On September 7, 2021, the Bitcoin Law took effect in El Salvador — mandating merchants to accept BTC as payment. The Bukele government launched the Chivo wallet with a US$ 30 airdrop per registered citizen, issued the "Volcano Bond" for geothermal mining, and purchased thousands of Bitcoins for the national treasury. The result is ambiguous: daily adoption stayed below 15%, the IMF sharply criticized the move, but the treasury accumulated relevant gains from BTC appreciation. The case is a textbook example for understanding network effects in digital money, dollarization, and the difference between adopting a currency and using a currency.
The context: a dollarized country in search of sovereignty
To understand why El Salvador was the first country to adopt Bitcoin, it helps to know a characteristic that sets it apart: it hadn't had its own currency since 2001. That year, the Salvadoran colón was replaced by the US dollar in complete dollarization — not just de facto, as happens in many Latin American countries for large transactions, but de jure, as official currency.
Dollarization has well-mapped costs and benefits in the economics literature (Calvo & Végh, 1996; Mishkin, 2006). Benefits include: imported monetary credibility, low inflation, reduced transaction costs with the US — the main trading partner. Costs are equally severe: loss of seigniorage (the profit of printing money), loss of independent monetary policy (the central bank cannot cut rates in recession), and dependence on Federal Reserve policy. For El Salvador, which receives about 25% of GDP in remittances from emigrants in the US, benefits outweighed costs — dollarization stabilized the economy and reduced the cost of sending remittances.
But dollarization has a political problem: it is humiliating. A country that uses dollars is publicly admitting its own currency failed. For a populist leader — and Nayib Bukele is the archetype of the digital populist — that is a vulnerability. Bitcoin offered an exit: a currency that no country controls. Adopting BTC did not restore seigniorage, but it created the narrative of a technologically forward country, attracting foreign investment, crypto tourism, and a digital identity.
Money as a network: the theory that explains why switching currencies is so hard
Before we dive into the case, it is crucial to understand what makes a currency work. Economists since Carl Menger (1892) have argued that money is a network phenomenon: its utility to me depends on how many other people accept it. If I am the only person with dollars in a country that only uses euros, my dollars are effectively worthless. The value of money is literally a direct function of the number of users.
Katz & Shapiro (1985) formalized this intuition as network externalities: the value of a product increases with the number of users. For currencies, the effect is especially strong because nobody wants to receive a currency they cannot spend. This creates the famous chicken-and-egg problem: merchants don't accept Bitcoin because few customers pay with Bitcoin; customers don't pay with Bitcoin because few merchants accept it. The system gets stuck in a bad equilibrium.
To break this deadlock, there are three classic strategies: (i) subsidize one side (Uber paid drivers; Chivo gave US$ 30 to users); (ii) mandate adoption by law (the Bitcoin Law forced merchants to accept); (iii) create a killer use case (cheap international remittances). Bukele tried all three simultaneously.
The 4 decisions that defined the experiment
Mandatory legal tender or voluntary recognition?
The conservative option was to recognize Bitcoin as a legal asset — permitting voluntary transactions, without obligation. That is the strategy of Portugal, Switzerland, and dozens of other countries. Bukele chose the radical option: mandatory legal tender. Merchants (with exceptions for those technically incapable) would have to accept BTC if offered.
The upside: solves the chicken-and-egg problem by decree — all merchants become acceptance points simultaneously. The downside: most didn't want to. Without infrastructure, knowledge, and fearing volatility, the law generated more friction than organic adoption. The law was amended in 2024 to make acceptance voluntary, a public retreat from the original project.
State-owned Chivo wallet or let the market choose?
For BTC to work as currency, Salvadorans needed wallets. The government could have left the market to provide (Binance, Strike, Muun) or create an official wallet. Bukele chose to create the Chivo wallet, with two key features: (i) airdrop of US$ 30 in BTC for any citizen who downloaded and registered; (ii) automatic conversion between USD and BTC, shielding the user from volatility.
Chivo was downloaded by more than 60% of the population — a nominal adoption success. But it did not become a daily-use tool: most users withdrew the US$ 30 airdrop and stopped using it. Technical failures, fraud (accounts opened with stolen identities), and lack of integration with local commerce broke the virtuous cycle. Between 2022 and 2024, Chivo was essentially semi-abandoned.
Treasury in BTC or financing via the Volcano Bond?
There were two ways for the State to "signal commitment": buy BTC with fiscal reserves (low political cost, direct) or issue sovereign debt linked to BTC (bold, but riskier). Bukele did both. The treasury accumulated ~6,000 BTC in opportunistic purchases announced via Twitter. And he proposed the Volcano Bond: US$ 1 billion in debt to build "Bitcoin City," financing BTC mining with volcanic geothermal energy.
The Volcano Bond was repeatedly postponed — no serious institutional investor wanted to pay spread over already-junk sovereign debt. By 2024, with BTC's rally, the treasury gain became the dominant narrative: in dollars, the position was worth hundreds of millions more than acquisition cost. Bukele declared victory — but the nominal volume is small relative to the country's public debt.
Break with the IMF or negotiate integration?
The International Monetary Fund, historically a creditor of El Salvador, issued harsh criticism of the Bitcoin Law in January 2022, warning of financial and regulatory risks, and conditioning new loans on concessions. Bukele could confront the IMF publicly (consistent with populist rhetoric) or negotiate. He chose both: swagger on Twitter and, simultaneously, discreet negotiation.
In 2024, with unsustainable public debt, El Salvador returned to the IMF table accepting — among other conditions — reversing Bitcoin's mandatory acceptance. Implicit message: ideology has limits when financial credibility is needed. Bitcoin went from national project to symbolic treasury asset. The experiment as "legal tender" ended; as "sovereign reserve," it continues.
What the case teaches us about digital money
Three structural lessons transcend El Salvador.
1. Decreeing doesn't create a network
A law can mandate acceptance, but it cannot create the conditions for voluntary use. Monetary networks are social phenomena depending on trust, familiarity, and utility. The Bitcoin Law delivered the first but not the second. This echoes lessons from the euro (decades to enter daily use) and even Brazil's Real (preceded by Cruzeiro, Cruzado, Cruzado Novo — each substitution caused cultural friction for months).
2. Volatility kills currency function
Money needs to have three functions: medium of exchange, unit of account, store of value. Bitcoin serves reasonably well as store of value over long horizons, but fails as unit of account (no one prices salaries in BTC in an economy with 50% annual volatility) and has friction as medium of exchange (slow, volatile, with variable fees). The Chivo architecture tried to hide volatility by auto-converting to USD — but that is admitting BTC doesn't work as currency, only as payment rails.
3. The narrative has measurable value
Although the "legal tender" project failed, El Salvador gained something immeasurable: global visibility. The country went from an ignored Central American nation to a crypto reference, attracting tourism, conferences, investment, and an "early adopter" reputation — something you cannot buy with marketing campaigns. Bukele turned a risky monetary experiment into a sovereign branding asset. That is an important byproduct, even if the direct economic goal did not materialize.
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Explore SMX →Conclusion: Bitcoin as a layer, not as a currency
The deepest lesson of El Salvador may not be about Bitcoin — it is about what money is. Currency is not the physical object (paper or code); it is a social contract of acceptance. And social contracts have brutal inertia. The dollar replaced the colón in El Salvador in 2001 after decades of instability — and even that substitution took a generation to complete culturally. Bitcoin, proposed in 2021 by legislative decree, had neither time nor narrative to compete with the dollar, already entrenched.
What remained was something more modest and perhaps more important: Bitcoin as sovereign reserve asset. Not as circulation currency, but as item on the country's balance sheet — like gold in the central bank vaults. That is the thesis adopted by MicroStrategy, by institutional ETFs, and now by other small countries exploring the model. Bitcoin won't be El Salvador's currency. But El Salvador may be right to keep it in treasury. It is a subtle distinction — and essential.