El Salvador has reaffirmed its commitment to bitcoin by purchasing more than 100 million dollars worth Bitcoin in the midst of a dramatic price drop, a bold decision which is in direct contradiction to the rules established by the International Monetary Fund (IMF). Blockworks+3Bitget+3Bitget+3
A large-scale accumulation
Information obtained from sources within the Salvadoran Government’s Bitcoin Office indicate the country has added around 1.090 BTC in one tranche, bringing the total bitcoin holdings to 747 BTC which is worth around US$676 to a staggering US$688 million based on the current rate. MEXC+2Bitget +2 2Bitget+2 transaction occurred as bitcoin’s value fell below $90,000 — its lowest point in a while, suggesting El Salvador executed a classic “buy the dip” strategy. InsideBitcoins.com+1
Contradicting IMF conditions
The IMF has frequently expressed concern about the El Salvadorian strategy of defining bitcoin as an asset of national significance. In the terms of El Salvador’s US$1.4 billion IMF financing agreement that the government signed, it pledged to restrict public sector involvement in bitcoin accumulation as well as making sure that bitcoin use is free. The Financial Times + 2Blockworks+2 In proceeding with this massive acquisition, El Salvador appears to have escaped the constraints which raises questions regarding its fiscal and foreign-sector credibility.
The reason the government keeps purchasing
president Nayib Bukele, and the administration of President Nayib claim that bitcoin acts as an investment in the fight against the effects of inflation and dollar scarcity and also an emblem of financial sovereignty. The fact that bitcoin is accumulating when prices fall demonstrates the trust of the government in the value of bitcoin, despite the fluctuations. Bitget+1 Due to El Salvador’s reliance on the remittances (which comprise around 22 percent of GDP) the strategy could also be a reflection of the desire to diversify assets away from that of the U.S. dollars.
Risks and market consequences
But the timing of this event is a risky one. The drop in Bitcoin’s price below US$90,000. the wider market headwinds for crypto mean that the price may fall further, potentially causing more costs for the country. Analysts are concerned that a volatile crypto asset as a part of sovereign reserves could undermine the stability of financial markets. Wikipedia+1
From the perspective of markets El Salvador’s acquisition is significant because very Few sovereign actors are publicly expanding their crypto holdings in an economic downturn, and this move could inspire the other major corporations or governments who are exposed to crypto assets. Cryptonews
What’s next to watch
What will happen if the IMF responds How will the fund respond? Will it publicly defend itself against the violation of conditions or revise the agreement?
Impact on bond and credit metrics Do rating agencies or investors reduce El Salvador’s debt risk due to the increased exposure to crypto?
The price of Bitcoin’s trajectory A rebound could confirm the date of purchase, but any further declines could increase the fiscal pressure.
Economic and political outcomes in the United States The move could boost the presidency’s image or will the public and the opposition be more likely to be hesitant about the move?
Final thoughts
The decision of El Salvador to double on bitcoin in the event of the market downturn, departing from IMF guidelines, is an unintentional but risky bet. The investment could yield dividends if bitcoin’s value improves and the government’s overall gamble on the sovereignty of digital assets succeeds. However, it could also bring back vulnerabilities related to crypto-volatility, fiscal discipline, and international financial rules. The coming months will be revealing for the nation’s financial plan-of-action, as well as in general terms, the issue of the accumulation of bitcoin by sovereigns.
