Why El Salvador Is Bitcoin’s Make Or Break Moment

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On Tuesday, Bitcoin (BTC) tumbled over 15% as El Salvador — a tiny, impoverished Central American country — became the first country to make Bitcoin into legal tender. It appears investors were spooked by the clumsy roll-out, as the government-sponsored digital wallet “Chivo” failed to appear in smartphone app stores. When it was finally available, the volume of traffic overwhelmed it, producing technical glitches.

Hangups aside, the real question for Bitcoin investors is whether El Salvador’s 6.4 million people embrace the decentralized currency. So far, the answer to that question is a resounding “no.” Over 1,000 people marched in San Salvador on Tuesday in protest of the new form of currency. A recent poll conducted by the local Universidad Centroamericana José Simeón Cañas found that over two-thirds of Salvadorans are opposed to Bitcoin’s adoption as legal tender; 80% say they have zero confidence in the cryptocurrency. 

Many Bitcoin investors in the United States and developed world will dismiss El Salvador’s Bitcoin experiment, pointing to the fact that El Salvador’s population is smaller than New York City’s, and that Bitcoin’s role as a global store-of-value is secure regardless of whether one particular venture succeeds or fails. But those arguments fail to consider some important factors specific to El Salvador. 

For one, El Salvador’s population may be small, but its income levels and standards of living are on par with much of the developing world: countries with underfunded treasuries that struggle to manage fiscal policy, debts and inflationary conditions — in other words, countries whose populations would theoretically benefit from a transparent, decentralized, deflationary digital currency like Bitcoin. These countries are watching El Salvador’s experiment closely; if things go wrong, other nations from the Global South are likely to shun Bitcoin.

El Salvador’s venture is also testing whether Bitcoin is capable of replacing the U.S. dollar as a reserve currency of choice: El Salvador adopted the U.S. dollar in 2001. Bitcoiners have long claimed that their cryptocurrency of choice competes directly with the dollar, but this is the first time that Bitcoin is actually competing against the dollar in any substantive way. If El Salvadorans continue to shun the digital currency in favor of the dollar — or, if they eventually embrace Bitcoin but see no improvement to their standard of living — then Bitcoin will suffer a reputational blow.

In fact, El Salvador’s Bitcoin experiment might backfire in a profound way for El Savladorans. Bitcoin remains a highly volatile asset; its price often swings over 10% in a single day. Any dramatic plunge in Bitcoin’s price will wreak havoc on Salvadorans who may be heavily exposed to the currency — and who do not have enough money to be saving or investing. News reporting of El Salvadorans going broke as Bitcoin plummets will hardly inspire confidence among new investors.

This conundrum also poses the question of whether Bitcoin can properly function as a unit of exchange. Investors in the U.S. treat Bitcoin as a speculative asset or store of value; people aren’t typically using crypto to buy groceries or pay for rent. Of course, some Bitcoiners will say this is precisely the point: Bitcoin was never designed to serve as a unit of exchange, and El Salvador’s experiment shouldn’t have any bearing on Bitcoin’s long-term price trajectory. But that argument assumes that people already recognize Bitcoin as a dependable store of value, without needing to see other use cases — it’s a risky bet. 

Like any stock, Bitcoin needs new investors to continue growing. That’s why the cryptocurrency has a lot riding on El Salvador: the Central American country is Bitcoin’s first real opportunity to prove itself as a financial vehicle that doesn’t only create wealth for some, but systematically uplifts an entire country. Only time will tell. 

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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