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El Salvador Bitcoin Strategy Explained

El Salvador became the first country in the world to make Bitcoin (BTC) legal tender. Over the last year, El Salvador purchases have been among the most covered by the media, considering the country continues to add BTC to its holdings. 


But what is El Salvador strategy? Is there any possibility for other countries to follow the example of this Central American country? Despite this initiative and this decision to make Bitcoin legal tender, El Salvador has been criticized by several international financial organizations. What can we learn from that? 

In the next sections, we are going to cover all the things you should know about El Salvador purchases and its strategy when it comes to adopting the largest cryptocurrency in the world. 

A Brief Introduction to El Salvador

El Salvador is a country located in Central America with access to the Pacific Ocean and a population that is close to 6.8 million. In 2018, the GDP (nominal) amounted to $26.28 billion and its GDP per capita was $4,041. 

The currency used in El Salvador was called Colón. The currency was used until 2001 and it was then replaced by the U.S. dollar (USD). This change offered the possibility to the country to avoid politicians controlling the new issuing of money. 

There is a very close relationship between El Salvador and the United States. A large diaspora of Salvadorans is currently working in the United States, sending monthly payments to their families using remittance solutions such as Western Union or MoneyGram, among others. 

El Salvador Bancoagricola El Salvador Bitcoin Strategy

This is quite costly for these workers, as sending small amounts of money requires people to pay very high commissions. Furthermore, funds are not available instantly but people have to wait even days to receive the funds.

There are many things to take into consideration about this country and how it has evolved over the course of the years. Despite the growth that it experienced in recent times, a large part of the population still earns very low salaries that, in some cases, are not enough for people to live. 

Therefore, El Salvador is a rich country in culture and traditions that have some economic issues to solve. Some of these problems (inflation) have been solved by using USD. Nevertheless, with the growth and expansion of inflation in the United States, people are being hit in El Salvador as well, which cannot print USD. 

El Salvador adoption represents a unique opportunity for people to start living better and to slowly move away from USD and get integrated into a new economy. 

El Salvador Makes Legal Tender

El Salvador strategy started with the country making Bitcoin legal tender on September 7, 2021. Thanks to this decision of President Nayib Bukele, El Salvador became the first country in the world to make Bitcoin legal tender. This represents a great and unique opportunity for the country to move away from the U.S. Dollar and get into the Bitcoin standard.

The decision of El Salvador strategy was made in a year in which Bitcoin expanded from $20,000 to $69,000. This was something that pushed investors from all over the world to enter the market. 

El Salvador attracted a large number of tourists that tested the “ experience” of living in a country where the USD is accepted as legal tender alongside Bitcoin. Another thing that is worth taking into consideration is that the country attracted a large number of companies and investors that started to build new and unique projects in El Salvador. 

El Salvador strategy of making Bitcoin legal tender included the purchase of BTC on a regular basis, especially when the price of Bitcoin moved lower. 

It is worth pointing out that after the decision of El Salvador to make legal tender, the Central African Republic (CAR) did the same in 2022. The main difference is that this decision from CAR did not reach the audience that El Salvador Bitcoin legal tender decision reached in the past. It is clear that Nayib Bukele was able to offer a unique marketing point of view that CAR couldn’t offer.

In the future, it might be possible for other countries to follow the example of El Salvador and adopt Bitcoin as well. This is something that might require some time, especially for countries with more than 10 million people. Relatively small and less populous countries have an advantage in terms of organization and execution. 

New Bitcoin-Related Projects

It is clear that the decision to make Bitcoin legal tender brought the attention of a large number of projects from all over the world. Indeed, there was, for the first time, the possibility to create and run a Bitcoin business in a country that offered all different types of benefits for those that invested in it. 

Jimmy Song, for example, is in El Salvador teaching people about Bitcoin and blockchain technology. He is offering a course for people to learn more about Bitcoin programming. This is one of the most interesting initiatives from one of the most popular figures in the cryptocurrency industry. 

El Salvador Bitcoin

El Salvador Bitcoin

Peter McCormack, the host of the What Bitcoin Did podcast, has released a documentary about Bitcoin adoption in El Salvador. In this documentary, he talks with the president of the country about the impact that Bitcoin could have on the economy and lives of millions of individuals. 

Athena Bitcoin installed in the country dozens of Bitcoin ATMs that let people exchange USD and BTC in just a few simple steps. Considering that most people was used to dollars, having a country that now handles two currencies required a company such as Athena Bitcoin to help El Salvador Bitcoin adoption. 

Moreover, other larger companies have searched for different ways to start offering solutions and services directly from El Salvador. This would not only increase the involvement of El Salvador in the world economy but it is also expected to generate high-quality work offers for individuals in the country. 

One of the most popular El Salvador Bitcoin projects is the one to mine Bitcoin by using energy from volcanoes. The goal is for El Salvador to be able to protect the Bitcoin network by using clear energy from a volcano. This is something that no other country has implemented and that could push El Salvador to the next level of Bitcoin adoption. 

El Salvador Bitcoin Strategy

El Salvador Bitcoin strategy has many different aspects that are worth taking into account. The first one is that the goal was to move away from the U.S. Dollar (USD) and its dominance in the economy of the country. Despite the fact that the dollar is still being used, there are many other benefits of having adopted Bitcoin as a legal tender. 

Bitcoin is allowing Salvadoreans to receive and send transactions from one country to another without the need to pay very high fees. This is something that was not possible in the past, as the country was attached to all international financial companies that offered centralized services to people in the country. 

Now, the possibilities are endless. As we mentioned before, rather than paying a commission for every transaction processed by MoneyGram or Western Union, Salvadorans are able to use the Bitcoin network or the Lightning Network (LN) in order to process cross-border payments. 

At the same time, thanks to the El Salvador Bitcoin strategy, the country is testing a new monetary system. A monetary system that does not depend (or that at least relies much less on) on the US Dollar. This is especially important at a moment when in the United States inflation is almost at 10% and where El Salvador cannot print more money as the U.S. does. 

Nayib Bukele knows which are the advantages of using Bitcoin and he decided to implement this strategy for the long term. He knows that there are short-term benefits but other long-term positive things that are worth considering when it comes to El Salvador Bitcoin strategy. 

It will be very important to see the evolution of El Salvador Bitcoin strategy in the future, especially on how it has an impact on GDP. After all, the goal would be to help El Salvador increase its GDP and make people’s lives better. 

Bitcoin vs Dollar for a Foreign Nation

Using the U.S. Dollar as a foreign nation could have many advantages. Some countries are already using the U.S. Dollar unilaterally including Ecuador, El Salvador, and Panama. Argentina is another country that has heavily relied on the U.S. Dollar due to its long history of hyperinflation. 

One of the advantages of having the U.S. Dollar as a currency involves eliminating internal inflation. As El Salvador, or the country that adopted the USD, cannot control the money supply in the economy, they would be able to eliminate internal inflation. Hence, politicians would not be able to use a central bank to create money.

However, there are some drawbacks to this strategy. For example, if international inflation grows, as it happened now with the United States registering a 10% inflation, countries like El Salvador get their money devalued without being able to get the “benefits” of freshly printed dollars. 

Now, with Bitcoin, things are different. Bitcoin is not controlled by any central bank around the world and is a currency that is non-inflationary over time. This is one of the main advantages of using Bitcoin. The USD can still be used alongside Bitcoin, allowing the economy to have the positive aspects of both systems, especially during a transition period. 

Thanks to Bitcoin, it is possible for a country to depend less and less on international financial organizations and central banks. As we have shown before, this would allow remittances to be cheaper and Salvadoreans to receive more money every single time that a remittance is sent to the country. 

Therefore, El Salvador is now moving away from the traditional financial world and building new possibilities basing its economy on the Bitcoin standard. This is one of the main pillars of El Salvador Bitcoin strategy. 

El Salvador Bitcoin Purchases

According to data shared by Bitcoin Treasuries, El Salvador Bitcoin holdings amount 1,771 BTC. That means that El Salvador is currently holding 0.003% of all Bitcoins in existence. Other countries such as Ukraine hold over 46,000 BTC. However, it is very difficult to compare a country like Ukraine with over 40 million people with El Salvador. 

The country continues to regularly buy more BTC as the price of Bitcoin moves lower. These purchases allow the country to increase its international currency reserves. Over time, the goal would be to hold more BTC when compared to fiat currencies, but it does not seem so easy to make regular purchases of BTC. 

According to El Salvador Bitcoin strategy, the goal would be to continue the regular purchases of BTC in order to transition to a fully Bitcoin nation. This is something that could take several years but that has already started. We can definitely see the positive impact of adopting Bitcoin on the local population and in some regions of the country where courses and initiatives have been linked to Bitcoin. 

The country could also obtain a real benefit if the price of Bitcoin skyrockets in the future. As one of the first moves, El Salvador already has an advantage that should not be wasted.  Therefore, the government should follow very well what happens to Bitcoin and the crypto industry and how holding BTC could make people’s lives better in the country in the long term. 

Criticism

El Salvador has been heavily criticized by international financial organizations and institutions due to its approach to Bitcoin. The International Monetary Fund (IMF) has urged El Salvador to remove Bitcoin as legal tender, as it could damage the country and its financial obligations. 

These financial institutions have been the ones controlling financial interactions around the world since WWII. Therefore, if they see their power threatened by a new monetary system built on top of Bitcoin they would attack all those that start getting involved in it. 

El Salvador is paying a very high cost to introduce Bitcoin as legal tender when it comes to its relationship with other international financial organizations. However, the benefits for the population are larger than keeping in good contact with the IMF or other international organizations. 

Financial experts around the world have also been attacking Nayib Bukele’s decision to make Bitcoin legal tender in the country. CNBC released a report where they explain that the country is “struggling” after introducing Bitcoin as legal tender. The report mixes economic issues (which cannot be solved by simply making Bitcoin legal tender) with criminal violence and gangsters controlling the streets of the country. 

It is clear that the El Salvador Bitcoin strategy requires time. Moreover, Bitcoin is not going to solve all the economic problems of El Salvador, as there are other things to take into consideration for a country to grow prosperous. Therefore, the criticism has come mostly from international financial organizations and institutions that didn’t have before any type of competitor in the market, until Bitcoin was created.

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