Bitcoin Crash Puts ‘Extremely Minimal’ Fiscal Risk on El Salvador, Finance Minister Says
El Salvador’s finance minister said on Monday that the country’s economy would not be affected by the sudden drop in the value of bitcoin. Despite the criticism from international agencies and the International Monetary Fund, it still managed to maintain its fiscal health.
El Salvador is on the Losing End
El Salvador, one of the world’s first countries to adopt cryptocurrencies, has purchased over 2,301 bitcoin. On May 9, the President of the country, Nayib Bukele, announced that they would buy another 500 Bitcoin for an average price of $30,744.
Due to the sudden decline in the price of Bitcoin, El Salvador’s massive investment has significantly decreased. When writing, Bitcoin is trading at around $20,000 to $22,000.
According to a report by Mashable, El Salvador currently has over 2,200 Bitcoin worth approximately $53 million. It is less than half of the country’s initial investment of over $100 million.
According to Finance Minister Alejandro Zelaya, El Salvador’s Bitcoin holdings lost around $40 million. Even with the country’s current budget, that doesn’t even come close to 0.5% of the total.
Meanwhile, the government of El Salvador postponed the launch of its $1 billion Bitcoin bonds due to the country’s financial situation. The El Salvadoran government also hoped the money would be used to fund its Bitcoin City project. However, due to the country’s high credit risk, the rating firm has downgraded its debt rating.
Notably, there’s always the chance that Bitcoin will eventually return to its former glory, and El Salvador’s holdings could be worth more than what they purchased. If this were the case, then Bukele would have been right.
The Inflation Agenda
Some economists are predicting the Federal Reserve will accelerate its rate hike timeline. It could cause more pain for crypto and bitcoin.
The US Federal Reserve’s policy update on Wednesday is expected to provide investors with a clearer view of the central bank’s intentions regarding interest rates. Russ Mould, an investment director at AJ Bell, said in an emailed statement that investors are becoming more concerned that the Fed will become more aggressive in curbing inflation.
After releasing its latest inflation report on Friday, the Fed will meet on Wednesday. Economists had expected the central bank to raise its key interest rate by a small amount of time following the release of the data. However, many of them raised their expectations after the Fed had time to study the report thoroughly.
According to Barclays, the Fed should take immediate action to address the rising risks of prolonged inflation. In a report released Monday, the bank noted that the central bank should increase rates aggressively to reinforce its inflation-fighting credibility. Meanwhile, JPMorgan also pointed out that the likelihood of a full-point increase in the federal funds rate is non-trivial.
Following the latest crypto crash, many investors are now expecting more losses. They are worried that the Fed will increase its quantitative tightening program, which is a policy that involves raising interest rates.
Not a Hedge Against Inflation?
The rise of the crypto and bitcoin markets has so far been accompanied by a significant increase in the stock market and vice versa. It can be attributed to the Fed’s decision to stop its pandemic-era measures last year. Before this, folks believed that the cryptocurrencies above and other digital assets, such as BNB, solana, and Cardano, had started acting as inflation hedges.
