El Salvador, the first country to introduce Bitcoin as legal tender, has announced it will buy up its own government bonds, in an attempt to show the markets that it can meet its payment obligations. Will President Bukele succeed in guiding the country through the bear market?

Like many emerging market countries, the Central American country is struggling with the deteriorating global economy. It also doesn't help that President Bukele's bravado has created friction with the IMF.

It concerns 1.6 billion in sovereign debt that El Salvador needs to refinance. But how? After all, the country only has access to the dollar and Bitcoin. It doesn't create those currencies. And so, unlike most countries, it cannot create money out of thin air to refinance its national debt. According to the finance minister, El Salvador still has credit lines with the IMF. This is remarkable because since the introduction of Bitcoin as a means of payment, the IMF has been very critical. It has even explicitly called on El Salvador to halt the Bitcoin project. The president responded on Twitter with a meme...

No mass adoption (but still...)

Meanwhile, how does the daily use of Bitcoin fare as a means of payment? A report from April 2022 shows that about 20% of residents use the Chivo Bitcoin wallet. The government had this wallet built and promoted it. Now of course this figure is not high in a country where Bitcoin is legal tender. Or should we view the glass as half full? It is certainly a higher percentage than in any other country in the world.

What was certainly been a disappointment is that according to the report the percentage of remittances made through crypto apps is only 2 percent of the total. These international payments were seen as an important use case of Bitcoin. In fact, payments from the U.S. by family members constitute a substantial part of the income for many families in El Salvador: sometimes tens of percents. The transaction costs of the traditional banking system are high: they add up to 400 million per year for El Salvador.

Bitcoin bonds and Bitcoin city

In the spring of 2022, the issuance of one billion dollars in Bitcoin bonds was postponed. The sale of the bonds would have financed the purchase of Bitcoin and a start of the construction of Bitcoin City. According to the finance minister, the bonds will come but, of course, that remains to be seen. How much confidence do international investors have in a country struggling with poor credit ratings, a soured relationship with the IMF and a dubious reputation of the president as a "dictator" (there are elections for the presidency in 2024)? It won't be easy.

There is hope

Anyone who buys Bitcoin knows that it is a long-term strategy. The problem is that governments are often not given that time: residents want short-term solutions. Accepting stimulus checks in fiat currency is more popular than suffering in the crypto bear market....

El Salvador had no luck with the timing of their bold strategy to buy Bitcoin and make it legal tender. Now that we are in a bear market and the country's Bitcoin position is at a loss, it is no surprise that criticism is only mounting. But the told-you-so's of many traditional media outlets do not take away from the fact that the rogue country now holds over 2,300 Bitcoin. The strategy appears not to be waning now the prices have dropped. On the contrary; in early July, the country bought another 80 Bitcoin, at a favorable rate of $19,000. If the country can weather this bear market, there is hope.