El Salvador incurs losses in Bitcoin trading

On September 7, El Salvador’s President, Nayid Bukele, tweeted about the new currency adoption at midnight, saying that the country would make history in three minutes. El Salvador officially became the world’s first country to adopt cryptocurrency as its legal currency and a Bitcoin City. Bukele also purchased approximately 400 bitcoins to commemorate the decision, worth $20.9 million for the transition.

Bukele has purchased at least 1,391 Bitcoins since September, costing the Central American country roughly $71 million based on an average acquisition price of $51,056 per token using the date and time of his tweets.

Bitcoin was trading around $50,000 at the time, and the country kept buying as the token approached a record high of nearly $69,000 in early November. It has since lost up to 40% of its original value. Given Thursday’s price, 1,391 Bitcoins are now worth approximately $61 million, a 14 percent loss.

So far, it appears Bukele has lost money, assuming the government has held the digital coins. Apart from the volatility of the crypto market, one of the reasons cited is the secrecy with which Bukele trades in Bitcoins.

The Bitcoin address of the government is a closely guarded secret. The government claims to have a $150 million fund for Bitcoin transactions at the state-run bank Bandesal, but no details are available.

“Opacity surrounds everything related to it,” said Ricardo Castaneda, an El Salvador-based economist for the Central America Fiscal Studies Institute. “There’s no official information about the amount of Bitcoin the government has purchased, the price they paid or how much is in reserve,” he said.

El Salvador’s financing costs have increased because of the drop in its bond. The country’s overseas dollar bonds had the worst performance in the world in 2021, as investors were scared off by Bukele’s unconventional economic management and the country’s experiment with Bitcoin.

Monetary regulators such as the IMF and credit rating agencies such as Moody’s have warned El Salvador about the consequences of its decision to adopt cryptocurrency as a legal tender. While Moody’s downgraded the country’s debt rating, the IMF warned of potentially destabilizing economic trends.

The yield on the country’s $800 million in dollar bonds due January 2023 increased to 34% on Tuesday, up from less than 9% a year ago. Due to the International Monetary Fund’s concerns about Bitcoin, an extended fund facility with the IMF has not materialized.

Bukele has become a Bitcoin celebrity, buying at low prices and promising to build a tax-free Bitcoin City on the country’s coast.

His government announced that investors who buy $100,000 or more of a proposed blockchain bond on Blockstream Corp.’s Liquid Network this year will be granted expedited citizenship.

Bukele is likely the world’s only head of state who uses public funds to trade Bitcoin on his phone. On December 21, he purchased 21 Bitcoins to commemorate the occasion. As a fervent supporter of cryptocurrency, he has even engaged in Twitter battles with Bitcoin critics, labeling Johns Hopkins economist Steve Hanke an “idiot” after Hanke called his plan to mine Bitcoin using geothermal energy from an inactive volcano “antics from a narcissistic president who is full of hot air.”

Last week, Finance Minister Alejandro Zelaya stated that the government had converted some of the Bitcoins purchased back into dollars, but he did not elaborate. He noted that a group of government officials decides when to buy dips.

Bukele’s administration intends to use any trading profits to build a public animal hospital, he said.

According to Nathalie Marshik, head of emerging-market sovereign research at Stifel Nicolaus & Co. in New York, the government will have a $1 billion funding gap this year.

“The government has fairly large financing needs. What money is it using to day-trade BTC with?” she said. “I could understand why the Salvadoran taxpayer would be peeved about this, especially given the recent Bitcoin nosedive. It is hard to justify a government trading such a risky asset with taxpayers money in such opaque circumstances.”

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