El Salvador’s controversial $117.5 million Bitcoin investment briefly swung into profitability this past week for the first time in two years. 

This was a milestone of sorts because, until then, not much had gone right crypto-wise for the impoverished Central American nation.

El Salvador still hasn’t come close to making Bitcoin (BTC) a medium of exchange as was anticipated when it made Bitcoin legal tender in September 2021, the world’s first nation to take such a step.

Moreover, it endured scathing criticism from many quarters, including the International Monetary Fund (IMF) as crypto prices worldwide plunged. In January 2022, the fund urged El Salvador to end its recognition of Bitcoin as legal tender.

But President Nayib Bukele simply dug in deeper during the crypto winter, making repeated BTC purchases throughout 2022. He followed a disciplined — or foolhardy, according to critics — dollar-cost-averaging strategy.

In early December, Bukele took a leave of absence to prepare for his 2024 election campaign, but he hopped on X last week for a victory lap of sorts and to take a jab at his “naysayers”:

El Salvador’s #Bitcoin investments are in the black!

After literally thousands of articles and hit pieces that ridiculed our supposed losses, all of which were calculated based on #Bitcoin’s market price at the time…

With the current #Bitcoin market price, if we were to sell… pic.twitter.com/gvl2GfQMfb

— Nayib Bukele (@nayibbukele) December 4, 2023

It was a diverting sideshow, but it raised some real questions: Is the former president justified in declaring vindication given that El Salvador’s BTC investment was only marginally profitable? (On Dec. 11, it slipped into the red again.)

Meanwhile, Bitcoin still hasn’t been widely adopted by the Salvadoran public to pay for goods and services, nor is it used by Salvadorans working overseas to send money home through remittances.

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Finally, given that El Salvador remains a small, indebted, poor country, was it really responsible for its leaders to gamble taxpayer money on high-risk Bitcoin purchases?

“A bold and unprecedented move”

Bukele has his defenders. El Salvador was in desperate economic straits back in 2021, and nothing seemed to be working.

“El Salvador took a bold and unprecedented move in adopting Bitcoin as legal tender, which was roundly criticized by the IMF, among others,” Nigel Green, CEO of the deVere Group, told Cointelegraph, adding:

“Something new had to be done to end decades of financial instability and reliance on the U.S. dollar in the country. Nothing else has previously been successful in this regard.”

Bukele “declared Bitcoin legal tender and provided the citizens of El Salvador the opportunity to adopt an alternative financial system that is different from the dollar,” Paolo Ardoino, CEO of Tether and chief technology officer at Bitfinex, told Cointelegraph. “It takes a lot of confidence and belief to withstand the pressure of international creditors and economic policymakers to stick with that resolve.”

At one point in 2022, El Salvador’s BTC investment portfolio was underwater by more than 50%. However, Bukele “stuck to his guns, and he made it through,” added David Tawil, president of ProChain Capital. Tawil expects other economically struggling nations to emulate El Salvador’s Bitcoin example. Argentina could be next.

At the time of writing, El Salvador has purchased 2,770 BTC in total at an average price of $42,436.22 per coin for a portfolio cost of $117.5 million, according to the “Nayib Bukele Portfolio Tracker,” which follows the changes in El Salvador’s Bitcoin stash.

It was running an overall profit of $4.16 million — up 3.54% — as recently as Dec. 9, when BTC was selling for about $44,000. Bukele’s first bulk BTC purchase was made on Sept. 6, 2021; his last was on Nov. 18, 2022, shortly after FTX imploded. There were 12 bulk purchases in all, after which Bukele still committed to buying 1 BTC per day.

But on Dec. 11, the portfolio dropped underwater again — down 1.15% — as BTC dipped below $42,000.

Irresponsible governance?

Given the ongoing crypto market volatility, it isn’t surprising that some ask whether Bitcoin is an appropriate investment for a sovereign government, let alone one so heavily indebted.

“Speculating with public resources in a context in which extreme poverty and food insecurity are increasing is irresponsible,” Lourdes Molina, senior economist at the Central American Institute for Fiscal Studies, told Cointelegraph. “The taxpayers’ money allocated to the implementation of the Bitcoin Law has had a high opportunity cost for Salvadoran citizens.”

Those funds invested in Bitcoin should have been used instead to finance public goods and services, Molina added. The new law has had other unforeseen effects, too:

“The economic risks derived from the implementation of the Bitcoin Law persist, particularly those linked to the possibility of turning the country into a tax haven and facilitating money laundering. Other risks have been contained by the non-mass use of the currency.”

George Selgin, senior fellow and director emeritus of the Center for Monetary and Financial Alternatives at the Cato Institute and professor emeritus of economics at the University of Georgia, told Cointelegraph that the country’s monetary experiment, as initially conceived, went well beyond a big crypto investment:

“El Salvador’s Bitcoin scheme wasn’t sold as a risky investment gambit — though it was certainly that. It was an attempt to achieve the ‘Bitcoinization’ of El Salvador’s dollarized economy. And with respect to that end, it has been a complete flop.”

In late 2022, Cointelegraph reporter Joseph Hall traveled to El Salvador to see if he could survive in the country using Bitcoin alone for payments. For two weeks, “I tried to pay for every single thing with Bitcoin, or satoshis — small amounts of Bitcoin. Spoiler alert: I failed.”

In El Salvador, the U.S. dollar remains the overwhelming payment “medium of choice,” Selgin noted, “for all, save some Bitcoin tourists.” It isn’t used by Salvadorans living overseas to send money home, though remittances were billed as a natural use case for Bitcoin. “Why any other country would wish to follow such an example is beyond me,” Selgin said.

Part of a bigger plan

Still, it’s important to put the country’s Bitcoin expenditures into a larger context. It is just one element in a plan to make El Salvador economically independent. Bukele also implemented a number of bond buyback programs to restore the country’s debt profile and expanded the tax base “by welcoming immigration and returning citizens to the country,” Ardoino told Cointelegraph, adding:

“El Salvador now has among the best-performing bonds among emerging market countries and is seen as a safe and attractive place to visit. The country’s decision to adopt Bitcoin has brought them investment, tourism and international recognition.”

“In order for the project to get off the ground, [Bukele] had to pitch it with high — maybe excessive — expectations,” Tawil told Cointelegraph. “No one really expected that it [BTC] would be a medium of exchange in the short term.”

That part of the experiment was “premature,” Tawil continued, mostly because Bitcoin still has usability shortcomings. “It’s not simple enough yet — it’s not as easy as a credit card.[…] But it will get easier,” he predicted.

In the meantime, the positive return on El Salvador’s BTC investment portfolio — if it persists — will likely catch the eye of other sovereign nations. Inflation-wracked Argentina, for one, has a new president, Javier Milei, who is well-disposed toward crypto, and he could borrow some elements from El Salvador’s BTC pioneer program. Many people remain unbanked in Argentina, so Bitcoin could be helpful.

Failure as a medium of exchange?

The lack of retail usage remains a sore point. Much was made two years back about El Salvador’s efforts to encourage its citizens to use Bitcoin for retail purchases. The government spent millions distributing Chivo wallets and small amounts of (free) BTC to citizens, and in the end, the results were disappointing. Doesn’t that detract from Bukele’s legacy?

“Whenever you introduce something very different, you cannot expect instant success and instant results,” answered Ardoino. “People forget that when credit cards and debit cards were first introduced, it took 10 years for them to gain acceptance in Europe, and it was not until 20 years later that we saw full coverage.”

As for investing in risky assets, “Governments make investments all the time, of course they do,” said Green. “But El Salvador experienced significant ire — more than for anything else — for investing in Bitcoin.”

Why the IMF, an organization whose mission is to “achieve sustainable growth and prosperity,” fears a future-focused solution is “baffling,” he added.

“The S&P 500 entered a bear market for the first time since March 2020,” continued Green. “Many investments were underwater,” but “savvy investors do not just panic sell during bear markets.”

A work in progress?

Overall, is it still too early to say whether El Salvador’s Bitcoin journey is a success or failure?

“It’s a mixed report, but then it always would be when launching a new legal and digital tender with no roadmap to do so,” commented Green.

Tawil called the country’s BTC gamble a “100% success.” Look at the cost basis for its BTC purchases — those “may never be seen again,” at least by any sovereign nation. El Salvador was prescient, he believes.

Conversely, economist Selgin argued that the small profit made so far on El Salvador’s Bitcoin splurge is largely irrelevant. Things could have easily gone south:

“No responsible government places risky bets with tax funds, and it is utterly irresponsible for a poor country to do so. Whether the gamble pays off or not is really beside the point.”

Molina also gave El Salvador low marks for its Bitcoin venture. “To this day, the arguments of attracting investment, generating employment or promoting financial inclusion have not been fulfilled. The only thing that has been socialized is the cost that citizens have had to assume,” she said.

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Ardoino, by contrast, judged El Salvador’s Bitcoin pivot a “success so far.” Bitcoin has brought the country ancillary benefits in tourism and investment, “and now El Salvador is developing an entire financial industry based on digital assets.[…] On the current trajectory, El Salvador is poised to be the new financial center for Latin America.”

Green referenced a Sept. 8 report from Spanish banking giant Santander that lauded El Salvador for its new “market friendly approach on policy management” and an increasing willingness to repay debt. The rise in Salvadoran bond prices “almost defies gravity,” commented Santander, and the country may soon be able to access Eurobond capital markets.

It should also be remembered that El Salvador “has a bleak history of defaulting on its international debt obligations,” Green added, but “is now unlikely to do so until at least 2029, according to most experts, which is pretty remarkable considering the history.”