News hardware Bitcoin in legal tender, is it really a good idea? A look back at El Salvador’s experience
El Salvador has been experimenting with the use of Bitcoin as legal tender within its country for a year now – the perfect opportunity to take stock of this large-scale demonstration.
El Salvador: a life-size test for Bitcoin
The smallest country in Latin America located between Guatemala and Honduras is the subject of an unprecedented experiment… Since September 7, 2021, President Nayib Bukele has decreed that El Salvador officially welcomes a new legal currency: Bitcoin.
The establishment of the Bitcoin law was not entirely disinterested on the part of the president, since Nayib Bukele is considered a true cryptocurrency enthusiast.
Through this financial innovation, the aim was, among other things, to save bank charges related to the dollar currency – amounting to 400 million per year. With the significant migratory flows, El Salvador saw about 22% of its GDP fly away in taxes and conversions of Salvadoran expatriates.
Also, Nayib Bukele intended to take advantage of the renewable energies offered by the country of volcanoes. With this objective, the President of El Salvador has undertaken the creation of multiple infrastructures allowing the energy of the volcano to be used to mine Bitcoin.
“We are still testing and installing, but this is officially the first bitcoin mining since the volcanode” proudly wrote the president of El Salvador on September 28, Nayib Bukele.
In the logic of building a new Eldorado, President Nayib Bukele had also promised to build “Bitcoin City”, a kind of tax haven for investors and cryptocurrency miners.
1 year later, what remains of its many promises?
A first year anniversary of Bitcoin that leaves doubtful
Although a majority of people in El Salvador had opposed the decision of the head of state for fear of novelty, they were several to take the plunge and use Bitcoin for payments of everyday life. Some even used it long before the Bitcoin law, like businesses not far from famous surf spots. Very frequented by tourists, these places highlight the advantages of Bitcoin, namely to allow travelers to exchange value without going through any conversion.
Nevertheless, after the mass adoption of bitcoin as legal tender in El Salvador, locals are in the throes of some disillusionment.
During the first months, the application allowing to use Bitcoin was downloaded by nearly 4 million out of 6.6 million inhabitants. However, it no longer seems to be used by the locals:
“For a while, yes, I used bitcoin. But the way things are going, I don’t trust it anymore, and I even deleted the application,” explains Carmen Mejia, a 22-year-old student.
First, residents who bought Bitcoin under the advice of the president are suffering the fall in the price of cryptocurrency. Indeed, El Salvador undertook the adoption of Bitcoin as legal tender while it was in the midst of a bull market (bull market in crypto). Thus, the state and the inhabitants bought Bitcoin when it cost around €40,000. Today, the price of Bitcoin is fixed around €20,000, halving the purchasing power of Salvadorans.
As for the El Salvador coffers, according to the credit rating company Moody’s, it recorded a loss of 57 million dollars following the purchase of Bitcoin for a value of 106 million.
Beyond the fall in the market, beyond the president’s control, the positive effect that Bitcoin was supposed to have on the remittances of immigrants is still pending… And for good reason, according to data from the Salvadoran Central Bank , they would be “less than 2%” to use Bitcoin for this type of transaction.
Bitcoin City: The Salvadoran Mirage
Despite few encouraging elements due to the context of the cryptocurrency market, the President of El Salvador however found that Bitcoin was a tourist asset. This is in any case what the recent interventions of the Salvadoran government on Twitter suggested. With this in mind, Nayib Bukele intends to become a Bitcoin “eldorado” and this involves the construction of a city dedicated to cryptocurrency: Bitcoin City.
In the idea, the new city was to be located on the side of the Conchagua volcano and its architecture was to form a huge circle like a coin. Littered with businesses of all kinds allowing the use of Bitcoin, the streets of Bitcoin City were to be mainly pedestrian with a few bike paths.
To carry out this project, the president had put forward the idea of borrowing half a billion dollars in cryptocurrency. However, after several months, the project does not seem to be very advanced…
A year after its inauguration in El Salvador, Bitcoin is perplexing the locals. The government is subject to the bear market context (a bear market in the cryptocurrency cycle). However, in order to take advantage of this price drop, Nayib Bukele continues to act as a true Bitcoin Maximalist. He recently indicated that he bought 80 bitcoins at a price of 19,000 dollars on the Salvadoran account. Therefore, if the bitcoin is brought up, this could partly make up for the losses caused at the beginning of the year – a very likely scenario when we know the volatile potential of bitcoin cycles.
What is Bitcoin?
Bitcoin is first and foremost a payments network allowing its users to exchange peer-to-peer currency. It is based on a digital currency called Bitcoin (BTC).
Thanks to blockchain* technology, Bitcoin offers the possibility of making decentralized payments, i.e. without third parties or trusted authorities. With this in mind, Bitcoin was initially created to be an alternative system to banks.
What is Blockchain?
The blockchain (literally chain of blocks) is in a way the digitization of trust. Concretely, his code allows web users to exchange peer-to-peer value with a decentralized validation system. All actions performed on a blockchain are anonymous but transparent.
The mathematician Jean-Paul Delahaye explains that we can visualize this large archive as “a very large notebook, which everyone can read freely and free of charge, on which everyone can write, but which is impossible to erase and indestructible”.
Who Runs Bitcoin?
If the name behind Bitcoin is known to everyone, Satoshi Nakamoto, no one really knows the identity of the creator. Either way, it doesn’t matter since Satoshi has little power over his code.
Indeed, Bitcoin is decentralized, so it does not depend on any entity. Its network does not belong to anyone since it is the consensus of its users that allows the change of its protocol. Developers can make changes only if miners and network nodes agree with the choice.
How does bitcoin work?
The Bitcoin network works thanks to its users. To carry out user transactions, Bitcoin has operated its blockchain. Concretely, each miner puts their machines (graphics card, ASICs) in competition to solve an equation in order to validate the veracity of the block. Thus, the Bitcoin network makes sure to issue secure transactions scrutinized by several binary intermediaries.
How to get Bitcoin?
Anyone using their hardware computing power (graphics card, ASICs) is paid in BTC according to their involvement in the network.
In addition to mining, Bitcoin can be obtained on cryptocurrency exchange platforms against fiat currency among others (euros, dollars, etc.).
Where to store bitcoin?
Like cash, Bitcoin can be stored on virtual wallets, generally called wallets. There are several types of wallet:
Hot wallets are private key storage solutions attached to the Internet. In the form of software, these portfolios can be applications, extensions or even websites.
Cold wallets are a more secure alternative for cryptocurrencies. Indeed, the private keys of these wallets are not stored online, so it is much harder for a hacker to gain access to them. These wallets usually take on the appearance of a thumb drive or even paper.
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Bitcoin in legal tender, is it really a good idea? A look back at El Salvador’s experience
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