In 2021, El Salvador became the first country to adopt Bitcoin as legal tender. Brought in by President Nayib Bukele, many believed the gamble was too big or was massively ahead of the curve. Last week, a reform was made to the law that saw Bitcoin acceptance curbed. This was so the struggling country could accept $1.4 billion in credit from the International Monetary Fund. However, by no means has the country given up on Bitcoin.
Will Bitcoin maintain its position?
Yesterday, El Salvador added 11 Bitcoins to its national reserve at a cost of around $1.1 million. This takes the country’s ownership to 6.067 BTC. It has also said that it will grow its reserve, despite not allowing tax payments in Bitcoin. Many believe El Salvador is seeing this as a hedge against inflation, which may be emanating from events elsewhere in the world.
Generally, these overriding economic fears are coming from the US and are also having an impact on the volatility of Bitcoin. When inflation is high, people tend to invest in less risky assets and commodities. This results in the price of Bitcoin falling. When inflation lowers, people invest in riskier assets, raising the price.
Inflation worries tend to stem from tariffs imposed by the US on other countries. When these are put to rest, or when they are delayed as has been seen this week, the price has risen accordingly. The Bitcoin price today signals a positive shift upwards, though it remains volatile. Its current position around the $100,000 mark will be dependent in part on how other countries respond to these tariffs. If they supply a large number of necessary goods to the United States, this could ramp up inflation further. Even the Federal Reserve has stated that its goal of keeping inflation at 2% may need to be adjusted if the current policy continues. If inflation fears remain, then Bitcoin may remain trading sideways.
The long term can be viewed by looking at the bond market. People use the yield curve here, looking at the interest rates of bonds with different maturity periods. People tend to look at long-term bonds as indicative of what the Federal Reserve will do in the future. If they drop, then it could be a sign that less spending and a period of stagflation begin.
There are two other factors that may signal the direction Bitcoin will take. The first of these is that the currency’s recent run was in part down to the incoming government’s stance on a strategic bitcoin reserve. This was said to be a certainty. Yet while the government has signed orders on most of its promises, the Bitcoin reserve is notable by its absence. The government has said it will evaluate this, which means it will be looked at, and that may take some time. It decision will inevitably impact the price.
Another is that market liquidity is also tightening. The Treasury General Account has seen a rise over the last month, despite a self-imposed debt limit. The US is not running down its debts; they are, in fact, getting bigger. This means we may see higher borrowing rates. When this happens, people tend to turn to more traditional, less risky asset classes.
Pressures on Bitcoin production
Another strain El Salvador must be aware of is the pressure placed on those producing Bitcoin. MARA is one business that has faced difficulties producing Bitcoin. In January, they reported a 12% decline in production from the previous month. While they managed to maintain their hash rate, they did not deploy any new miners in the month.
The problems facing miners are plentiful. MARA itself cited the extreme weather conditions and intermittent outages as a problem. However, increased energy costs are hitting Bitcoin miners hard. Coupled with a reduction in the reward for producing Bitcoin as of last year, we are not entering a period where the gold rush of Bitcoin mining is over. Companies must be astute in their operations and work out if production is viable anymore.
This could be seen from two angles. If Bitcoin is not being produced, it becomes a much more scarce asset. Thus, prices will rise accordingly, and this would be a benefit to El Salvador, which would see its reserves rise in value. The second scenario is a half-glass empty one, wherein with no Bitcoin being produced, people lose interest in having it. This would lead to a collapse in value.
The economic and historical ties between El Salvador and the US may not seem apparent. However, the country accepts deported migrants and criminals from the US for a sum of money. US events also have a huge impact on Bitcoin, which El Salvador is linked to for better or worse. The future of Bitcoin could be that of El Salvador itself.