El Salvador made it to headlines in 2021 as the first country to legalize Bitcoin as legal tender. The Central American nation has become the pioneer in the cryptocurrency space after this unprecedented move. Proponents said the decision was innovative and forward-thinking, but skeptics were concerned about potential risks.
The Bitcoin price is at the heart of this debate, and how it will affect El Salvador’s economy. The Bitcoin price is a real time metric of value which is highly volatile and dictates the actions of individual investors as a well as the national economy that incorporates the Bitcoin.
In this article, we assess the motivation for El Salvador’s choice of Bitcoin, the drawbacks of tying the financial future of a nation to the volatility of Bitcoin’s price, and what the country, and others that may follow, can learn from it.
El Salvador embraced Bitcoin; But Why?
Bitcoin adoption was a proposal championed by President Nayib Bukele, who believed that it helps improve financial inclusion and reduce reliance on traditional banking systems, so as to attract international investment. Bitcoin serves as an alternative to banking services that are unavailable to a large part of the population of El Salvador.
Remittances—money sent home by Salvadorans living abroad—are more than 20 percent of El Salvador’s GDP as well. Bitcoin was touted as a way to reduce the costs of traditional remittance services because it is decentralized and has low transaction fees, allowing families to keep more of their hard-earned money.
Bitcoin’s Volatility: A Double-Edged Sword
Bitcoin’s price volatility is its strength and its Achilles’ heel at the same time. The cryptocurrency has exhibited great growth over the years, but the value of the coin can fluctuate drastically over short periods. For example, Bitcoin’s price hit an all time high of almost $69,000 in 2021, before dropping to just above $30,000 within months.
A nation like El Salvador faces difficulty with this volatility. The country dug itself into financial trouble by adopting Bitcoin because the exposure to rapid swings in value put its economy at risk. Critics contend that such volatility can damage the economic stability of a developing country with constrained financial resources.
Implementation and Challenges
For the sake of Bitcoin adoption, El Salvador rolled out the Chivo Wallet, a government-backed digital wallet that utilizes technology, and set up Bitcoin ATMs throughout the country. To encourage its citizens to download the wallet, the government promised a $30 Bitcoin bonus, while businesses had to accept Bitcoin payments alongside the US dollar, which is the nation’s primary currency.
Hurdles Faced by El Salvador in Bitcoin Adoption
Low Adoption Rates: But for many Salvadorans, Bitcoin was something to doubt and to stick with cash or the US dollar. In addition, there was a lack of education about cryptocurrency, and limited internet access to social media channels promoting it in rural areas inhibited its widespread adoption.
Technical Issues: Besides, technical glitches, such as delays in transactions and security issues, made the Chivo Wallet lose the public’s trust in the initiative.
Economic Risks: At the time Bitcoin was at its peak, the government was putting a lot of money into it, buying perhaps most of what Bitcoin was left. But when the value of Bitcoin dropped, so did these investments — as much as 75 percent in some cases — and that raised questions about the fiscal responsibility of such a strategy.
The Broader Economic Impacts
Bitcoin’s El Salvador experiment has been a global attraction, with proponents promoting that Bitcoin will drive tourism, technology and investment. For instance, the government announced plans for Bitcoin City, an untaxed, cryptocurrency-driven urban development near a geothermal energy source.
Still, the fall in Bitcoin price has hurt the country’s Bitcoin holdings and shaved off large unrealized losses on its otherwise healthy balance sheet, potentially affecting its public finances. Critics fear that tying national resources to Bitcoin could expose key services and infrastructure to bankruptcy if the prices of Bitcoin fall.
Looking Ahead
Whether El Salvador’s Bitcoin journey is successful or not is still to be seen. The country has been slammed and challenged but has also started a worldwide discussion about the place of cryptocurrencies in contemporary economies.
It’s not yet clear the full extent of El Salvador’s decision to back Bitcoin and whether or not it was a shrewd decision by President Nayib Bukele. As we start the year 2025, Bitcoin is in an extremely good place.
Nevertheless, as mentioned above, the high volatility of Bitcoin and the crypto market as a whole can never be underestimated, and it is certainly the biggest hurdle El Salvador and any other country that is thinking of adopting Bitcoin will face in the coming years.
Although El Salvador’s bet on Bitcoin is a case of both innovation and resilience, it is also an object lesson in the dangers of jumping on the latest bandwagon of financial technology.