A Poor Country Made Bitcoin a National Currency. The Bet Isn’t Paying Off.

Bitcoin was meant to transform El Salvador’s economy, catapulting the poor Central American nation into an unlikely harbinger of a financial revolution.

But nearly a year after the country’s president, Nayib Bukele, shocked the financial world by making its most popular digital coin a national currency, his bet appears to be backfiring, highlighting the gap between the utopian promises of cryptocurrency’s proponents and economic realities.

The government’s bitcoin holdings have lost about 60 percent of their presumed value during the recent market plunge. The use of bitcoin among Salvadorans has collapsed and the country is running out of cash after Mr. Bukele failed to raise fresh funds from cryptocurrency investors.

Still, the financial setbacks have failed to dent Mr. Bukele’s popularity. Polls show that more than eight of 10 Salvadorans continue backing the president, thanks in part to his widely supported crackdown on criminal gangs and on fuel subsidies that have lessened the sting of global inflation.

But the failure of Mr. Bukele’s stated objectives for bitcoin — to bring investment to the country and financial services to the poor — has exposed the shortcomings of his authoritarian, image-focused style of governance, critics say. It has also raised questions about the financial sustainability of his ambitious plan to modernize El Salvador at the expense of democratic governance.

Last year, his government allocated the equivalent of 15 percent of its annual investment budget to try ingraining bitcoin into the national economy.

It offered $30 dollars, nearly 1 percent of what an average Salvadoran earns in a year, to every citizen who downloaded a government-backed cryptocurrency payment app called Chivo Wallet; chivo means “cool” in local slang.

Mr. Bukele claims that nearly 3 million Salvadorans, or 60 percent of adults, heeded his call.

Yet, after the initial uptake, the use of cryptocurrency has plunged.

Only 10 percent of Chivo users continued making bitcoin transactions on the app after spending their $30 stipend, according to a survey conducted by three American-based economists in February and published by the National Bureau of Economic Research. Almost no new customers downloaded the app this year, the researchers found.

“The government gave this project as much push as you could hope for, and it still failed,” said Fernando Alvarez, a University of Chicago economist and an author of the study.

A separate survey by El Salvador’s Chamber of Commerce in March found that only 14 percent of the country’s businesses made bitcoin transactions since it was introduced in September, and only 3 percent said they perceived any business value in it.

Salvadorans in the United States have also ignored Mr. Bukele’s call to use bitcoin to send money to relatives back home. Digital currency payment apps, such as Chivo, accounted for less than 2 percent of remittances in the first five months of this year, according to El Salvador’s central bank.

Mr. Bukele’s bitcoin push was dealt a further blow by a global cryptocurrency sell off that wiped away hundreds of billions dollars from the value of digital assets since March.

“People are scared of losing their money,” said Edgardo Villalobos, who coordinates vendors at a sprawling street market in downtown San Salvador, El Salvador’s capital. After the recent price collapse, he said his $30 stipend from downloading the Chivo app is worth $10.

Still, despite the downturn, bitcoin enthusiasts and entrepreneurs argue that the introduction of bitcoin has transformed El Salvador’s image into that of a technological trailblazer and has created financial opportunities for its citizens outside the mainstream banking systems.

“To the extent that we are pursuing financial freedom, we are still on track for that,” said Eric Gravengaard, the C.E.O. of Athena Bitcoin, a United States-based cryptocurrency company that operates El Salvador’s network of cryptocurrency A.T.M.s and processes bitcoin transactions for the country’s largest retail chains.

Critics say bitcoin has also failed to bring the promised wave of cryptocurrency entrepreneurs into the country.

Only 48 new companies focused on bitcoin have registered in El Salvador since the cryptocurrency’s introduction, according to the country’s central bank; that represents less than 2 percent of all businesses that opened in 2019. Almost all are start-ups that hire few locals and bring little investment, said Leonor Selva, the executive director of El Salvador’s National Association for Private Enterprise.

“In day-to-day, the impact has been null,” she said, adding that instead of attracting new investors, bitcoin has scared off traditional financiers concerned by cryptocurrency’s impact on economic stability.

Mr. Gravengaard retorted by pointing out that all but two of his company’s 30 employees in El Salvador are local citizens. More broadly, the country’s growing tech sector has given its youth an opportunity to build a career in a country that has long been one of the largest sources of migrants to the United States.

“This is simply a dream,” said Gerson Martínez, a Salvadoran bitcoin entrepreneur. “As a son of migrants who had to leave El Salvador, this gives me a lot of hope.”

The price collapse has also not deterred Mr. Bukele’s enthusiasm for bitcoin, which has earned him the adulation of the global cryptocurrency community.

In a series of Twitter posts over the past year, Mr. Bukele announced that he had bought a total of nearly 2,400 bitcoin tokens since September, in deals valued at an estimated $100 million. When critics accused him of financial irresponsibility, he responded by saying that he conducts transactions on his phone while naked.

“Bitcoin is the future!,” he said in a Twitter post on June 30 after announcing his latest purchase amid an ongoing cryptocurrency sell-off. “Thank you for selling cheap.”

It is unclear where the bitcoin assets are held, what they are worth, how they were paid for or even who holds the codes that prove their ownership.

Mr. Bukele’s press office, his finance minister, José Alejandro Zelaya, and his bitcoin adviser, Samson Mow, did not respond to requests for comment.

So far, Mr. Bukele’s trades have cost the country an estimated $63 million in lost value, according to estimates last week by the magazine Disruptive, published by Francisco Gavidia University in San Salvador.

The losses are increasing as the government struggles to subsidize the rising costs of food and fuel imports and meet an upcoming debt payment.

Underlining the funding challenges, Mr. Bukele last year slashed disbursements for local governments, forcing some mayors to reduce public services like scholarships and water infrastructure.

“The problem with bitcoin is that no one is gaining anything,’’ said Carlos Acevedo, a Salvadoran economist and former central bank director. “It’s an investment that doesn’t bring social benefits.”

The collapse of cryptocurrency prices has already derailed a main plank of Mr. Bukele’s financial experiment: the issue of the world’s first government bond backed by bitcoin.

The bond would have allowed Mr. Bukele to bypass traditional financial institutions, such as the International Monetary Fund, which has made fresh funds to the country conditional on financial discipline.

After announcing a $1 billion bond denominated in bitcoin, the government postponed the project indefinitely at the last minute, in March, claiming the war in Ukraine had worsened global financial conditions.

Economists say this has left the country with few good options to make an $800 million payment on its debt that is due in January, or subsequent payments in later years.

Eventually, Mr. Bukele will face a difficult choice of drastically cutting public spending at the risk of angering voters, or pushing the country into default. A default could disrupt basic imports, reduce growth and even cause a bank run.

“Bukele has shown that he cares more about public image than sound economic management,” said Frank Muci, a public policy expert at the London School of Economics who has studied El Salvador’s bitcoin bond. “But eventually the chickens will come home to roost, at a very high cost for the country.”