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Bitcoin weighs down El Salvador’s economy

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In El Salvador, the spectacular fall of Bitcoin worries. The number 1 cryptocurrency recently fell below the $30,000 mark, a far cry from its all-time high of $68,000 in November 2021. If this plunge is frightening, it is because Bitcoin is one of the country’s official currencies: analysts doubt El Salvador’s ability to repay its debt.

Model of Bitcoin City, presented by the President of El Salvador Nayib Bukele on his account Twitter.

For the President of El Salvador, the adoption of Bitcoin in September 2021 was a good opportunity to reflect the image of a modern country through major projects such as the creation of “Bitcoin City”, a city dedicated to mining or even ” Bitcoin Beach”, a seaside village where businesses give pride of place to cryptos. The other currency of El Salvador being the dollar, the adoption of Bitcoin was also a good way for the government to detach itself from the United States while having better control over its financial policy.

If the news caused so much talk at the time, it was because it was also very risky. The decision immediately alarmed the IMF, which asked the authorities to ” reduce the scope of Bitcoin law by removing its legal tender “. Indeed, the very volatile course of this new currency directly influences the coffers of the state.

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More than six months after its adoption, it is the issue of debt repayment that worries. El Salvador will have to repay $800 million in January 2023, which it will not be able to do if the price of Bitcoin does not pick up: it would then find itself in cessation of payments. A sword of Damocles which does not seem to worry the country’s president more than that, who announced on Twitter that he had reinvested more than 15 million dollars following the fall in prices.

Although the president firmly believes that the cryptocurrency will go up, analysts are less optimistic. Between the war in Ukraine, COVID-19 in China and a tightening of monetary policy in the United States, investors tend to flee volatile assets.

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Several credit agencies have lowered El Salvador’s rating, a data on which the market is based to assess the probability of a debt default. The lower the rating, the more the country is considered at risk and must pay high interest rates to its creditors. The agencies Fitch and Moody’s have assigned a “CCC” rating to El Salvador, one of the lowest ratings which imposes particularly high rates.

In El Salvador, cryptocurrency does not really interest citizens despite several communication campaigns. According to a study, only a small part of the population would still use it several months after its launch, while one in five companies would accept Bitcoin transactions.

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