IMF Tells El Salvador to Cut Back on Bitcoin—But Is the Strategy Fizzling Out Anyway?

Key Takeaways

• IMF has urged El Salvador to reduce its Bitcoin reliance.
• IMF also called for better regulatory oversight of the crypto market.
• President Bukele conceded that El Salvador’s Bitcoin adoption has fallen short of his initial expectations.

The International Monetary Fund, a longtime skeptic of El Salvador’s Bitcoin experiment , has renewed its call for the country to scale back its reliance on the cryptocurrency.

The recommendation, part of the IMF’s latest discussions with Latin American nations, comes as President Nayib Bukele has acknowledged that his bold gamble on Bitcoin has yet to pay off.

IMF Wants El Salvador to Reduce Public Exposure to Bitcoin 

At a recent press conference , IMF spokesperson Julie Kozack outlined a more nuanced approach to El Salvador’s Bitcoin experiment, one that prioritizes managing risk and bolstering regulatory oversight.

“We have recommended a narrowing of the scope of the Bitcoin law, strengthening the regulatory framework and oversight of the Bitcoin ecosystem, and limiting public sector exposure to Bitcoin,” Kozack explained.

Kozack said that IMF officials have been working closely with Salvadoran authorities, seeking to build a new economic program that would drive macroeconomic stability and promote growth.

The Bitcoin initiative, however, has become a critical sticking point.

Kozack emphasized that the IMF is determined to support a credible policy package devised by El Salvador’s government, but only if it is well-sequenced and responsive to the unique risks posed by the cryptocurrency.

El Salvador’s Bitcoin Experiment Goes South

When El Salvador made history by embracing Bitcoin as legal tender in 2021, the move was hailed as a bold experiment in financial innovation.

Now, three years into the experiment, the outcome is decidedly mixed. Despite early promise, the adoption of Bitcoin has failed to live up to President Nayib Bukele’s lofty expectations, with the country struggling to harness its full benefits.

Initially, the timing seemed auspicious. The country’s entry into Bitcoin coincided with a bull run that sent its price soaring.

The government leveraged this momentum to mine Bitcoin and add it to its treasury, momentarily reaping the rewards. But when the market turned bearish in late 2021, El Salvador’s fortunes declined in tandem.

Undeterred, President Bukele continued to double down on Bitcoin, buying up the cryptocurrency despite mounting losses. One of the primary motivations behind the adoption was to bring banking services to El Salvador’s vast unbanked population, an estimated 70% of the country.

To encourage the use of Bitcoin, the government even airdropped small amounts of the asset to citizens. Yet, despite these efforts, President Bukele has acknowledged that the adoption of Bitcoin has fallen short of expectations , leaving the future of this experiment in doubt.

BTC’s Strength Lies in Hedging, Not as Legal Tender

Behind the appeal of Bitcoin’s buoyant highs lies a sobering reality: its price volatility poses significant challenges to its adoption as a viable legal tender.

Bitcoin’s value does not just fluctuate on a daily basis but also adheres to a peculiar pattern of boom and bust, marked by halving cycles every four years.

This characteristic has resulted in Bitcoin shedding more than 70% of its value during each bear market, only to recover and touch new all-time highs in the subsequent bull run.

To put this volatility in perspective, consider that the U.S. dollar, while losing nearly 90% of its value over several decades, does so gradually, without the jarring fluctuations that have come to define Bitcoin’s price movements.

In contrast, Bitcoin sheds over 50% of its value every four years, only to later recover.

Some investors have continued to incorporate Bitcoin into their portfolios as a hedging strategy, undeterred by its unique asset profile.

Companies like MicroStrategy , and even nations like Bhutan , have begun exploring the potential benefits of harnessing Bitcoin’s uncorrelated returns.
For Bitcoin to make the leap from a niche store of value to a widely accepted legal tender, it must first tame its notorious volatility.