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The country planning a Bitcoin city and what it means for the economy

·5-min read
A sign that reads
Street stalls in El Salvador already accept Bitcoin as currency. (Source: Getty)

Bitcoin and cryptoassets as a whole have taken the world by storm. Whether it’s smart contracts, coins, tokens, or NFTs, it’s a huge, new world to conquer and one with a lot of potential to change the standard ways in which the world works - further than just transactions.

Recently, El Salvador announced it would become the world’s first Bitcoin city, but what exactly does this mean?

And, what could become of El Salvador and, more widely, the world’s future if this Bitcoin city is successful?

Building a ‘Bitcoin city’... on a volcano

El Salvador and, more specifically, its President Nayib Bukele’s love affair with Bitcoin and cryptoassets is nothing new. The country’s leader has posted numerous tweets letting the world know he was buying the dip when Bitcoin’s price tumbled in the first half of 2021.

Additionally, the government is reported to hold hundreds of Bitcoins in its balance sheet, and has launched its own national cryptoasset wallet, Chivo, which, upon download and sign up, provides every citizen with US$30.

This Bitcoin stipend was offered in an effort to save on the remittance costs many Salvadorans incur when transferring funds to the United States, to the tune of almost US$6 billion, or 23 per cent of the entire country’s gross domestic product in 2020 alone.

In November of 2021, the country made headlines when an announcement was made that a small amount of Bitcoin had successfully been mined, powered by the Conchagua volcano.

Following this was Bukele’s announcement, where he outlined plans to build the world’s first Bitcoin city at the base of the same volcano.

A fishing boat against the looming backdrop of Conchagua Volcano in El Salvador.
El Salvador's president announced plans to build the city at the base of the Conchagua Volcano. (Source: Getty)

Utilising the same source of power, Bukele plans to not only mine Bitcoin, but also power the city that will stand on the site.

The money made through mining will go into building the city, and half the money made after completion will be used to maintain the city and improve quality of life for Salvadorans.

Current plans outline a modern, coin-shaped city, with key educational, transport and residential infrastructure. Other planned public amenities include museums, entertainment and restaurants - all dedicated to celebrating Bitcoin.

Good in theory, but is it viable?

While the potential for positive outcomes exists, so do a number of challenges.

The first is power. With the country already importing 25 per cent of its electricity, critics could argue that the power generated by the volcano would be better used to power the country and reduce the need to import electricity.

The second, while more apparent, are challenges with volatility.

The cryptoasset market is still finding its feet in the world, and Bitcoin - while the highest-valued crypto - has swung from as high as US$69,000 to as low as US$30,000 in 2021 alone.

Mitigating the risks that come with this volatility for citizens and businesses alike will be a huge undertaking.

A homeless person is seen lying on a bench as a woman walks by.
Bitcoin is seen as offering hope to El Salvador's poverty-stricken population. (Source: Getty)

With these factors in mind, it’s clear the world’s first Bitcoin city is a risky endeavour and a huge undertaking. But, it’s also worth noting that El Salvador has a high place in global poverty rankings.

As such, it’s reasonable to posit that the country can afford to take these kinds of risks in improving economical and living conditions - especially when the payoff could be significant.

So will there be a payoff? Perhaps. Bukele’s idea is Bitcoin will become a long-term store of value for the country, and it will if the currency continues on its price trajectory.

If not, El Salvador could be in for a tumultuous ride.

Potential local impacts: A sign of things to come?

The proposed city has huge potential to not only assist El Salvador in improving its economy and living conditions for its people, but will also act as a flagship city - if successful - that showcases the possibility and opportunity cryptoassets can offer to other countries.

But first, let’s examine the potential local impacts for Salvadorans.

The move will likely result in the development of a more attractive tax framework and economic ecosystem for Bitcoin and other cryptoassets in the country.

With these factors coming together, it’s highly possible almost 100,000 crypto millionaires in the world will be attracted to the region, bringing their wealth with them to invest in El Salvador’s economy.

Additionally, businesses, both large and small, will be required to invest in infrastructure to process payments made with Bitcoin. This is already happening across El Salvador, with the announcement that the country would officially adopt Bitcoin as legal tender in June of 2021, requiring multinational corporations, including Starbucks and McDonald’s, to accept the assets.

Overall, the project has great potential to change not only the lives of those living in El Salvador, but in countries with a similar economic status.

Studies show cryptoassets have potential to heavily serve those in economically poorer nations. In fact, 1.7 billion people across the globe are considered unbanked, and cryptoassets enable them to access financial infrastructure through their mobile device.

If this city turns out to be viable, it will provide a blueprint for countries with similar economic status that may be able to assist in lifting them out of poverty.

In addition to this, the city will show those in traditionally rich countries with abundant sources of natural power that the concept is viable.

If towns and cities can get to the point where they generate their own revenue for reinvestment into infrastructure and community, it could mean changes to the way states and countries run their tax systems and result in a lower tax burden for citizens.

Evidently, there’s a lot hanging on the outcome of this concept.

While success would be ideal - for more than just El Salvador - only time will tell.

Josh Gilbert is a market analyst at eToro.

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