On Tuesday, El Salvador’s bitcoin gamble massively shook its debt market, which is now teetering on the precipice.
Investors forecasted the bitcoin rollout misfortune and began selling the country’s bonds early in the year — amid concerns of the president’s increasing authoritarianism.
On the day of El Salvador’s announcement of Bitcoin adoption as a national currency, Bitcoin global prices nosedived by about 17% before recovering to trade at 10% lower.
Unmoved, President Nayib Bukele tweeted that El Salvador now holds more Bitcoin after buying the dip. “150 new coins added”, he wrote, adding a winking emoji.
Bond traders unimpressed by the bitcoin gamble
The tweet left a sour taste on bond traders’ mouths, prompting another round of bond selling this week.
This pushed the government’s long-dated debt (debts that mature in over one year) yields to 11%, while debt expected to be paid off within a year offered 14%. Before the president’s Bitcoin announcement in June, the long-dated debt yields were at 8.5%.
To add to the misery, the country’s bond prices dipped, inverting the yield curve. In other words, current liabilities are now priced lower compared to long-dated debt.
And that spells doom to the country’s economy. It’s now clear that Salvadorans (investors included) are questioning the viability of Bitcoin as a legal tender.
Bitcoin is a risky, expensive bet
El Salvador is not a wealthy country. It has an annual GDP of $25 billion. And yet, it took a risky and expensive bet by adopting Bitcoin.
For the record, Bitcoin prices swung from $10,000 last year to $64,000 as the highest price point this year.
It even hit $52,000 earlier on Tuesday, before suddenly going down to $47,000. El Salvador’s Bitcoin adoption move was rushed, perhaps to make headlines around the world. We will never know!
However, the president is optimistic that the Bitcoin plane will take off. And that people will save money in crypto, boosting their wealth when Bitcoin prices soar. But will they?
Bitcoin is wild and volatile. And anything can happen that will heavily impact the lives of Salvadorans.
But the crypto gamble is just half the journey. The president’s attempts to increase his power now elicit political jitters. If not, shaking the markets yet again.
So far, adopting Bitcoin as a legal tender will cost El Salvador’s taxpayers around $200 million, and that’s not all. They need to repay $800 million debt by January 2023. There’s a real risk that all this will end in (painful) tears. Let’s hope it doesn’t.
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