Written by 7:21 pm Bitcoin

Bitcoin City: Is El Salvador’s Crypto Dream Crashing Down With The Market – Bitcoin (BTC/USD)

By Tereza Bízková

On January 1, Nayib Bukele, the president of El Salvador, shared his predictions on Bitcoin BTC/USD for the year. Will reach $100k, Bitcoin City will commence construction, and Volcano bonds will be oversubscribed were some of the points shared in his viral tweet.

Ten months later, none of these seem to be materializing yet—with many critics suggesting that El Salvador could be farther from its Bitcoin dream than ever.

When the country adopted Bitcoin as its legal tender on September 7, 2021, the crypto was close to $47,000. But rather than continuing its upward trend, it ended up plunging to less than $20,000, throwing a monkey wrench into Bukele’s plans.

Volcano bonds, devised to fund the futuristic Bitcoin City, have been delayed—three times already. And while Paolo Ardoino, Tether’s CTO, claims they should become available by the end of the year, amid a bear market, skeptics doubt whether they’ll be issued at all.

The quest for a $15 billion crypto metropolis

When Reuters recently ventured to El Salvador’s region of La Unión, it was hardly a surprise they found no heavy machinery or signs of construction at Bitcoin City’s site.

Still, rendered images of how the city could look one day have been flooding digital spaces. Bitcoin City would be circular and full of green areas, have an airport and a port, residential and commercial areas, and feature a central plaza looking like a bitcoin symbol from above.

The city would get geothermal power from the nearby Conchagua volcano and not levy any tax except for a 10% value-added tax (VAT).

To kickstart the construction, El Salvador plans to issue $1 billion volcano bonds, followed by additional bonds over time. But with the financial costs of the project estimated at more than $15 billion, there’s a long way to go. 

So, why haven’t the first bonds been issued yet? Speculations hint at weak investor interest, among other things. El Salvador’s finance minister Alejandro Zelaya cited the economic effects of the war in Ukraine, dwindling risk appetite, legislative deferrals, and faltering bitcoin prices as reasons for not honoring the initial March date.

“Volcano bonds are an amazing idea; however, they faced the wrong timing,” commented Pavel Chicowsky, Head of Dealing at xbo.com, a cryptocurrency exchange platform. “The project is viable, but the global conditions need to improve significantly, and El Salvador needs to find a more convincing way to attract the right investors to back the project.”

Until that happens, El Salvador has a legislative procedure to tackle, too. For the bonds to go ahead, the country’s parliament needs to pass a corresponding bill—after that, it would take up to three months to roll them out.

Bear market showed sharp teeth

The future of Bitcoin City will be inherently tied to the future of bitcoin. But the world’s most popular cryptocurrency has had a few bumpy months. 

As Adam Carver, the CEO & Co-Founder of Bitgreen, a purpose-driven blockchain, implies, a key component of bitcoin’s hypothesis is serving as a safe haven from inflation. 

“August inflation reports show that bitcoin—the “inflation hedge cryptocurrency”—plummeted by 10%. And even worse: Its losses were twice the pullback in the NASDAQ and greater than those of beers such as Ethereum or Polkadot,” he declared.

El Salvador has felt the fluctuations hard. The country has relied on bitcoin heavily over the past year—and has lost as much as $60 million in crypto value as of July. Despite that, it continues buying the dip, indicating more of a long-term approach.

And the wait may pay off.

“Bear markets usually start every four years—at the end of 2013, 2017, and 2021,” noted Daniel Kostecki, director of the Polish branch of Conotoxia, a payment solutions company. “In November or December, the end of the current bear market could come. Then, another bull market could emerge, with a potential target at least at the current all-time-high.”

And considering that the adoption of cryptocurrencies is taking off, the tides might change for Bitcoin City. “We should expect more demand for digital currencies that store value, scale, are trustworthy, and enjoy high demand. Right now, bitcoin is the only crypto in the world that delivers that,” said Chicowsky of xbo.com. 

A problem bigger than a city

Whether El Salvador is in a position to afford to wait—that’s a completely different question. Given the volatility of bitcoin and its low adoption among Salvadorans (only 14% of local businesses have used the cryptocurrency), the International Monetary Fund (IMF) has urged the Central American country to withdraw the legal tender.

The “unsustainable path” the IMF has warned about has a lot to do with El Salvador’s risk of defaulting on its $800 million loan payment due January 2023. While Bukele said there was “zero risk” of the country defaulting on its creditors, he later reaffirmed that El Salvador could pay its debt. But credit rating agencies remain skeptical. 

When Bitcoin City was first announced, El Salvador was poised to become the Singapore of Latin America. Now, instead, there are fears it could become the next Sri Lanka. 

El Salvador’s international debt was 28% of its GDP in March, most of which is denominated in US dollars. “The country’s monetary policy decision to shift to bitcoin as the national currency was effectively a long-BTC, short-USD trade,” expressed Carver of Bitgreen. 

“Had it worked, it could have significantly reduced the country’s USD balance sheet obligations. Unfortunately, the opposite happened, and now El Salvador is left with fewer liquid assets to service a relatively higher USD-denominated national debt. This tale will be instructive to other countries contemplating similar abandonment of USD, EUR, and JPY reserve currencies,” Carver concluded.

These economic woes could be fatal—both for Bukele’s popularity and the Bitcoin City. And it’s unlikely that volcano bonds could help revert this. While it’s true that many investors in the blockchain space choose to support projects out of enthusiasm, the bonds will generate only a 6.5% annual interest. 

“This project, if it goes ahead at all, might be pushed back even further, especially since with the rise in global bond yields, those issued by Salvador would no longer be as competitive and could be very risky,” mentioned Kostecki of Conotoxia. 

The bear market is one thing, but when bleak economic outlooks are added into the mix, it’s evident that the construction of Bitcoin City will see further slowdowns, at the minimum.

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