El Salvador's risky gamble is giving investors sleepless nights

On Tuesday events in El Salvador shook the country’s debt market. Now it stands on the brink of the abyss.

Investors had predicted the calamity of Bitcoin adoption and began selling the country’s bonds earlier this year amid concerns about the president’s growing authoritarianism.

On the day Bitcoin was announced as the national currency, Bitcoin prices plunged 17% globally. They then recovered, but about 10% below previous levels.

Undeterred, President Nayib Bukele tweeted that El Salvador now has more Bitcoin. “Added 150 new coins,” he wrote, adding a winking emoji.

Bond traders not impressed the bitcoin gamble

The tweet left a bitter taste in bond traders’ mouths and triggered another round of bond selling this week.

That pushed yields on long-dated government bonds (maturing in more than a year) to 11%. Debt that will be paid off within a year offered 14%. Before the president’s bitcoin announcement in June, long-term debt yields were at 8.5%.

To add to the misery, the country’s bond prices fell. This reversed the yield curve. In other words, short-term debt is now priced lower compared to long-term debt.

And that spells doom for the country’s economy. It is now clear that Salvadorans (including investors) are questioning the viability of Bitcoin as legal tender.

Bitcoin is a risky, expensive bet

El Salvador is not a rich country. It has an annual GDP of $25 billion. And yet, it has made a risky and expensive bet by adopting Bitcoin.

As a reminder, the Bitcoin price has fluctuated from $10,000 last year to $64,000 as the highest price this year.

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On Tuesday, it even reached $52,000 before suddenly dropping to $47,000. El Salvador’s move to launch Bitcoin was rushed, perhaps to make headlines around the world. We will never know!

But the president is optimistic that the bitcoin plane will take off. And that people will save money in cryptocurrencies to grow their wealth as Bitcoin prices rise. But will they?

Bitcoin is wild and volatile. And anything can happen, which will greatly affect the lives of Salvadorans.

But crypto gambling is only half the story. The president’s attempts to increase his power are now causing political jitters. If not, markets will be shaken once again.

So far, making bitcoin legal tender will cost El Salvador taxpayers around $200 million, and that’s not all of it. They have to repay $800 million in debt by January 2023. There is a real risk that all of this will end in (painful) tears. Let’s hope it doesn’t.