One economist predicted that Bitcoin gambling in El Salvador could start a chain reaction that drains the country’s dollar reserves.
After the country’s bitcoin law went into effect on Tuesday, September 7, economic forecasters expect the majority of Salvadorans to immediately change the bitcoin they receive into US dollars. Tuesday’s cryptocurrency market crash will only cement this situation.
To facilitate the mass conversion of bitcoin into dollars, the Central Reserve Bank of El Salvador has hoarded $150 million (£108.25 million), an insufficient amount that will need to be constantly increased.
Talk to Yahoo! A worrying dynamic will begin, said finance economist Daniel Monívar, “as El Salvador will see a steady influx of US dollars and a constant influx of Bitcoin.”
The solid process in which El Salvador is systematically collecting bitcoin will pay off astonishingly if the price of the cryptocurrency continues to rise. However, if it fell, it could be devastating and leave the nation with few options to save its economy.
This has led Munivar, a specialist in global debt, to claim that Salvadoran President Neb Bukele is “playing the role of YOLO at the state level.” He highlighted President Bukele’s Twitter reaction to “buy the dip” when bitcoin fell about 20% as an example of this speculative stance.
Monívar, who was an aide to former Greek Finance Minister Yanis Varoufakis, cited this as revealing the Salvadoran leader’s “disregard for public resources”. Steve Hanke, a former economic advisor to Ronald Reagan, echoed that sentiment in a tweet that said, “It’s easy to speculate on taxpayer money.”
Read more: Bitcoin becomes legal tender in El Salvador amid doubt and protest
Bitcoin is expected to continue its sharp fluctuations over the coming months. Jake Wujastyk, chief market analyst at TrendSpider, told Yahoo Finance UK that major news catalysts such as cryptocurrency gambling in El Salvador “will lead to extreme volatility in bitcoin in the short term.” This will reduce the enthusiasm for owning and transacting with Bitcoin in El Salvador.
Monívar suggested that the Salvadoran government “assumes that it can handle the short-term volatility of bitcoin and profit from the long-term appreciation of the cryptocurrency against the dollar.”
However, in contrast, he added that many Salvadorans are in “a level of poverty that cannot absorb this kind of fluctuation,” which leads to a common attitude to immediately withdraw their bitcoins against the US dollar.
The subsequent influx of dollars could result in El Salvador trying to borrow more from the IMF to meet domestic demands, pay off international debt, and import goods.
Watch: What is Bitcoin?
El Salvador is debt-strapped, and the International Monetary Fund has already set indicative targets for fiscal restructuring until the country is granted a $389 million loan request.
Monnivar said the IMF was unlikely to provide more aid unless the Bukele administration did a fundamental fiscal restructuring. A former adviser to the Colombian Ministry of Finance went on to describe how “the IMF is a very conservative organization and if there are no guarantees to repay the loan, the IMF will not lend money.”
The IMF will hold two aspects of President Bukele’s bitcoin law as problematic. The law makes it easier for international bitcoin holders who want to exchange their bitcoins for US dollars without paying capital gains tax in their jurisdictions.
Also, according to Minnevar, the new law will allow transactions between bitcoin wallets for large purchases that “avoid anti-money laundering regulations.”
If the Salvadoran government had a financial system that facilitates money laundering, global finance would not want to deal with it. The IMF cannot be seen as irresponsibly exposing the public resources of a global institution to the economic betting unfolding in El Salvador.
This leaves the Bukele administration with limited options to replenish the influx of dollars from state reserves. In the short term, he may even have to rely on an influx of bitcoin for money laundering purposes, critics say.
Read more: How changes in crypto exchange Binance and FTX could affect the price of Bitcoin
El Salvador may eventually have to default on its international and financial agreements. However, this outcome can be completely reversed if the gambling pays off and the value of Bitcoin continues to rise against an ever-increasing inflationary dollar.
Bitcoin, given its limited supply of 21 million coins, is an antidote to inflationary fiat currencies. After several Fed stimulus packages, bitcoin has become increasingly attractive as an inflation hedge.
Encouraged by Edward Snowden’s Limited Cryptocurrency Supply tweet On the day El Salvador’s new law came into effect, Bitcoin’s design “greatly spurs early adoption and latecomers may regret the hesitation.”
Watch: What are the risks of investing in cryptocurrency?
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