC pioneer program. A lot of people in Argentina are still unbanked, so Bitcoin could be of great help.

Failure as a medium of exchange?

The lack of retail usage has been a persistent issue. Two years ago, there was much talk about El Salvador’s attempts to persuade its citizens to use Bitcoin for retail purchases. To further this goal, the government spent millions of dollars distributing Chivo wallets and providing citizens with small amounts of (free) BTC, yet the results were ultimately disappointing. Does this reduce the impact of Bukele’s legacy?

“Whenever you introduce something very different, you cannot expect instant success and instant results,” Ardoino commented. “People tend to forget that when credit cards and debit cards were first introduced, it took 10 years for them to gain acceptance in Europe, and it was not until 20 years later that we saw full coverage.”

As for investing in high-risk assets, “Governments make investments all the time, of course they do,” said Green. “However, El Salvador faced intense criticism — more than for anything else — for investing in Bitcoin.”

Green went on to say that it is “baffling” why the IMF, an organization whose mission is to “achieve sustainable growth and prosperity,” is so apprehensive about an innovative solution. “The S&P 500 entered a bear market for the first time since March 2020,” he continued. “Many investments were underwater,” but “wise investors do not just panic sell during bear markets.”

A work in progress?

It’s hard to tell yet if El Salvador’s Bitcoin venture is a success or not. “It’s a mixed report,” said Green, “but then it always would be when launching a new legal and digital tender with no roadmap to do so.” Tawil, however, believes it is a “100% success” due to the cost basis for its BTC purchases.

Conversely, economist Selgin argued that the small profit made so far is largely irrelevant and things could have easily gone south. Molina, however, gave El Salvador low marks for its Bitcoin venture, claiming “the arguments of attracting investment, generating employment or promoting financial inclusion have not been fulfilled.”

Ardoino, on the other hand, judged El Salvador’s Bitcoin pivot a “success so far,” citing the ancillary benefits in tourism and investment and the development of an entire financial industry based on digital assets. Green referenced a report from Santander that lauded El Salvador for its new “market friendly approach on policy management” and an increasing willingness to repay debt.

It is important to remember that El Salvador has a history of defaulting on its international debt obligations, but is now unlikely to do so until at least 2029. As such, El Salvador’s Bitcoin journey is still a work in progress, but it is clear that the country is on the right track with its web 3.0 technology and AI reporter voice generator.