A little over a year ago, El Salvador made a bold bet on Bitcoin. The Central American nation of 6.5 million residents became the first country in the world to accept Bitcoin as legal tender. Led by its young president, Nayib Bukele, El Salvador sought to change its economic fortunes overnight with this decision.

Needless to say, there were raised eyebrows around the world when Bukele announced the country’s move to Bitcoin. Up to that point, El Salvador had been famous for many reasons, but none of them were good. In addition to being one of the poorest countries in the Western Hemisphere, El Salvador is plagued by a pernicious violent crime problem because of the entrenched presence of MS-13, one of the world’s most notorious street gangs.

With this as a backdrop, Bukele felt the need to make a radical move to turn the country’s fortune around. In announcing the country’s adoption of Bitcoin as legal tender, he did just that. As part of effecting the change, El Salvador’s central bank purchased nearly $425 million worth of Bitcoin. Bukele also proclaimed he would build a Bitcoin City, which would serve as an international hub for Bitcoin investors.

This crypto paradise was supposed to include all new infrastructure designed to facilitate the cryptocurrency trade. At a ribbon-cutting ceremony in November 2021, Bukele promised that Bitcoin City would break ground on its own airport, new commercial and residential developments and its own Bitcoin mining facilities. More importantly, it was going to become a tax haven, where Bitcoin investors from all over the world could live and trade Bitcoin.

The Bitcoin Conversion Has Not Gone According To Plan

When El Salvador announced the switch to Bitcoin in September last year, economists around the world saw the move in much the same way. There was going to be no middle ground. It was either going to be a stroke of genius that revolutionized the country and made it an investor’s paradise, or it was going to be an unmitigated disaster.

A little over a year in, it’s beginning to look like a disaster. When El Salvador made its $425 million bet on Bitcoin, it was trading at an all-time high (then) of $47,000. Today, it’s hovering around the $20,000 mark. That essentially means that a large part of the “currency” in El Salvador has lost more than half its value. As for the Bitcoin City that was supposed to spark El Salvador’s emergence as a cryptocurrency economic superpower, it’s not even a ghost town — you have to have a town before it can become a ghost town.

By all accounts, there has been no ground broken on any of the promised infrastructure projects. There is no airport, no commercial development and certainly no Bitcoin mining. Between that lack of infrastructure and the Bitcoin crash, it goes without saying that there has been no large influx of Bitcoin investors arriving in private jets to help revolutionize El Salvador’s economy.

Unfortunately for El Salvador and Bukele, that’s not where the bad news stops. The country has an estimated $1.6 billion worth of bond issues coming due in 2023 and 2025. And that’s just part of the country’s debt. All told, El Salvador has $7.7 billion in bond debt. But the total value of the country’s economy is estimated at only $29 billion.

Making matters worse, El Salvador currently has a debt to gross domestic product (GDP) ratio of nearly 87%. That’s a large part of why FitchRatings has downgraded El Salvador’s bonds from B- to a CCC rating. In simple English that means at the same time El Salvador’s economy is in the tank, it’s going to become even more difficult for the country to borrow funds and raise capital.

It’s basically the equivalent of a person with a 500 FICO score trying to get a debt consolidation loan. Even if it is approved, the loan terms will be so severe that there will be little to no benefit accrued from getting the money. At this point, any loans to El Salvador will carry annual interest rates between 25% and 29%.

This dire estimate was provided by Frank Muci, a policy fellow at the London School of Economics who has served as a financial adviser for numerous Latin American governments. The International Monetary Fund (IMF) has taken notice as well. It is basically telling Bukele that if he wants to have any hope of continued financial assistance, the country will need to end its Bitcoin experiment post haste.

The IMF is still largely skeptical about cryptocurrency and negotiations with Bukele about a $1.3 billion loan to cover the country’s bond issues have largely ground to a halt. This decision has as much to do with El Salvador’s bleak economic picture as it does with Bukele’s unyielding faith in Bitcoin.

Another problem is that El Salvador can’t just print money to ease its debt like some other countries. In 2001, El Salvador dropped its colon currency in favor of U.S. dollars. The move made sense at the time, especially in light of the millions of dollars per year flowing into the country via remittances from El Salvadorans living in America. However, because only the Federal Reserve can print dollars, El Salvador can’t pull that lever.

Then there is the question of Bukele himself. The man who styles himself as “the world’s coolest dictator” on his Twitter account has been busy consolidating his power through a number of decidedly undemocratic means. Last year, he fired the country’s attorney general and many of its top judges — specifically judges who were a thorn in his side politically.

He’s also upping the ante on Bitcoin and reportedly commissioned the acquisition of nearly 2,400 more coins in spite of its precarious slide in value. Aside from the international issues Bukele is facing with Bitcoin, the El Salvadoran population has been slow to embrace his experiment as well. When the plan was announced, every El Salvadoran was given the equivalent of $30 worth of Bitcoin through the country’s Chivo app.

The original plan was that El Salvadorans would embrace the app because it allowed them to access funds without going to banks that charge hefty commissions. Early signs were promising when nearly 80% of El Salvadoran households downloaded the app. Unfortunately for Bukele, less than 20% of El Salvadorans who downloaded Chivo kept using it after spending their original $30 credit.

Apparently, there is still a very strong preference for cash among the general populace and business community in El Salvador. And although all El Salvadoran businesses are supposed to accept Bitcoin, it is estimated that only 20% of them do. All of this has contributed to making the first year of El Salvador’s Bitcoin experiment a disaster.

Possible Silver Linings

There is concern among many economists about whether El Salvador is headed for default or may have to resort to austerity measures to avoid one. However, there are also some very real silver linings to the clouds forming over this Central American nation. El Salvador Minister of Tourism Morena Valdez reports that tourism to the country has increased by 30% since it began accepting Bitcoin as legal tender.

It remains to be seen how sustainable that trend is for the long term. However, Bukele’s support in El Salvador remains high. Along with his Bitcoin program, he’s also taken a hard stance on MS-13 and locked up thousands of its members. That’s bound to make you popular in a country that is known for being one of the most violent places on Earth. As it stands, Bukele’s approval rating is over 80% by some estimates.

So, Is President Bukele a Madman or a Genius?

In reality, it’s too early to know whether Bukele’s Bitcoin gambit will pay off. With hindsight being 20/20, it’s unlikely he would have adopted Bitcoin as legal tender if he’d known the crypto crash was coming. And while there can be no doubt that early returns have been poor, and his Bitcoin City has yet to be built, it’s still impossible to tell what the future holds.

Right now, it looks like one of the most colossal blunders imaginable. However, the same thing was true about the Las Vegas Flamingo Hotel in 1947. The hotel’s grand opening was such a flop that the original owners (the New York Mafia) famously rubbed out Benjamin “Bugsy” Siegel as punishment for losing all their money. However, 80 years later, Siegel’s belief in Las Vegas has been vindicated.

It could still come to pass that Bukele’s Bitcoin gambit is the prescient vision of a man several decades ahead of his time. The question of timing determines the fate of almost all investments, Bitcoin included. It’s entirely possible that Bukele’s dream of El Salvador as a crypto-state with Bitcoin City acting as an international crypto hub may come true. Only time will tell, even if things don’t look so good right now.

Could it Work Elsewhere if it Fails in El Salvador?

Like all bold moves, El Salvador’s gamble on Bitcoin is the product of both inspiration and desperation — probably in equal measure. Because of that, it may not be wise to completely write off Bitcoin as a currency if it doesn’t work for El Salvador. Even if Bukele’s move worked perfectly, it wasn’t going to solve all of El Salvador’s problems.

The truth is, there are a lot of structural issues like crime, entrenched poverty, the after-effects of a decades-long civil war, and corruption that make the El Salvadoran economy a tough puzzle for any monetary policy to solve. Another country with more well-developed infrastructure and a population with more disposable income may be able to make accepting Bitcoin as legal tender work.

Unfortunately for Bitcoin holders, as long as the currency is showing such volatility, it’s unlikely any country not in similarly desperate straits to El Salvador will adopt Bitcoin as legal tender anytime soon. That may not always be the case. If Bitcoin — and cryptocurrency in general — can solve its volatility and regulatory problem, it still has the potential to be a game changer. El Salvador just may be decades ahead of its time.

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