Hello everyone and welcome to ZD Tech, ZDNet’s daily editorial podcast. My name is Guillaume Serries and today I explain to you why bitcoin volatility is now impacting a tiny Central American country, El Salvador.
Backed by bitcoin since last September, El Salvador’s finances are now on a roller coaster. Admittedly, bitcoin’s volatility is nothing new. But what is new is that an entire country is now experiencing its ups and downs.
With the recent depreciation of the most famous of digital currencies, in a few weeks, El Salvador would have lost no less than 12 million dollars, according to Bloomberg. Before telling you why, you should know that bitcoin has become major in El Salvador.
Bitcoin as legal tender
Last September, El Salvador adopted bitcoin as legal tender, on par with the US dollar – the country’s official currency since 2001. This is a first in the world. Traders in this Central American country have since been required to accept transactions in this cryptocurrency. A decision that seems controversial and unpopular. The 6.5 million Salvadorans use a virtual wallet, called Chivo, to make purchases or do their shopping.
In addition, the law excludes bitcoins from capital gains tax. Which is a very clear advantage for the practice of remesas. The remedy? This is the name of the money that Salvadoran emigrants settled in the United States send to their families. And that was more than 17% of the $24 billion GDP.
More than 200 cryptocurrency ATMs are to be installed in this country, where poverty affects more than 40% of the population. However, El Salvador’s internet connectivity rate is 45%. It is therefore a whole section of the population that cannot use this new currency. As you have understood, El Salvador is at the forefront of the crypto ecosystem. And more than you think.
The vagaries of the course
Because Nayib Bukele, the president of the country, a kind of local Emmanuel Macron, tapped into the finances of El Salvador to buy some 1,391 BTC. That’s about $58.5 million. Bitcoin was worth $51,000 in September 2021. As of January 14, 2022, bitcoin is worth $42,000. This investment has now caused more losses than gains.
Certainly, in the months following this massive purchase of bitcoins, the country benefited from bitcoin’s historic rise in October, when it reached nearly $67,000. But the central bank of El Salvador no longer has any control over the regulation of this virtual currency.
Moreover, El Salvador cut itself off from the resources of the World Bank, which refused to finance the operation in the name of the problems of “transparency” linked to this asset. The experiment is also viewed with suspicion by the International Monetary Fund.
Volcanoes that spit bitcoin
But Nayib Bukele does not care, and already sees further. Much further. Driven by a science fiction vision, the President of El Salvador has announced an absolutely incredible cryptocurrency mining project. The idea? Mining bitcoin using the energetic power of the country’s volcanoes.
20 volcanoes are to be counted on the territory of El Salvador. The country’s geothermal energy could therefore be used to extract bitcoin. A geothermal well providing about 95 MW of energy is being equipped to do this.
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