Bitcoin City: El Salvador’s crypto dream crashes with the market – Bitcoin (BTC/USD)
By Tereza Bízková
On January 1, Nayib Bukele, the president of El Salvador, shared his predictions about Bitcoin BTC/USD for the year. Will reach $100k, Bitcoin City will start construction, and Volcano bonds will be oversubscribed if any of the points were shared in his viral tweet.
Ten months later, none of these appear to be materializing yet – with many critics suggesting that El Salvador may be further away from its Bitcoin dream than ever.
When the country adopted Bitcoin as its legal tender on September 7, 2021, the crypto was close to $47,000. But instead of continuing its upward trend, it ended up plunging to less than $20,000, throwing a monkey wrench into Bukele’s plans.
Volcano bonds, designed to finance the futuristic Bitcoin City, have been delayed – three times already. And while Paolo Ardoino, Tether’s CTO, claims they should be available by the end of the year, amid a bear market, skeptics doubt whether they will be issued at all.
The Quest for a $15 Billion Crypto Metropolis
When Reuters recently traveled to El Salvador’s La Unión region, it was hardly a surprise that they found no heavy machinery or signs of construction at Bitcoin City’s site.
Still, rendered images of what the city might one day look like have flooded digital spaces. Bitcoin City will be circular and full of green spaces, have an airport and a port, residential and commercial areas, and have a central square that looks like a bitcoin symbol from above.
The city would get geothermal power from the nearby Conchagua volcano and impose no taxes except a 10% value added tax (VAT).
To kick-start construction, El Salvador plans to issue $1 billion in volcano bonds, followed by additional bonds over time. But with the financial cost of the project estimated at more than $15 billion, there is a long way to go.
So why haven’t the first bonds been issued yet? Speculation suggests, among other things, weak investor interest. El Salvador’s Finance Minister Alejandro Zelaya cited the economic effects of the war in Ukraine, declining risk appetite, legislative delays and fluctuating bitcoin prices as reasons not to respect the March 1 date.
“Volcano bindings are a fantastic idea; however, they encountered the wrong timing,” commented Pavel Chicowsky, Head of Dealing at xbo.com, a cryptocurrency exchange platform. “The project is viable, but global conditions need to improve significantly and El Salvador needs to find a more compelling way to attract the right investors to support the project.”
Until that happens, El Salvador also has a legislative procedure to deal with. For the bonds to go ahead, the country’s parliament must pass a corresponding bill – after that it will take up to three months to roll them out.
The bear market showed sharp teeth
The future of Bitcoin City will be inherently tied to the future of bitcoin. But the world’s most popular cryptocurrency has had a bumpy few months.
As Adam Carver, CEO and co-founder of Bitgreen, a purpose-driven blockchain, suggests, a key component of bitcoin’s hypothesis is acting as a safe haven from inflation.
“August inflation reports show that bitcoin – the ‘inflation-hedge cryptocurrency’ – fell 10%. And even worse: Losses were double the pullback in the NASDAQ and bigger than losses for beer like Ethereum or Polkadot,” he declared.
El Salvador has felt the fluctuations hard. The country has relied heavily on bitcoin over the past year — losing as much as $60 million in crypto value as of July. Despite that, it continues to buy dip, indicating more of a long-term approach.
And the wait can pay off.
“Bear markets usually start every four years – at the end of 2013, 2017 and 2021,” noted Daniel Kostecki, director of the Polish branch of Conotoxia, a payment solutions company. “In November or December, the end of the current bear market may come. Then another bull market may emerge, with a potential target at least at the current record high.
And considering that the use of cryptocurrencies is gaining momentum, the tide may be changing for Bitcoin City. “We should expect more demand for digital currencies that store value, scale, are reliable and enjoy high demand. Right now, bitcoin is the only crypto in the world that delivers,” said Chicowsky of xbo.com.
A problem bigger than a city
Whether El Salvador is able to afford to wait is another question entirely. Given the volatility of bitcoin and its low adoption among Salvadorans (only 14% of local businesses have used the cryptocurrency), the International Monetary Fund (IMF) has urged the Central American country to withdraw the legal tender.
The “unsustainable path” the IMF has warned has a lot to do with El Salvador’s risk of defaulting on its $800 million loan payment due in January 2023. While Bukele said there was “zero risk” of the country defaulting on its creditors, he later confirmed that El Salvador could pay its debt. But the credit rating agencies remain skeptical.
When Bitcoin City was first announced, El Salvador was poised to become the Singapore of Latin America. Now, instead, there are fears that it could become the next Sri Lanka.
El Salvador’s international debt was 28% of GDP in March, most of which is denominated in US dollars. “The country’s monetary policy decision to switch to bitcoin as the national currency was effectively a long-BTC, short-USD trade,” expressed Carver of Bitgreen.
“Had it worked, it could have significantly reduced the country’s balance sheet liabilities in USD. Unfortunately, the opposite happened, and now El Salvador is left with fewer liquid funds to service a relatively higher national debt denominated in USD. This story will be instructive for other countries considering similar abandonment of USD, EUR and JPY reserve currencies,” Carver concluded.
These financial issues could be fatal – both to Bukele’s popularity and Bitcoin City. And it is unlikely that volcanic bonds can help restore this. While it is true that many investors in the blockchain space choose to support projects out of enthusiasm, the bonds will generate only 6.5% annual interest.
“This project, if it goes ahead at all, could be pushed back even further, especially since with the increase in global bond rates, those issued by Salvador would no longer be as competitive and could be very risky,” said Kostecki of Conotoxia.
The bear market is one thing, but when a gloomy economic outlook is thrown into the mix, it’s clear that the construction of Bitcoin City will see further declines, at the very least.
