Salvadoran President Nayib Bukele (left, in cover) unveils designs by architecture studio FR-EE for a crypto-funded city set to rise the side of a volcano in the south of the country

Could the Bitcoin crash cause El Salvador to spin out of gear? The government lost $40 million amid plans to build a crypto city

A Bitcoin bet in El Salvador could put the country at risk as its holdings have already lost $40 million amid the cryptocurrency’s defeat.

The losses – equal to the Central American country’s next bond payment – come amid the so-called “crypto winter” and the president’s plans to build a volcanic-powered “crypto city” to mine coins.

President Najib Bukele announced in September that El Salvador would become the first country in the world to accept bitcoin as legal tender and incurred $105 million on the digital currency.

But since then, its value has plunged 45% amid a general burst of the crypto bubble, reducing the value of 2,301 Bitcoins purchased by state coffers to $66 million.

The decision to submit a legal tender for bitcoin has left bond investors unconcerned, who see it as exposing state coffers to the volatility of the cryptocurrency market, thus harming the country’s ability to make bond payments.

“It is very risky because it is a very volatile asset, and it is an investment that is completely at the discretion of the president,” said Carlos Acevedo, former president of the Central Bank of El Salvador.

Salvadoran President Nayib Bukele (left, in cover) unveils designs by architecture studio FR-EE for a crypto-funded city set to rise the side of a volcano in the south of the country

President Najib Bukele announced in September that El Salvador would become the first country in the world to accept bitcoin as legal tender.

President Najib Bukele announced in September that El Salvador would become the first country in the world to accept bitcoin as legal tender.

The decision to submit a legal tender for bitcoin has left bond investors unconcerned, who see it as exposing state coffers to the volatility of the cryptocurrency market, thus harming the country's ability to make bond payments.

The decision to submit a legal tender for bitcoin has left bond investors unconcerned, who see it as exposing state coffers to the volatility of the cryptocurrency market, thus harming the country’s ability to make bond payments.

The President of El Salvador, Neb Bokel, has allocated $105 million to the cryptocurrency.  But since then its value has plummeted 45% amid a general burst of the crypto bubble, reducing the value of 2,301 bitcoin purchased by state coffers to $66 million.

The President of El Salvador, Neb Bokel, has allocated $105 million to the cryptocurrency. But since then its value has plummeted 45% amid a general burst of the crypto bubble, reducing the value of 2,301 bitcoin purchased by state coffers to $66 million.

Self-described 'coolest president in the world' Nayib Bukele (above) is a staunch supporter of the cryptocurrency Bitcoin.

Self-described ‘coolest president in the world’ Nayib Bukele (above) is a staunch supporter of the cryptocurrency Bitcoin.

“He buys it on his phone when he wants to take advantage of a dip, but he doesn’t do it right because when he buys there’s always a bigger dip.”

El Salvador owes bondholders $382 million in interest this year, and July was the heaviest month for payments with $183 million due.

The country held $3.4 billion in reserves in April, according to the central bank, and there are plans to raise $1 billion through Bitcoin-backed bonds, though the cryptocurrency’s collapse is now in doubt.

Despite these reserves, markets are now seriously doubting El Salvador’s ability to service its debt due to its foreplay with cryptocurrency.

Rating agency Fitch lowered El Salvador’s debt rating to CCC, or “junk” in the industry, fearing that an increase in debt to GDP levels, expected to reach 86.9% in 2022, would “increase concerns about debt sustainability over the medium range”.

Bukele maintained his enthusiasm for the digital currency even as its price plummeted, having sagged with the purchase of another slice of 500 bitcoins on May 9 for $15.5 million – now worth $14.1 million just four days later.

On the same day, he tweeted lavish architectural plans for a “coded city,” a lush, verdant sci-fi vision of a major coastal city filled with landmarks and an airport.

Bukele maintained his enthusiasm for the cryptocurrency even as its price plummeted, having slumped with the purchase of another slice of 500 bitcoin on May 9 for $15.5 million — now worth $14.1 million just four days later.

Bukele maintained his enthusiasm for the cryptocurrency even as its price plummeted, having slumped with the purchase of another slice of 500 bitcoin on May 9 for $15.5 million — now worth $14.1 million just four days later.

Luxurious Architectural Schemes for

Sumptuous Architectural Plans for a “Coded City” A lush and green fantasy vision of a gigantic coastal city complete with landmarks and an airport

Bitcoin City plans to build it - start date unclear - near the Conchagua volcano on Fonseca Bay in the southeast of the Central American country

Bitcoin City plans to build it – start date unclear – near the Conchagua volcano on Fonseca Bay in the southeast of the Central American country

“Trees are everywhere,” he said on Twitter. “Beautiful view of the volcano.”

Bitcoin City plans to build it – the start date is unclear – near the Conchagua volcano on the Gulf of Fonseca in the southeast of the Central American country.

Neb Bokhel – The first dictator of the millennial generation?

Najib Bukele, 40, who describes himself as “the coolest president in the world,” was developing a new form of authoritarianism that savvy Democratic leaders might soon embrace.

Since the beginning of May, he and his supporters have made classic authoritarian steps to consolidate their hold on power and impartial democracy.

On May 1, he sacked the country’s attorney general and the country’s Supreme Court, mobilizing both institutions with loyalists.

Since then, he has used state agencies to harass journalists, investigate political opponents, and dismantle government checks and balances.

He is also drafting a new constitution.

He has openly stated that his task is to ensure that his opponents never return to power.

Yet he retains more than 80% of popular support on the ballot.

He seemed to achieve this by positioning himself as the antidote to the notoriously corrupt and endemic El Salvador establishment – an opposition he never wanted to return to power.

He has deliberately appealed to the illiberal leanings of young voters who have been disillusioned with democratic policies that have produced decades of corruption.

They prefer to have an authoritarian leader who represents their interests.

First proposed in 2001, it is intended to be a “smart” city based entirely on the use of bitcoin as a digital currency, in which citizens would be exempt from most taxes.

We won’t have income tax forever. “There is no income tax, no property tax, no purchase tax, no city tax and zero carbon dioxide emissions,” Bukele said in a statement in November.

“The only taxes they will have in Bitcoin City is a value-added tax, half of which will be used to pay municipal bonds and the rest for public infrastructure and city maintenance.”

El Salvador has struggled with deciding which currency to use over the years. It abandoned its fiat currency – and thus control of its monetary policy – in favor of the US dollar in 2001.

The goal of moving to Bitcoin was to help citizens of the country who depend on remittances from the United States and other countries avoid known predatory services through which the money had to pass.

The government has developed an app called Chivo Wallet to facilitate daily crypto transactions with a $30 gift to citizens who have downloaded it to promote its use.

But only 20% of users continue to use it after spending the giveaway, with the fluctuations making crypto such an attractive, unregulated security making it a bad everyday currency.

The nation has been in talks with the International Monetary Fund about an extended fund facility to help it weather the recent turmoil, but those talks have stalled due to Bukele’s decision to legalize bitcoin.

Since then, spreads on state-default swaps — a type of insurance against missed payments — have risen by more than 20 percentage points, implying an 87% chance of default in the next five years.

El Salvador’s troubles come against the backdrop of falling cryptocurrency values ​​across the board in the so-called “crypto winter” in which investors lost billions.

More than $200 billion was wiped out from the cryptocurrency market yesterday alone.

During the pandemic, record low interest rates aimed at boosting economies have caused investors to buy riskier assets such as cryptocurrencies at higher rates of return.

As rising inflation causes interest rates to rise in order to protect savings, these assets are sold in favor of safer government bonds – which will provide better returns.

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