El Salvador became the first country in the world to adopt bitcoin as its national currency, allowing people to use a digital wallet to pay for everyday goods. kicking off a radical monetary experiment that could pose risks to the fragile economy.
Bitcoin Tumbles Nearly 10% after El Salvador Adopts it as National Currency:
The price of bitcoin fell Tuesday after breaking through $52,000 late Monday, reaching its highest level since May.
Bitcoin is now legal tender in El Salvador alongside the US dollar. On Tuesday, the risks of the approach were highlighted when bitcoin prices dropped sharply on what Bukele has called “Bitcoin Day.”
Cryptocurrencies are held in digital wallets, rather than through a traditional bank account.
So that people in poorer communities with less access to banks could use bitcoin as a way to gain increased access to their finances.
On Monday Panamanian politician Gabriel Silva introduced the “Crypto Law,” which “seeks to make Panama a country compatible with the blockchain, crypto assets and the internet,” Gabriel said on Twitter. “This has the potential to create thousands of jobs, attract investment and make the government transparent,” he added.
President Nayib Bukele announced late Monday that his government purchased 200 bitcoins ahead of El Salvador’s formal adoption of the currency. He added another 150 on Tuesday, bringing the country’s total to 550 bitcoins.
Chivo Wallet Will be Used as An Application for Bitcoin:
Bitcoin gave El Salvador a taste of its famous volatility on Tuesday, as the Central American country became the first nation in the world to adopt the asset as a national currency.
The government has installed 200 bitcoin ATMs around El Salvador. It also bought 400 bitcoins worth about $20 million. Salvadorans will be able to download the “Chivo Wallet,” an application created by the government which will deliver $30 worth of bitcoin to people to promote its use.
Early Tuesday El Salvador temporarily disabled Chivo, its government-run bitcoin wallet, to increase the capacity of the servers, which were hindering new users from installing it, President Nayib Bukele announced in a tweet at about 7:00 a.m. EST.
“Any data they try to enter at this time will give them an error,” he said. “This is a relatively straightforward problem, but it cannot be fixed with the system connected.”
Bukele, a right-wing populist who rose to power in 2019, announced the plan to start using bitcoin in June. The law designating bitcoin as legal tender says that all “economic agents” shall accept the cryptocurrency as a form of payment. It also says that tax payments can be made in bitcoin.
As part of the new law, businesses will be required to accept bitcoin for goods and services, though merchants who aren’t technologically able to accept bitcoin will be exempt.
The market action is unsurprising, according to Leah Wald, CEO at Valkyrie Investments, who said the news was largely priced into the market “a while ago.”
Bitcoin has recovered some lost ground following a dramatic crash earlier this year, but it remains well below its record high of nearly $65,000 set in April.
The price action comes as El Salvador officially adopts the largest cryptocurrency by market cap as legal tender, becoming the first country to do so.
The world’s largest cryptocurrency fell as much as 17% ‘Bitcoin Day’ from its 5 p.m. ET value on Monday, briefly hitting $42,921.27, according to CoinDesk. It later recovered slightly to trade at the price of $46,930 on Tuesday, down 9.1% in the past 24 hours. Ether fell 12% to $3,441.21.
“The process of #Bitcoin in El Salvador has a learning curve. Every step toward the future is like this, and we will not achieve everything in a day, nor in a month,” Bukele tweeted. “But we must break the paradigms of the past.”
Moody and International Monetary Fund Reactions on El Salvador:
El Salvador has partnered with digital finance company Strike to create the infrastructure required.
In late July, Moody’s Investors Service pushed El Salvador’s debt rating deeper into junk territory, citing “a deterioration in the quality of policymaking” including the government’s decision to adopt bitcoin as legal tender.
Moody’s said the country remains susceptible to financing shocks that could jeopardize the government’s ability to repay creditors starting in January 2023.
The International Monetary Fund, which provided an emergency loan to El Salvador last year and is now negotiating another round of lending, has taken a dim view of using bitcoin as legal tender, saying that doing so raises a number of economic, financial and legal issues.
“How do we know what we collect in taxes when bitcoin goes up and bitcoin goes down? How do we plan for expenditures? Remember in April, bitcoin crossed $65,000 and then it dropped almost half of it. That is a problem that the ministry of finance is going to be wrestling with. And it is not an easy one,” Kristalina Georgieva, managing director of the IMF, said recently.
Crypto adjacent stocks MicroStrategy and Coinbase also lost about 9% and 4%, respectively. Coinbase users were experiencing delayed or cancelled transactions at “elevated rates” in the morning, the company said in an update on Twitter, but those issues were resolved by the afternoon. Major crypto exchanges Kraken and Gemini were also investigating delays and performance issues.
El Salvador’s government is betting that using bitcoin as legal tender will attract new investments. Authorities also hope to reduce commissions paid for sending remittances from abroad.
Bitcoin advocates have long held there’s a strong case for Latin American markets using the cryptocurrency as a medium of exchange, for remittances and even for central banks that experience high currency depreciation.
El Salvador Citizens Reactions:
Some citizens have embraced the technology, while others are cautious.
One of the shop owners said, “[Bitcoin is] something new and we don’t have enough information about it,”
Some traders are saying on social media that they will be buying $30 worth of bitcoin in their local fiat currencies to commemorate and support El Salvador’s new law, at 3:00 p.m. ET. But bitcoin prices were sliding into the afternoon anyway.
However, social organizations have asked the Salvadoran government to repeal the law, largely because they fear the extreme volatility of cryptocurrency.
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El Salvador Bitcoin Acceptance is Trending on Twitter:
Everyone has different thoughts on Twitter including Bitcoin Network.
El Salvador 🇸🇻 legal tender laws go into effect and #Bitcoin plunges; it is only up about 400% in the past 12 months. pic.twitter.com/XxJcTzxh2O
— Bitcoin (@Bitcoin) September 7, 2021
Starbucks accepting #bitcoin as payment in El Salvador 🧡pic.twitter.com/FIUXo8OKVp
— Bitcoin Magazine (@BitcoinMagazine) September 7, 2021
Welcome to #Bitcoin #ElSalvador. Your national “currency” just lost over 15% of its purchasing power in under an hour. Get use to it. Just another perfectly orchestrated pump-and-dump by the Bitcoin whales. Too bad this time they had to sacrifice an entire nation to pull it off!
— Peter Schiff (@PeterSchiff) September 7, 2021
