El Salvador's president Nayib Bukele is a big Bitcoin enthusiast. However, his push into the cryptocurrency has left his country facing the spectre of default, a situation made worse by the famous digital currency's recent crash.
Bitcoin has plummeted from a high of over $68,000 in November to around $28,000, and other crypto assets have also seen dramatic falls.
The current price of Bitcoin at $28,404 puts El Salvador's Bitcoin value at just over $65 million, but the country paid over $103 million for it in a series of purchases.
The drop of over $38 million is a fall of 37 percent.
The problem is compounded by the International Monetary Fund (IMF) looking to provide El Salvador with financing to help it repay a government bond due in January 2023. The bond is worth $800 million, and the country has other debt repayment obligations on top of that.
The IMF was blunt in its assessment on El Salvador in January.
In a consultation document, the IMF said regarding Bitcoin: "Efforts to improve financial inclusion are welcome, but Bitcoin use carries significant risks and Bitcoin should not be used as an official currency with legal tender status."
The IMF executive board urged El Salvador to reverse track and remove Bitcoin's legal tender status, and expressed doubts about the plan for Bitcoin-backed bonds.
In response, in February credit rating agency Fitch downgraded El Salvador's long-term debt rating from 'B-' to 'CCC,' putting it in the category where "default is a real possibility."
In its assessment, Fitch noted that "the weakening of institutions and concentration of power in the presidency have increased policy unpredictability, and the adoption of bitcoin as legal tender has added uncertainty about the potential for an IMF program that would unlock financing for 2022-2023."
Moody's rating agency followed suit in May, dropping El Salvador's rating to Caa1 from B2, "in good part by the lack of a credible financing plan."
Having made Bitcoin legal tender the country in September 2021, the country has made several big Bitcoin purchases, frequently buying at prices well in excess of $40,000.
According to Bloomberg, El Salvador has made a series of Bitcoin purchases, including 420 Bitcoin at $58,630 in October.
|Date||Bitcoins Purchased||Price ($)||Value|
|May 9, 2022||500||30,744||$15,372,000|
|Jan 21, 2022||410||36,585||$14,999,850|
|Dec 12, 2022||21||49,280||$1,034,880|
|Dec 3, 2022||150||48,670||$7,300,500|
|Nov 26, 2021||100||54,108||$5,410,800|
|Oct 27, 2021||420||58,630||$24,624,600|
|Sep 9, 2021||150||45,713||$6,856,950|
|Sep 7, 2021||150||46,675||$7,001,250|
|Sep 6, 2021||200||52,686||$10,537,200|
|Sep 6, 2021||200||52,684||$10,536,800|
Total: $103,674,830 | Current value: $65,357,604
Bukele has talked of building a "Bitcoin City," and tweeted further details on Thursday.
The city is planned to be built on the Gulf of Fonseca on the southern coast of El Salvador, and will be funded by the sale of a Bitcoin bond.
The city will be powered by geothermal energy from the nearby Conchagua volcano.