El Salvador Weekly: One Year in, Bitcoin Currency Experiment Has Bombed

The anniversary of El Salvador’s experiment with bitcoin as a legal tender hit without much fanfare on Sept. 7, as it takes a fair bit of creativity to call it anything but a failure.

Even leaving aside paper losses of about $58 million on the 2,381 bitcoins President Nayib Bukele purchased on half of the Central American nation, El Salvador’s credit rating has tanked; plans for a $1 billion bitcoin-backed bond and construction of a geothermally powered Bitcoin City offering crypto miners and entrepreneurs tax breaks are on hiatus; and a planned loan from the International Monetary Fund to cover an $800 million Eurobond payment due in January stalled.

Then, there’s the reality that hardly anyone is making payments or sending remittances using the cryptocurrency.

A report in local news outlet La Prensa Grafica found that owners and managers of businesses of all sizes in two of the main tourist beaches said only 10% of visitors pay with bitcoin, and other reports from the capital San Salvador’s main business district have found less than that.

“No one really talks about Bitcoin here anymore. It’s kind of been forgotten,” former Salvadoran central bank president Carlos Acevedo told Fortune. “I don’t know if you’d call that a failure, but it certainly hasn’t been a success.”

La Prensa Grafica, on the other hand, cited the Moody’s ratings service’s estimate that the total cost to El Salvador has been $375 million — $150 million for a trust fund designed to ease the conversion of bitcoins to dollars, $120 million for the $30 worth of bitcoin given to citizens for opening the government’s Chivo digital wallet, and $106 million to buy bitcoins.

Although to be fair, those are still worth $48 million.

On the other hand, it also fails to take into account the country’s cost of borrowing after the combination of concern about a Eurobond default and the opacity of its bitcoin buying which have slashed the country’s bond price from almost 90 cents on the dollar to $0.40 currently. Then there’s the gang violence crisis that has led President Bukele to detain tens of thousands of alleged gang members.

Why Bother?

And beyond that, there’s a reality that bitcoin is not a very good day-to-day payments currency — particularly for small-denomination purchases by people without a lot of money who can ill afford to weather 5% and 10% price spikes and drops that are endemic to cryptocurrencies.

Where it has proven successful is in countries whose economies are in a lot rougher shape than El Salvador’s is, and which also have substantial political instability: Venezuela, Argentina and recently, Peru.

See more: Peru Embraces Stablecoins amid Political, Economic Instability

Which is to say, countries in which the currency’s volatility — and almost exclusively downward volatility — is a lot more of a problem than in El Salvador, where the president remains enormously popular and which has a very stable legal tender alongside bitcoin: the U.S. dollar.

There’s also the problem of translating the price into dollars with every purchase: Using a cryptocurrency for daily shopping is essentially a forex transaction, like shopping in a foreign country — you have to constantly calculate how much something really costs.

The most notable example of how little bitcoin is being adopted is remittances. Those cross-border transactions can be far cheaper via cryptocurrency than traditional channels. And yet, less than 2% of Salvadoran remittances are carried out through the Chivo wallet — and not all of those are denominated in bitcoins.