How the Cryptocurrency Crash Could Bankrupt El Salvador? What Went Wrong?


as some of you probably already know the crypto markets have been having a torrid time for the past few weeks cryptocurrencies across the board including bitcoin Ethereum and tether have all crashed and the drop doesn't seem to be slowing down so, in this blog, we're going to be taking a look at the ongoing crypto crash and how it might even force El Salvador into default so, let's start with the crypto crash itself as central banks around the world raise interest rates to cool off their national economies' stock markets have been plummeting the Nasdaq is down 28 from its January high and the s p is down 18 in the same time this sort of makes sense as central banks raise rates trade and demand dry up and this reduces the revenues of publicly traded companies what's been more surprising however is the corresponding drop in crypto markets where things have been far worse just looking at the big cryptocurrencies drops in excess of 50 percent aren't uncommon bitcoin for example is currently trading at about 30000 and Ethereum is trading about 2100 both down about 50 percent in the last six months and tether which is always supposed to be a stable coin that always trades at one dollars fell to 95 cent on Thursday prompting its chief technology officer to tweet reassurances to investors that it was capable of honoring withdrawals at par smaller cryptocurrencies have fared even worse Cardano and Solana are both down 80 from this September and November highs respectively Tara Luna which was once among the top 10 most valuable cryptocurrencies lost 98 of its value in just 24 hours you get the picture the crypto market is crashing and crashing hard now this is probably happening because while cryptocurrencies aren't really directly affected by changes in interest rates they are affected by changes in market confidence crypto-assets like many other assets are clearly speculative in other words lots of people buy crypto assets just hoping they'll go up in value and they could sell them later without any regard to the intrinsic value this means that when a sell-off begins it triggers a feedback loop speculative investors who only wanted the crypto assets for its future value sell-off to minimize their losses bringing the price down further and causing even more people to sell off so what triggered the sell-off this time well it probably began in reaction to the collapse of the stock market traders saw the value of their portfolios declining and decided to sell their cryptos whatever the original cause the feedback loop was started and cryptos have been collapsing the idea that cryptos are a sort of digital gold or a hedge against inflation now look frankly visible and people across the internet have lost terrifying amounts of money the terra Luna subreddit pinned national helpline numbers after multiple posts from users considering suicide however the biggest loser in this crypto crash might be naive buckeley for those of you who don't know him buchelle is the twitter addicted president of El Salvador in 2015 bucheller was elected mayor of San Salvador the capital of the largest city in El Salvador he was remarkably popular with San Salvadorians largely because he successfully reduced crime in the city in his first year in office the murder rate saw a fall of 50 percent which buchelle attributed to his tough anti-crime policies including an increased police and military presence on the streets and tighter security and jails although it's worth noting that there were reports that buchelle had made an informal deal with the gangs buchelle also won over voters with projects to revitalize poor neighborhoods progressive stances on social issues such as gay marriage and shrewd use of social media he even donated his salary to provide scholarship for poor students throughout his mayoralty buchelle enjoyed approval ratings of above 70 and soon became the most popular politician in the country bucheller used his mayorship as a launchpad to the presidency winning the 2019 presidential election by a landslide with 53 percent of the vote well ahead of both of the mainstream candidates once in power buchelle turned into a bit of an autocrat albeit an effective one allegedly thanks to some dodgy deals between buchela's government and the gangs gang warfare has subsided and the murder rate has fallen by 60 percent but alongside reducing the crime rate buchelle's other big political aspiration was about turning El Salvador into a crypto paradise on September the 7th of last year bucheller passed a law recognizing bitcoin as legal tender requiring businesses to accept the cryptocurrency for goods and services and a few months later he announced a 1 billion bitcoin bond issuance to fund a low-tax bitcoin city next to kolchagwa volcano since September bucheller has bought some 2301 bitcoins with El Salvadorian taxpayer money the most recent purchase coming on Monday the 9th of May when he bought 500 coins at an average price of 30 744 dollars we did the maths and figured out that the average price Buckley paid for his bitcoins was about 43 900 per bitcoin at the time of writing Bitcoin is trading at about 30000 which means bucheller has lost around 14000 per bitcoin or about 32 million dollars total now we should say that 32 million dollars isn't going to bankrupt an entire country sure El Salvador is a tiny country of less than seven million people and a GDP per capita of less than four thousand dollars but it's already got a national debt of about 23 billion dollars so another 23 million dollars is hardly going to take it over the edge however, buchelle's failing bitcoin strategy has also hurt El Salvador finances in other ways his reckless by-the-dip attitude has spooked investors pushing El Salvador borrowing costs sky-high for context El Salvador 800-million-dollar bond due next January is now trading at 76 cents on the dollar implying an annual yield of over 50 percent and in early may Moody's downgraded El Salvador's credit rating to caa3 with negative outlook which is one rating away from quote likely or very near default for those of you don't know much about bond yields that's really not good now buchelle was planning on paying off this 800-million-dollar bond due in January by issuing a new so-called bitcoin bond worth one trillion dollars again, the crypto-cash has put a spanner in the works here because well who wants a bitcoin bond when bitcoin is crashing Bloomberg recently reported that there's currently, zero demand for it although we should say that Buc hello's finance minister claims it's 50 oversubscribed anyway if buchela can't find any buyers for his bitcoin bond then default on that 800 million dollars during January looks likely nonetheless, Bucheli looks unlikely to change course he's continued to buy the dip and even revealed a model of bitcoin city in the last few days which by the way looks like this buchelle will be encouraged by his sky-high approval ratings while El Salvadorians aren't so keen on his bitcoin plans vast majorities approve of his crime and covet policies and his own approval rating is still well above 80 percent one of the highest in the world while this might be good news for buchelle the lack of political resistance to his hair-brained bitcoin schemes might end up being bad news for ordinary El Salvadorians.