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Recently, El Salvador's Bitcoin bill officially came into effect, making Bitcoin the country's legal currency. El Salvador has thus become the first country in the world to use cryptocurrency as legal currency.
The country's President Nayib Bukele immediately posted on Twitter that the Salvadoran government had purchased the first batch of 200 bitcoins. Based on the price at the time the tweet was published, the total value of the Bitcoin purchased by Salvatierra was approximately US$20.9 million.
Later, Salvador added another 200 bitcoins, bringing the total number of bitcoins held to 400. The Salvadoran government also recently launched an official Bitcoin wallet called "Chivo", where citizens can register with their national ID and conduct Bitcoin transactions to accelerate the promotion of Bitcoin across the country.
After the information was released, the price of Bitcoin rose briefly and reached a recent high of $52,924 at 11:00 noon. But in fact, the overall increase of Bitcoin at that time was not very high. The price only rose from around 52,250 to 52,924, an increase of only about 1.3%.
This is because the market has partially digested this positive information in the previous three months, and the release of this tweet is only logically beneficial to the price trend of Bitcoin.
As early as June 5 of this year, Salvadoran President Nayib Bukele announced at the 2021 Bitcoin Conference in Miami that he would introduce legislation to make Bitcoin a form of legal tender in the Central American country alongside the U.S. dollar.
According to the details of the bill, Bitcoin will be regulated as legal tender in El Salvador and can be used for commodity pricing, payment and tax purposes. In addition, the bill shows that the state will allow users to adopt Bitcoin trading alternatives and automatically convert Bitcoin into US dollars when necessary.
It can be seen that the country's bill is being steadily implemented, and the market has been digesting this information in the past three months. Therefore, the formal implementation of this bill has not played a big role in boosting the short-term price of Bitcoin.
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Why the flash crash?
Regardless of the impact of the passage of the bill, it is positive in the short term. However, the price of Bitcoin fluctuated violently a few hours later, plummeting by more than 20% at one point and falling below $40,000. It then quickly rebounded, narrowing its intraday decline to 11%, and is now consolidating in the range of $45,000-47,000. During the same period, Ethereum fell by 12%, Dogecoin fell by 16%, and Ripple fell by 20%.
The blockchain sector of the U.S. stock market also plummeted. Among them, Coinbase's stock price fell by 4.18% a few days ago; MicroStrategy, a business intelligence software company that is a major buyer of Bitcoin, fell by 9.02%; mining company Riot Blockchain fell by 6.74% and Marathon Digital Holdings fell by 9.26%. There are several reasons for the instantaneous plunge in Bitcoin prices.
First, the Kremlin said that Russia has no reason to recognize Bitcoin as legal tender and believes that legalizing digital currency will damage the financial system.
Russia's attitude towards Bitcoin has been tightening this year. For example, at the beginning of the year, Russia officially banned cryptocurrency payments in the country. However, there has been no legislation prohibiting Russians from purchasing or trading cryptocurrencies such as Bitcoin. However, it can be seen that the overall trend is not to support it. The recent news updates have caused the price of Bitcoin to quickly fall under pressure.
Additionally, the Salvadoran government’s “Chivo” bitcoin wallet encountered technical problems within hours of its launch and had to temporarily take its app offline.
The vulnerability of the wallet system has caused widespread anxiety. President Bukele also said recently that the team is still working hard to increase the ability of the server to scan images in the application, which means that the overall stability and completeness of the system still need to be improved.
In this regard, Luis Membreo, a local economic adviser in El Salvador, said that this is a disaster. If the existing program problems of this APP wallet application make it impossible for people to exchange Bitcoin for US dollars in a timely manner, then people will lose confidence in the system.
In addition, there is controversy over the bill among the people of El Salvador, and most people oppose making Bitcoin a legal currency.
According to the Technology News, in the opinion poll, among the 1,281 people surveyed, about 68% disagreed or strongly disagreed with considering Bitcoin as legal tender, and the other 32% only agreed to some extent.
In addition, a public opinion survey conducted by the University of Central America (UCA) in August showed that about 90% of the people did not know much about digital currencies such as Bitcoin, 80% of the people had no information on how to use them, and 70% of the people believed that the law that made Bitcoin a legal currency should be abolished.
Recently, more than a thousand people held a protest in the capital San Salvador to oppose the bill.
Although the law can help some people save money on remittance fees, many people are more cautious about bitcoin because of its price volatility. In addition, the circulation of bitcoin will make financial supervision more difficult, and opponents believe that bitcoin may be used for illegal activities. Fourth, the international financial community does not support El Salvador’s move to legalize Bitcoin.
International ratings agency Moody's recently downgraded the country's debt rating, in part because of the bill.
The International Monetary Fund (IMF), which is currently negotiating a new loan with the Salvadoran government, has previously warned that the bill's implementation could destabilize the $25 billion economy, dimming the prospects for more than $1 billion in financing that El Salvador is seeking from the IMF.
The World Bank also reiterated that it would not be able to provide bitcoin assistance to El Salvador due to environmental and transparency deficiencies. Earlier in June, Salvadoran Finance Minister Zelaya sought technical assistance from the World Bank to help it use bitcoin as legal tender, but the World Bank refused.
Finally, due to the sharp fluctuations in Bitcoin prices and the rapid increase in trading volume, the trading platform Coinbase was once again hit by technical problems, resulting in transaction delays or cancellations, which further undermined investor confidence.
Due to the combined influence of the above reasons, the price of Bitcoin has dropped significantly.
However, the Salvadoran government's attitude towards Bitcoin is relatively firm. After the sharp drop in Bitcoin, its president Bukele tweeted that he had purchased another 150 Bitcoins, now totaling 550. He also left an optimistic message under the tweet, thanking the sharp drop for giving him the opportunity to buy at a low price. 2
$50,000 may be the short-term pressure line. If the timeline is slightly extended, it can be found that Bitcoin has rebounded significantly in more than two months, but the upward trend seems to have slowed down in mid-August. In the short term, it has only broken through the $50,000 mark twice, and then fell back to consolidate. The $50,000 mark seems unlikely to be broken again in the short term.
According to the Wall Street Journal, a lot of funds are being transferred to other cryptocurrency markets.
CoinShares data shows that funds trading Ethereum attracted a total of $22.4 million in inflows in August; funds focusing on Cardano (a blockchain platform similar to Ethereum) received inflows of $18.7 million.
In addition, non-fungible tokens (NFTs) are attracting the attention of a large number of investors.
Visa and Facebook have successively entered the NFT market. Among them, Visa purchased the "CryptoPunks" series of NFTs, and Facebook said it was considering setting up a dedicated NFT service in its upcoming digital wallet business.
According to data from the DappRadar research website, the largest NFT exchange, OpenSea, has had a trading volume of $3.5 billion in the past month. However, from its establishment in 2016 to August this year, the total trading volume of the exchange was only about $1 billion. It can be seen that the attention paid to NFT has increased greatly in recent months.
The market capital diversion effect is increasingly affected by the above two factors (other cryptocurrencies and NFTs).
Meanwhile, data from CoinShares shows that Bitcoin's recent gains have not attracted more buyers. According to statistics, funds trading Bitcoin have seen outflows in 14 of the past 16 weeks, including a total outflow of $61 million in August.
From this point of view, it may be difficult for Bitcoin to achieve a significant increase in the near future. |
