Tracking adoption a year later

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El Salvador, the small Central American nation that made history just over a year ago when it made Bitcoin (BTC), just marked its first year of BTC adoption.

The Salvadoran government presented BTC as a tool to attract foreign investment, create new jobs and cut dependence on the US dollar in the country’s economy at the time of adoption. Many BTC proponents and the libertarian community have rallied behind the small nation despite growing pressure from global organizations such as the World Bank and International Monetary Fund (IMF) to remove BTC as legal tender.

A lot has changed over the past year since El Salvador became the first “Bitcoin nation”. Enthusiasm and public interest soared immediately after BTC’s recognition, with the price rising to new highs.

Salvadoran President Nayib Bukele joined the growing league of Bitcoin bidders to buy several market dips and even reap the benefits of their BTC purchase in the early days when the country built schools and hospitals with its profits.

As market conditions turned bearish, however, the frequency of BTC purchases slowed, and the president, who was often seen interacting with the crypto community on Twitter and sharing future Bitcoin trials, reduced his social media interactions significantly.

El Salvador has bought 2,301 BTC since last September for about $103.9 million. That Bitcoin is currently worth about $45 million. The most recent purchase was made in mid-2022 when the nation bought 80 BTC at $19,000 apiece.

As BTC’s price declined, critics who have long worried about a crypto bubble felt vindicated, with several comments along the lines of “I told you so.” However, market experts believe that El Salvador’s BTC experiment is far from a failure.

El Salvador’s Bitcoin Volcanic bond, a project intended to raise $1 billion from investors to build a Bitcoin city, has already been delayed on numerous occasions now and skepticism is growing not only around the project but on the general adoption of BTC itself.

Samson Mow, a Bitcoin entrepreneur who played a key role in designing the Bitcoin-Vulcan link – also called the Vulcan token – told Cointelegraph that contrary to common outside perceptions, El Salvador is building through the bear market. He noted that the Vulcan connection has been delayed for several reasons and is currently awaiting the passage of a digital securities law. He explained:

“We are still waiting for the new digital securities laws to go to congress, and once passed, El Salvador can start the capitalization for the Bitcoin Bonds. I hope it will happen before the end of this year. Much like Bitcoin companies, El Salvador is focused on building through the bear market. I can’t see President Bukele not rallying more at these prices.”

The BTC price recorded a new all-time high of $68,789 just a month after El Salvador’s adoption on November 10. Since then, however, the price has fallen by more than 70% and is currently trading around $19,000. Many critics believe that the future of the Vulcan link and its native token is highly dependent on the crypto market and thus it could only gain traction during bull markets.

Paolo Ardoino, chief technical officer at Bitfinex, told Cointelegraph that the Vulcan tokens would generate interest from investors regardless of the market conditions, he explained:

“The Vulcan token will be the first of its kind. While investor appetite for new offerings is usually greater during a bull market, we are confident that the unique offering this sign represents will garner significant interest regardless of market conditions. The Vulcan token has widespread support in the Bitcoin community and there is obviously a great appetite for the proposition regardless of whether we are in a bear or bull market.”

Bitfinex is the key infrastructure partner of the El Salvador government responsible for processing transactions from the sale of Vulcan tokens.

Bitcoin adoption boosted remittances and tourism

While critics called El Salvador’s Bitcoin experiment a failure from the start, proponents see it as a kind of revolution and believe that El Salvador’s adoption could create a domino effect for other nations with similar financial challenges such as a high number of unbanked citizens and significant remittances. volumes.

Bukele previously mentioned that the main focus of recognition of BTC was to offer banking services to more than 80% of unbanked Salvadorans. Within six months of the law’s approval, the country’s national Bitcoin wallet managed to onboard four million users, ensuring that 70% of the unbanked population gained access to payment and remittance services without having to go to a bank.

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Aarti Dhapte, senior research analyst at Market Research Future, told Cointelegraph that El Salvador’s adoption of BTC has proven successful on several fronts, whether it’s banking the unbanked or boosting tourism:

“We should admit that the digital currency has helped the Central American nation of El Salvador rebuild its tourism industry, although the country is still having difficulties coping with the long crypto winter. According to information from the Ministry of Tourism, El Salvador’s spending on travel increased by 81% in the post-pandemic period. In 2021 the nation welcomed 1.2 million visitors and 1.1 million during the first half of 2022.”

Statista data shows that more than 9% of El Salvador’s GDP is made up of the tourism industry, so a near doubling of tourism is a significant boon for the country.

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Proportion of tourism in El Salvador’s GDP. Source: Statista

In addition to tourism and offering financial services to the unbanked, BTC adoption has also proven beneficial in terms of cross-border remittances, reducing transaction costs significantly.

The El Salvador Central Reserve Bank estimates that from January to May 2022, remittances from citizens living abroad totaled more than $50 million. The adoption of Bitcoin and the Chivo wallet, an initiative supported by the government of El Salvador, helped boost Lightning Network transactions by 400% in 2022.

The downsides of Bitcoin adoption

The biggest downside to El Salvador’s Bitcoin adoption was macroeconomic factors that caused a drop in BTC price along with the amount of pushback it received from around the world. The pushback would not matter in a bull market, but being a small nation-state with financial challenges, the country cannot afford to be on bad terms with international monetary organizations.

Right now, the vast majority of El Salvador’s Bitcoin was bought at a higher value than it currently enjoys. Bitcoin has followed closely with traditional assets, such as the stock market – especially tech stocks. They, too, have taken a beating this year as the world tries to cope with the fallout from government pandemic handouts.

Beyond the price of Bitcoin, the bigger problem for El Salvador is how the international financial world views the movement.

The country’s move to Bitcoin limited the country’s access to traditional financial markets, causing Bukele some real problems in financing the repayment of its bonds. Moody’s, earlier this year, credited disagreements over Bitcoin as a reason El Salvador had difficulty reaching an agreement with the IMF.

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Richard Gardner, CEO of institutional infrastructure services provider Modulus, told Cointelegraph that maybe five years from now, Bukele’s decision won’t look so bad, but for now it’s controversial:

“Bukele’s move to Bitcoin does not look smart. Even with high inflation for the USD, Bitcoin ultimately failed as an inflation hedge, due to its dip. However, we are looking at a one-year snapshot during a recession. For a country like El Salvador, access to financing through organizations like the IMF is essential. That makes Bukele’s Bitcoin gambit hard to defend.”

El Salvador’s future depends heavily on the success of the late Vulcan deals, which could bring in billions in revenue and set a precedent for others to follow. Until the bond’s launch, the outside world will continue to measure its success based on its BTC purchases.