El Salvador Just Announced Bitcoin City. What Does That Really Mean for Bitcoin?

Want to live in a Bitcoin city? You may soon be able to, if you’re willing to move to Latin America. El Salvador President Nayib Bukele recently announced that his country is planning to construct an entire city that will be funded by Bitcoin (CCC:BTC-USD). The small nation made headlines in September 2021 when it became the first country to start accepting the crypto as legal tender. Despite significant public outcry from his citizens, Bukele has made it clear he is more determined than ever to move ahead with his adoption of Bitcoin.

Smartphone with Bitcoin chart on-screen among piles of Bitcoins
Source: Shutterstock

Bloomberg reports that the country’s plan involves issuing “$1 billion in tokenized U.S.-dollar denominated 10-year bonds to pay 6.5% via the Liquid Network.” Digital assets company Blockstream will be serving as the El Salvadorian government’s partner through the entire process. Half of the “Bitcoin bond” will be used to cover the costs of mining and infrastructure. The other half will go toward buying more of the crypto.

The planned city will be located at the base of the Conchagua volcano and will even be built in the shape of a coin. Additionally, the new city’s slated location was chosen so that the volcano’s energy can help power Bitcoin mining equipment. But that’s just where the story starts to get interesting.

This Won’t Be the Only Bitcoin City

Bukele isn’t the only politician to start embracing cryptocurrency or to proclaim a vision of creating a Bitcoin city. Miami Mayor Francis Suarez has found considerable success with the implementation of his CityCoin initiative. Additionally, newly elected New York City Mayor Eric Adams has stated that he plans on making it a cornerstone of his economic policy platform. Both politicians have said that they are willing to take their next paycheck in Bitcoin.

The 40-year-old Bukele has promised that the new Bitcoin city will include all types of residential and commercial areas, as well as museums, entertainment venues and bars. It will even include an airport and a rail system, the president proclaimed, emphasizing that everything would be “devoted to Bitcoin.”

Addressing a cheering crowd while wearing a backwards baseball cap, button-up shirt and khaki pants, Bukele didn’t call to mind images of a politicians delivering an important economic policy update. Rather, he looked more like a Silicon Valley entrepreneur, likely the exact image he wanted to project. Since his rise to political power, Bukele has become almost as linked with the backwards cap as former President Donald Trump has become with a red tie.

Silicon Valley in El Salvador

Construction of the Bitcoin City is slated to begin in 2022. Once finished, the city will impose no taxes for citizens with the exception of an AVT (added value tax). However, that still means taxes on capital gains income, payroll or properties. The incentives for moving to this futuristic “Bitcoin metropolis” are clear. However, that doesn’t mean that Bukele’s plan won’t garner plenty of opposition.

The initial news that El Salvador would start accepting Bitcoin sparked large scale protests from local citizens who feared the volatile nature of the crypto. Foreign Policy‘s David Gerard discussed Bukele’s initial mishandling of the new policy adaption, comparing it to the Silicon Valley approach of “move fast and break things.” Months later, it seems this was emblematic of things to come, as Bukele clearly wants to govern from a business standpoint, as demonstrated by his embracing of Bitcoin. That hasn’t been sitting well with his many impoverished citizens. Indeed, many won’t trust a volatile crypto that they likely don’t understand to protect what few financial assets they have.

It’s very likely, though, that Bukele will be considerably more focused on attracting foreign investment that helping his struggling people. The Bitcoin City will likely yield positive results for those connected to it, many of whom are already wealthy. From a strictly microeconomic standpoint, it makes sense. When we examine it from a macro lens, it’s easy to see why poorer Salvadorians would be less enthusiastic about a place that will be out of reach for them even if it does mean less taxes.

What Does the Bitcoin City Mean for Bitcoin Prices?

The way it looks from here, this type of adoption will only lend further credibility to Bitcoin, ultimately boosting prices. Since the El Salvadorian government owns at least 1,100 of the crypto tokens, this will be good news for it. And it will particularly be good news for Bukele, who enjoys buying the dip as much as some Reddit investors. He’s proven that he has complete faith in the crypto.

As exciting as the construction of a Bitcoin city sounds, there are still plenty of risks at play. Bukele is banking on the assumption that Bitcoin will remain on an upward trajectory. And while there’s no reason to assume that it won’t, we all know that Bitcoin is no stranger to volatility. Accordingly, it stands to pose negative effects for initiatives like this that have staked everything on it.

One indicator of the potential success of Bitcoin City will be the type of investors it attracts. If a few prominent names decide to board the train to Bitcoin City, others may follow. At the same time, it may be hard to trust an authoritarian leader whose policies have spurred plenty of controversy and criticism from human rights activists. All the same, the development of this massive crypto initiative is absolutely worth following closely. Even if the city collapses, Bitcoin will survive. However, Bukele’s presidency may not.

On the date of publication, Samuel O’Brient did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Article printed from InvestorPlace Media, https://investorplace.com/2021/11/el-salvador-just-announced-bitcoin-city-what-does-that-really-mean-for-bitcoin/.

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