What does the future hold for Bitcoin after El Salvador adopts it as legal tender?
Following the news yesterday that ‘The Bitcoin Law’ was passed by the Legislative Assembly of El Salvador to give Bitcoin the status of legal tender, Business Leader has explored what the announcement means for the cryptocurrency and global economies.
Earlier this year, President Nayib Bukele made the shocking announcement that his country would be the first nation to accept Bitcoin as legal tender – causing a global debate around its legitimacy and the impact it would have on traditional currency.
Bukele’s government donated $30 worth of Bitcoin to all Salvadorans in an effort to save the country up to $400m a year in transaction fees abroad – although this total is disputed by the data from the World Bank.
Despite the controversy, yesterday, Tuesday 7th September 2021, it became official.
— Binance (@binance) September 7, 2021
However, just a few hours after the first transactions were made, angry protests across the Central American nation exploded in opposition to the announcement.
Worse still, due to a series of technical glitches and the controversy the announcement had caused, the price of Bitcoin plummeted from around $52,000 to under $43,000 – its biggest fall in over a month.
Bitcoins were spent via a digital wallet known as Chivo – but major mabile phone manufactuerers Apple and Huawei havent made it avilable on their platforms. However, for those able to use it, they spent Bitcoin at global chains such as Starbucks and McDonald’s.
After a dramatic start to Bitcoin’s official first few days as legal tender, what does the future hold? Business Leader investigates.
Fresh attempts to pump up Bitcoin fall flat as El Salvador adopts currency
Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown shared her thoughts with Business Leader regarding the impact the transition to legitimate tender has had on the cryptocurrency.
Attempts to pump up the price of Bitcoin to celebrate its adoption as legal tender in El Salvador have fallen flat with the cryptocurrency deflating in value slightly over the past 24 hours.
Speculation had swirled that Bitcoin would see another price surge, especially if fans followed the calls put out on social media to buy $30 worth to mark the Bitcoin law coming into effect. But it’s fallen back by around 1.4% over the past 24 hours hovering just over $51,000.
The reticence to follow the herd on this occasion offers much needed crumbs of comfort, given so much of Bitcoin’s rise is down to speculation on future price rises and the FOMO effect, rather than necessarily its underlying use case. This concern has been echoed by Charles Randell, the chair of Britain’s financial watchdog, the FCA, who has highlighted the dangers of high-profile celebrity influencers promoting risky cryptoassets.
Bitcoin is still up by 65% since July 20th when it began its most recent climb, after losing more than half its value, after reaching a high of over $63,000 in April.
It’s this volatility that has made many in El Salvador less than optimistic about the currency’s adoption. It is a huge gamble for the country’s payment system given that making transactions in the currency when the future price is so uncertain is risky.
There will be concern that by becoming known as a Bitcoin haven, the country, which has already faced serious issues with corruption, could attract the wrong kind of investment from criminal groups seeking anonymity.
For investors it’s important to bear in mind that the payments world is in a state of flux, and the rules of the future game have not yet been drawn up.
Although it’s clear that digital currencies in some form will find a place at the table in the financial system, given the interest by large companies and governments, it’s very unclear which of the thousands of coins and tokens will retain their value in the future and what role they will play.
Given speculating in crypto assets remains such a high-risk strategy, traders should only commit money they can afford to lose.
Is El Salvador’s Bitcoin rollout the start of a ‘new world’?
The CEO of a global financial services group has said El Salvador becoming the world’s first sovereign nation to officially buy Bitcoin and to make the cryptocurrency legal tender ushers in the ‘start of a new world’. The comments from Nigel Green, chief executive and founder of deVere Group come as El Salvador’s president confirmed that his government has bought 400 Bitcoin – worth about $21m – just before the Central American country formally adopted the world’s most popular cryptocurrency as legal tender.
President Nayib Bukele said the government plans to “buy a lot more” too.
The price of Bitcoin rose following the announcements on Twitter to trade at around $52,680.
Green says: “It’s almost universally recognised that the future of money is inevitably digital, in some form or another. El Salvador has today made history by not only becoming the first country in the world to declare Bitcoin as legal tender, but by also becoming the first sovereign nation to officially buy it. I believe this is a threshold moment in the evolution of digital currency and that it ushers in the start of a new world as we can expect more nations, especially those with developing economies, to follow El Salvador’s historic lead.”
On Monday, the deVere CEO conceded that there are major risks attached to the move, including that there is a possibility that El Salvador could run out of dollars and that institutions, such as the IMF, might not look favourably on a nation that has adopted Bitcoin.
These risks prompted some El Salvadorans last week to take to the streets to protest against the adoption of Bitcoin as an official currency.
However, he set out five reasons why he “cautiously welcomed” the Bitcoin decision.
“First, El Salvador chose to be reliant upon a major ‘first-world’ currency, the U.S. dollar, to complete transactions. But this reliance on another country’s currency also comes with its own set of, often very costly, problems.
“The El Salvadoran government cannot print its own money and the economy cannot benefit from the U.S. Federal Reserve’s money-printing agenda. Therefore, El Salvador must either borrow or earn the dollars it needs.
“A stronger U.S. dollar can have a crippling impact on emerging-market economies, such as that of El Salvador. By adopting a cryptocurrency as legal tender these countries then immediately have a currency that isn’t influenced by market conditions within their own economy, nor directly from just one other country’s economy.
“Bitcoin operates on a global scale and is, as such, largely impacted by wider, global economic changes. Second, central banks around the world have been devaluing their currencies, while Bitcoin’s supply is not only limited, but also new coins are mined at a decreasing rate too. El Salvadorans could, therefore, find their new adopted currency gives them more purchasing power when they buy from overseas.”
He went on to say: “Third, El Salvador’s adoption of Bitcoin could cut the cost of remittances, a major source of income for millions of people. The remittances would be made faster and easier too, compared to money transfer services or bank wires, so remittances are likely to further increase.
“Fourth, by diversifying the nation’s dollar reserves into the cryptocurrency, there could be additional opportunities to earn yield, meaning the size of the reserves would grow. And fifth, El Salvador could benefit from significant foreign investment and capital inflows as digital asset organisations are likely to relocate to the Bitcoin-friendly nation.”
Of El Salvador’s Bitcoin legal tender rollout and massive purchase, Green concludes: “The world is watching. This is likely to be President Bukele’s legacy in the making.”
How has ‘negative bias’ impacted Bitcoin’s brand?
In light of El Salvador using Bitcoin as an official currency, Business Leader received a comment from analyst Daniela Hathorn at dailyfx.com regarding the impact the controversy has had on the cryptocurrency’s image.
Bitcoin has once again struggled to create meaningful momentum throughout last week and even the push higher on the weekend seemed slightly lackluster for what we’re used to given how cryptos tend to outperform when other markets are closed. $55,000 still seems far away from what we’ve seen over the last week as buyers have been unable to cross the halfway line within the $5,000 gap between 50k and 55k.
There is also increased chatter about a supposedly planned “Bitcoin day” or “Bitcoin earthquake” due to happen following Tuesday the 7th as El Salvador adopts the digital currency as legal tender. So far the online forums are suggesting a worldwide increase of $30 in every holder’s BTC stake in what is being considered as a move of solidarity with Salvadorans, which seems slightly confusing as to how it would help. But anyway, leaving the technicalities aside this may be a “buy the rumour, sell the fact” situation and so I would be looking out for any crypto volatility leading up to the event, with a slightly negative bias in the short term.