An Analysis of El Salvador's Failed Bitcoin Experiment

Seminar paper from the year 2023 in the subject Economics - Monetary theory and policy, grade: 1,3, University of Münster, language: English, abstract: This paper explores Bitcoin’s potential as an alternative to a central bank-backed currency by analysing El Salvador’s recent adoption of it as a legal tender. Such monetary experiments are rare, providing researchers with a unique possibility to identify the macroeconomic effects of monetary regime changes. I find that a medium of exchange is not simply created by a government adopting a new legal tender but by the broad acceptance of it by the populace, which occurs due to substantial relative benefits of the new currency to the status quo. In particular, I am going to argue that El Salvador’s Bitcoin experiment failed, because the people of El Salvador did not perceive the need for a new currency and because Bitcoin does not fulfil any of the traditional functions of a currency.