The president steps down, the whole country "trades coins," builds a Bitcoin city, and lets the volcano "erupt" Bitcoin

Author: Hao Lihai, Guoke

Editor: Shen Zhihan

In August this year, a country plans to provide Bitcoin training for 80,000 civil servants nationwide and is considering paying salaries in Bitcoin.

The training content includes basic knowledge of Bitcoin, laws, public policy impacts, etc., lasting 160 hours. The goal is to promote and accelerate the adoption of Bitcoin in daily life.

If it weren't for this "strange anecdote," I might never have known about El Salvador, this small country in Central America.

“Bitcoin City” promotional poster | El Salvador official Twitter

In 2021, El Salvador became the first country to adopt Bitcoin as legal tender. President Bukele announced plans to build a "Bitcoin City," allocating land next to the beach at the foot of a volcano (Zonte Beach) to develop infrastructure such as residential areas, commercial districts, restaurants, and ports, where everything needed for daily life can be purchased with Bitcoin, from food to real estate.

Local scenery in El Salvador | El Salvador Bitcoin Office Twitter

"It will either be the biggest failure or the biggest scam," some media commented on El Salvador's "Bitcoin experiment" at the time.

Opening my cryptocurrency wallet, the price of Ethereum (compared to when I bought it in November 2022) has risen by 125%. The fact is, I have never used Bitcoin or similar cryptocurrencies in the "real world."

In the words of insiders, Bitcoin is supported by "consensus." What does "consensus" mean? It means that a group of people firmly believes it is the future, which is the basis for generating value.

For example, using Bitcoin to buy pancakes at a street vendor, a boss without "consensus" would think it's no different from giving him game tokens.

An experiment of "universal Bitcoin usage" is being conducted in a small country with a population of 6 million and an area of over 20,000 square kilometers (Beijing's land area is 16,000).

Buying Bread with Bitcoin, Killing Chickens with a Big Knife

The Salvadoran government encourages the public to use Bitcoin, similar to our early promotion of mobile payments.

However, the main promoter has become the government. The Salvadoran government developed a payment app called Chivo. In front of various shops, from family-run stores to large supermarkets, a QR code for payments is posted. Once citizens successfully register, they receive a Bitcoin reward equivalent to $30 (the local minimum daily wage is $13).

Students buying lunch with Bitcoin | Barron's Weekly

Users can transfer Bitcoin by scanning each other's QR codes. Students can buy baked goods on the street with Bitcoin, and tourists can use Bitcoin at McDonald's and Walmart (a bottle of cola costs about $1, or 0.000017 BTC), and pay for gas at gas stations.

In El Salvador, a stall accepting Bitcoin payments | The Wall Street Journal

The government has installed 200 ATMs with Bitcoin exchange functions, allowing free exchanges between dollars and Bitcoin, subsidized by the government. Local banks accept loan repayments in Bitcoin.

The Ministry of Education organizes Bitcoin education "from a young age," incorporating it into public school curricula.

Many people come for the novelty and tangible subsidies. In the first year of the experiment, statistics showed that over 20,000 people and more than 30 shops on this beach conducted transactions in Bitcoin, with nearly 1,000 transactions daily.

However, as time went on, problems began to emerge.

Some merchants reported that their digital wallets were hacked, accounts were locked, and they couldn't withdraw their money; there were also issues with wallet crashes and slow transfer speeds; ATMs frequently malfunctioned, leading to protests by thousands in the streets of the Salvadoran capital.

Salvadoran residents damaging Bitcoin ATMs | BBC

In El Salvador, 70% of residents do not have traditional bank accounts, and 36.4% of the population lives below the poverty line—going from having no financial activity experience to being forcibly introduced to digital currencies and electronic wallets, the public cannot bear or accept the risks of Bitcoin being maliciously attacked.

El Salvador lacks the foundation for mobile payments, and few locals use smartphones; cash transactions have always been the choice of the majority.

The high volatility of Bitcoin (the value of fiat currency is usually backed by the government and related to the country's economic strength and physical assets, thus obtaining stable value support. But Bitcoin has no asset backing; it is produced by algorithms, leading to significant price fluctuations) makes it unsuitable as a currency for daily transactions; yesterday tomatoes were priced at $3 per pound, today they might rise to $30.

According to BBC reports, a year later, only 20% of locals continued to use the Chivo app, and nearly 92% of merchants stated that "Bitcoin is not important to them."

By 2023, a survey by the Central American University revealed that 88% of Salvadorans no longer use Bitcoin, and only 1% of remittances are sent in Bitcoin.

President Bukele's experiment proved that ordinary citizens neither became wealthy through Bitcoin nor found their lives more convenient.

A Turning Point? Or a Haven for Speculators?

After legalizing Bitcoin, El Salvador attracted a large number of Bitcoin holders to "satisfy their curiosity," and tourism performance increased by 30%. Some locals complained that the influx of foreigners even led to rising prices.

According to Triple data, the number of global cryptocurrency users grew by 34% in 2023, from 432 million to 580 million, mostly in Asia, followed by North America, Africa, and South America.

The location of "Bitcoin City" is significant. It is situated between the poor fishing villages of La Union and Conchagua, next to Zonte Beach. There are many volcanoes in the area, and the government plans to build a power plant to provide energy for both "Bitcoin City" and Bitcoin mining.

Cryptocurrency mining site in a tropical forest | Barron's Weekly

President Bukele aims to turn this place into a "tax haven" for Bitcoin investors. "Bitcoin City" only charges a 10% capital gains tax, with no income tax, property tax, or sales tax.

To build the city, the government issued "Bitcoin bonds," with half of the funds used for city construction and half for purchasing Bitcoin.

Unexpectedly, after the Salvadoran government announced the city-building plan, Bitcoin coincidentally plummeted. The "Bitcoin bonds" have struggled to raise funds, and the city-building plan has made no progress. However, this does not affect the president's faith; since November 18, 2022, he has been buying one Bitcoin daily and "mining," holding it regardless of price fluctuations (if this is part of the plan, then this is the only progress).

President Bukele, who is in his 80s, of El Salvador | El Salvador Bitcoin Office Twitter

In August of this year, the country received a $1.6 billion investment from Turkey's Yilport company. Yilport is a large international port and container terminal operator, and they will work together to upgrade two ports in El Salvador, one of which is in "Bitcoin City"—the dormant "Bitcoin City" finally sees a glimmer of hope.

President Bukele's initial hope was to improve remittance efficiency through Bitcoin. In 2020, 25% of El Salvador's GDP relied on remittances, mostly from workers in the U.S., and using Bitcoin for transfers could save $400 million in remittance fees annually; this could reduce El Salvador's dependence on the dollar, promote fiat currency diversification, strengthen financial infrastructure, and allow citizens to reserve assets to cope with the economic risks of dollar hegemony.

Compared to building financial infrastructure for the country, Bitcoin first brought ancillary benefits in tourism and investment, or "gimmicks."

Just as the Netherlands has a legal red-light district and Las Vegas relies on gambling as an economic pillar, "Bitcoin" may also become a symbol and feature of El Salvador. However, complete decentralization and liberalism could also become a shield for wrongdoing, bringing great uncertainty to the country's economy.