El Salvador's Bitcoin Adoption Drives Sovereign Bonds Up 3 Notches

Nayib Bukele, the president of El Salvador, has made a significant impact on the global stage by embracing Bitcoin as legal tender. His journey from mayor to the most influential Bitcoin advocate began with a strategic move to protect his campaign funds from government interference. In late 2017, as Bukele prepared to run for president, electoral authorities threatened to freeze his campaign funds. In response, Bukele suggested that his new party, Nuevas Ideas, would accept Bitcoin instead. This move was a bold statement against the government's attempts to stifle political movements and highlighted Bitcoin's potential as a tool for financial freedom.

Bukele's party, Nuevas Ideas, was successfully registered about six months before the election, collecting 200,000 supporting signatures in just three days. Bukele won the presidency with 54% of the vote in February 2019 and was inaugurated by June, becoming the youngest president in the nation’s nearly 200-year history. Around this time, Bitcoin was at the bottom of a grueling bear market, having retreated from almost $20,000 to under $3,200 in 14 months. This period set the stage for Bukele's next significant move in embracing Bitcoin.

In early 2019, an anonymous donor approached Michael Peterson, a California surfer and local volunteer, with the idea of creating a Bitcoin-based circular economy in the Salvadoran beach town of El Zonte. Over time, Bitcoin was increasingly accepted as payment around town, and El Zonte became known as “Bitcoin Beach.” The initiative funded various community projects, including youth work programs, educational grants, and universal basic income for families during the pandemic. This grassroots movement directly inspired Bukele to adopt Bitcoin as legal tender in El Salvador.

In June 2021, at Bitcoin Miami, Bukele announced his radical plan for El Salvador to adopt Bitcoin as legal tender alongside the US dollar. The next day, he donned laser eyes in his Twitter profile pic, symbolizing his full commitment to Bitcoin. El Salvador’s legislative assembly approved the Bitcoin bill in the same week, and three months later, the Bitcoin Law came into effect, making El Salvador the first country in the world to adopt BTC. Despite a rocky rollout amid protests, more than 1.1 million users had downloaded the official Chivo wallet in its first 11 days, each eligible for $30 worth of Bitcoin for free, Bukele’s way of helping onboard the nation.

Bukele's embrace of Bitcoin faced significant opposition from the International Monetary Fund (IMF), which urged El Salvador to drop Bitcoin as legal tender. The IMF's stance led to worries that El Salvador would default on its loans, and Fitch downgraded El Salvador’s debt following the one-year anniversary of the Bitcoin Law. Undeterred, Bukele announced that El Salvador would start buying 1 BTC every day, indefinitely. El Salvador now holds a significant amount of Bitcoin, demonstrating its financial strength and commitment to the cryptocurrency.

El Salvador eventually repaid an $800 million bond as a sign of its financial strength. Fitch bumped up El Salvador’s debt by three notches in response, stating that default “no longer appears likely,” and Bukele was re-elected in a landslide victory nine months later in February 2024. Late last year, El Salvador bonds largely outperformed other emerging market debt as Bitcoin rallied past $100,000. Bukele remarked it was the “first time in history that Bitcoin has driven sovereign bonds up in traditional markets.”

Bukele's Bitcoin tale is bittersweet. The IMF had been negotiating the terms of a $1.4 billion loan to El Salvador ever since it adopted Bitcoin, with the deal finally coming to a head in February. The IMF required El Salvador to drop Bitcoin as legal tender, reverting it to an optional payment method for the private sector and forcing taxes to be once again paid only in US dollars. Arguably history’s biggest Bitcoin experiment to date had ended far too soon. However, Bukele and El Salvador continue to buy Bitcoin, on most days at least. The IMF apparently knows about it and doesn’t mind, which implies that it’s not being purchased with public funds, but we don’t know for sure.

All things considered, Bukele is actually not the main character of this story, something with which even he would surely agree. Bitcoin is the real protagonist. Bukele simply understood that earlier than any other world leader. His journey from mayor to the most powerful Bitcoin advocate on Earth is a testament to his vision and determination to embrace financial freedom through Bitcoin.