El Salvador’s Bitcoin Experiment Starts Now: What This Means for Crypto

El Salvador’s legislature voted over the summer to officially adopt Bitcoin as legal tender. That law went into effect on September 7, meaning that El Salvador has now become the first country on Earth to make a cryptocurrency standard its national currency.

El Salvador’s president, Nayib Bukele, has been alternatively hailed as a financial genius and derided as a corrupt politician, depending on who’s describing him.

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The new law kicked into effect alongside a wallet app called Chivo. This app will allow El Salvadorans to make purchases and manage their funds. The currency can now be used in both physical shops and for online purchases.

This is the ultimate goal of Bitcoin and other cryptocurrencies. Despite a focus on these standards as assets and investments, they’re intended to be used as currency. As such, El Salvador’s experiment in allowing the coins to be used as legal tender is going to be under intense scrutiny by crypto detractors and crypto bulls alike.

Why Bitcoin?

The first question asked by many financial observers is “Why would El Salvador choose to make Bitcoin legal tender?” The answer is multifaceted and based on the country’s unique economic situation. A lot of the money that makes El Salvador’s economy work comes in the form of remittances, or money sent back home by migrants who have moved to countries like the US to take jobs to help out their families.

Bukele has stated that he hopes the Bitcoin law makes it that much easier for El Salvadorans abroad to send money back home. One of the biggest factors influencing his decision, according to the president, is that around seventy percent of El Salvadorans don’t have a bank account. As such, making Bitcoin legal tender essentially extends a digital account to everyone in the country.

At first blush, the idea of a country taking on a volatile, decentralized currency as its legal tender can seem like a recipe for disaster. However, in light of El Salvador’s specific economic situation, there does seem to be a method to the madness. The country relies on money sent in from abroad, and the government is using the new standard to encourage people to make online transactions.

Stack of bitcoins, concept of cryptocurrency
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Bukele announced on Twitter that the country has purchased some 550 Bitcoins, which is around $26 million worth of the cryptocurrency. The government has set up a fund for people who want to convert their Bitcoin to USD, another currency that is accepted as legal tender in the country. According to Bukele, Bitcoin will help to make El Salvador more independent and less reliant on the US for its economic security.

Potential Drawbacks

It’s not all upside for El Salvador, though. Taking on Bitcoin as legal tender comes with some significant challenges and potential stumbling blocks. For one thing, the currency is completely decentralized and unregulated. This leaves it open to extreme volatility: Bitcoin has been known to swing up or down by orders of thousands of dollars per coin in a matter of weeks.

On a national scale, that could trigger massive inflation or deflation, which makes investing in the coin a scary proposition for people and businesses alike. That’s before considering the possibility of cybercrime targeting El Salvadorans.

The average El Salvadoran isn’t an expert on cryptocurrency or online security. As such, some experts are worried that the people of El Salvador might be the targets of cybercriminals who try to part them from their Bitcoin. Since Bitcoin is anonymous and largely untraceable, this could grow to be a serious problem for the country if the new adopters of the currency aren’t careful with their passwords and digital wallets.

What the Experts Say

Some analysts think that El Salvador is blazing a path for other countries to follow. Nigel Green, CEO of the DeVere Group, told Yahoo Finance “I believe this is a threshold moment in the evolution of digital currency and that it ushers in the start of a new world as we can expect more nations, especially those with developing economies, to follow El Salvador’s historic lead.”

However, the instability of Bitcoin reared its head just as El Salvador’s crypto law went into effect yesterday. The cryptocurrency experienced a massive sell-off, falling under $50,000 for the first time in weeks. This coincided with the country’s wallet app, Chivo, experiencing some day-one glitches that rendered it unusable for several hours.

Some analysts have even predicted that shifting monetary policy on the global scale could push Bitcoin as low as $15,000 by the end of the year. Should this happen, El Salvador will be left holding significant losses in its purchase of millions of dollars worth of Bitcoin, and it could even be staring down an economic crisis.

Or, it could become one of the wealthiest countries in Central America. Bitcoin is so volatile that it’s hard to say anything with certainty.

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