El Salvador’s BTC experiment has failed

Good morning! Welcome to The Daily Moon. It’s a brand new week and we want to start you off with an explainer on what’s going wrong with El Salvador’s Bitcoin experiment. Also, there’s some not-so-good news from the LIC. So here we are, breaking it down for you. 

El Salvador’s BTC Crumble

A match made in heaven. Or so thought the El Salvador President Nayib Bukele. When the country made Bitcoin its legal currency in June 2021, many called it revolutionary. You could suddenly buy groceries, pay rent, and even salaries — all in Bitcoin. A year later, things are crumbling. 

Bitcoin prices have fallen ~45% since September 2021. El Salvador now has ~2,301 Bitcoins. As prices crash, Bukele is buying the dip. And now his economy looks shaky, with concerns of a possible default. 

What’s the back story?There are three main reasons ‌El Salvador chose Bitcoin:

1. About 23% of El Salvador’s GDP comes from its overseas citizens. Anything that made this transfer process super cost-effective and cheap for both the sender and receiver was a grab.  

2. The country adopted the US dollar as its official currency way back in 2001. But this meant that if the US Fed tinkered with rates, El Salvador got affected too. Bitcoin was a cool way to rebel. 

3. Bukele wanted Salvadorans to enjoy financial freedom. This meant each citizen could choose their payment method. Crypto was getting super popular across the world and he got FOMO. Enter, Bitcoin.  

Dreaming bigOnce Bukele found favour with the crypto community, his plans got bigger. He announced a Bitcoin City, a place where everything will be based on the crypto asset. The city will be powered by geothermal energy from nearby volcanoes, with zero taxes whatsoever.  

A $1 billion ‘Bitcoin City’ fund was unveiled in November 2021. Out of this, $500 million would go towards building the mining infrastructure. And the rest would buy the country more bitcoins. 

But since then:

• Bitcoin bond sale has flopped 

• Fund-raising has been pushed to September 2022

• El Salvador’s debt has been downgraded

• Government bonds are trading at historic lows

• Moody’s has cut ratings

On his part, Bukele has mocked the rating agencies using some NSFW terms. Amidst this crisis, the ‘Bitcoin City’ plans are not looking good.

Sinking under debtEl Salvador’s Bitcoin value has shrunk to ~$74 million, well below the $103 million Bukele paid for them.

And now: 

• The country has $24.4 billion in debt to repay. 

• An interest payment of $329 million on international bonds is due.

• An $800 billion bond payment is due in January 2023.

There was a chance of relief if the IMF offered some funds. Bukele had asked for a $1.3 billion loan. But El Salvador was asked to choose between Bitcoin and a bailout. The country chose the former. 

Now, what?There is a mountain of debt, and Salvadorans have made their discontent public.  The IMF is still ‘in talks’ to get the loan sorted, but has made no promises. 

Bukele is currently busy convincing central bankers of developing countries that switching to Bitcoin is the way to go. Haiti, Costa Rica, Ghana, Bangladesh, Palestine, and Pakistan are among the countries willing to listen.  

In his own neighbourhood, there are clear signs of bleak times ahead. But Bukele is in no mood to back off. Not yet. 

LIC’s Wobbly Week

The mother of all IPOs is stumbling. Just three days after listing, the LIC stock is down ~5%. Investors have lost a share of over Rs 78,000 crore. 

Who’s to blame?To be fair, this isn’t LIC’s fault alone. Negative vibes plague the market right now. Investors are worried about two things:

1. Growth: The market is iffy about GDP numbers. The UN set  6.4% as India’s growth estimate in 2022. In 2021, the growth was 8.8%. 

2. Inflation: Price rise is at an eight-year high. Retail inflation zoomed to 7.79% in April, with no signs of slowing down. 

When there’s volatility, even LIC has no escape. The stock had listed at a ~9% discount and has been trending downwards since. But if you’ve already invested in the stock, market experts advise against making hasty exits. 

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