Why El Salvador's Bitcoin Bet Threatens Its IMF Deal: What Investors Must Know

Key Takeaways

• El Salvador’s Bitcoin holdings fell ~38% in four months, eroding $300 million of value.
• Credit default swaps on its sovereign debt hit a five‑month high, signaling growing market anxiety.
• The IMF’s next review is tied to continued fiscal reforms; crypto purchases could delay disbursements.
• Bhutan’s recent liquidation highlights a contrasting risk‑managed approach to crypto exposure.
• Investors must weigh the upside of a potential rally against the downside of fiscal strain and possible IMF suspension.

The Hook

You’re about to discover why El Salvador’s crypto crusade could jeopardize its IMF lifeline.

Related Reads

• Crypto Volatility and Emerging‑Market Debt
• IMF Conditionality in the Age of Digital Assets
• Bhutan’s Bitcoin Mining Profitability Explained

El Salvador’s Bitcoin Portfolio: Size, Decline, and Market Impact

The Bitcoin Office reports 7,560 BTC on the nation’s balance sheet, valued at roughly $504 million at today’s price. Four months earlier, at the October 2025 peak, the same stash was worth about $800 million. The $300 million erosion represents a 38 % loss, a hit that reverberates through the country’s fiscal accounting and debt‑service calculations.

From a technical standpoint, Bitcoin’s price swing is measured by its 30‑day volatility index, which has hovered above 70 % since the start of the year. Such volatility translates into a moving average of daily unrealized gains/losses that can swing a sovereign balance sheet by hundreds of millions in a single quarter.

IMF Negotiations vs. Crypto Policy: The Clash of Priorities

The International Monetary Fund approved a 40‑month Extended Fund Facility (EFF) that could unlock $1.4 billion for El Salvador. Disbursement is milestone‑driven: each review unlocks an additional tranche. The second review, due in September 2025, has been stalled because the government delayed publishing a pension‑system analysis—a condition the IMF flagged as essential for fiscal sustainability.

While the IMF worries about fiscal stability, the Bukele administration continues buying roughly one Bitcoin per day, increasing exposure at a time when the IMF has publicly warned about crypto‑related risks. If the IMF deems the policy a breach of program compliance, it could withhold the next tranche, forcing the government to refinance $450 million of bond payments due this year and $700 million next year under tighter terms.

Comparative Lens: Bhutan’s Exit vs. El Salvador’s Accumulation

Bhutan’s state‑owned mining venture generated $765 million in profit since 2019, but the 2024 Bitcoin halving pushed mining costs up by 30 %, compressing margins. In response, Bhutan sold $22.4 million of BTC, opting for liquidity and risk mitigation. El Salvador, by contrast, doubles down, citing long‑term store‑of‑value narrative and political signaling.

Historically, sovereigns that have liquidated crypto positions during downturns (e.g., Ukraine’s partial sell‑off in 2022) saw a modest improvement in credit spreads. The divergent paths underscore a fundamental strategic choice: treat Bitcoin as a speculative asset versus a core reserve.

Bond Market Signals: CDS Spike and Debt Service Pressure

Bloomberg data shows El Salvador’s sovereign credit default swap (CDS) spread climbing to 1,250 bps—its highest in five months. A rising CDS spread typically indicates that market participants demand higher compensation for perceived default risk, which in turn raises borrowing costs for future issuances.

With $450 million due in bond repayments this year and $700 million slated for 2026, any delay in IMF funding could force the government to tap high‑cost market financing or tap reserve assets at distressed prices, further weakening the balance sheet.

Sector Context: Crypto Volatility and Emerging‑Market Debt

El Salvador’s situation is not isolated. Several Latin American and African issuers have explored crypto‑linked sovereign bonds, yet the majority have kept exposure under 5 % of total reserves. The market’s reaction to crypto‑related sovereign risk is captured in the emerging‑market CDS index, which has risen 12 % year‑to‑date, reflecting a broader risk aversion.

Investors should also note that gold purchases—$50 million added last month—are a classic hedge. Gold’s inverse correlation with crypto during market stress provides a modest buffer, but the magnitude of the Bitcoin loss dwarfs the protective effect of the new gold allocation.

Investor Playbook

Bull Case: If Bitcoin rebounds above $35,000 within the next 12 months, the portfolio could recover $200 million, restoring confidence and potentially unlocking the next IMF tranche. A successful IMF review would reaffirm debt sustainability, allowing the government to issue new bonds at lower yields.

Bear Case: Continued crypto decline, coupled with a postponed IMF review, could trigger a CDS spread breach above 1,500 bps. In that scenario, bond investors may demand a 200‑basis‑point premium on new issuances, and the government might be forced to sell Bitcoin at a deep discount, crystallizing losses and jeopardizing sovereign credit ratings.

Strategically, a balanced exposure—maintaining a modest crypto position while increasing holdings in safe‑haven assets like gold and USD‑denominated bonds—offers the most prudent risk‑adjusted return profile for investors tracking El Salvador’s fiscal trajectory.