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El Salvador’s embrace of bitcoin has the potential to deplete the country’s US dollar reserves

According to one economist, El Salvador’s bitcoin bet might set off a chain reaction that depletes the country’s dollar reserves.

El Salvadorans to Convert BTC to USD

Economic experts predict that most Salvadorans will convert the bitcoin they get into US dollars. As soon as the country’s Bitcoin Law takes effect on Tuesday, September 7. The crypto-market meltdown on Tuesday will only serve to confirm this viewpoint.

The Central Reserve Bank of El Salvador supplies $150 million to allow bulk bitcoin to dollar conversions. However, this is an insufficient quantity that will need to be replenished regularly.

According to economist Daniel Munevar, a dangerous dynamic would emerge. This will cause “El Salvador will experience a constant outflow of US dollars and a constant inflow of bitcoin.”

Effect of Rising BTC Price

If the price of bitcoin continues to rise, El Salvador systematically acquires bitcoin will pay off spectacularly. However, if it collapses, it may be disastrous, leaving the country with few alternatives for reviving its economy.

According to Munevar, a worldwide debt expert, El Salvadoran President Nayib Bukele is “playing YOLO on the state-level”. He used President Bukele’s tweet about “buying the dip” when bitcoin plummeted by almost 20% as an example.

Munevar, an aide to former Greek finance minister Yanis Varoufakis, said this showed the Salvadoran president’s “disregard for public resources”. In a tweet, Steve Hanke, Ronald Reagan’s former economic adviser, shared this idea, saying, “It’s easy to speculate with taxpayers’ money.”

Wild Swings Expected to Continue

However, Bitcoin’s wild swings are anticipated to continue in the coming months. Major news events like El Salvador’s crypto-gamble, according to Jake Wujastyk, chief market analyst at TrendSpider, “will lead to extreme volatility in bitcoin in the short term,” he told Yahoo Finance UK. This will dampen interest in owning and trading in bitcoin in El Salvador.

According to Munevar, the El Salvadoran government “assume they can handle bitcoin’s short-term volatility and gain from the cryptocurrency’s predicted long-term appreciation against the dollar.”

However, he said that many El Salvadorans are in a “level of poverty that can’t absorb that kind of volatility,” leading to a widespread desire to trade out bitcoin for US dollars almost away.

El Salvador may try to borrow more from the Foreign Monetary Fund (IMF) to fulfil domestic demands, pay off international obligations, and import products as a result of the ensuing dollar drain.

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