On Wednesday, a day that should have been a huge win for Bitcoin, the cryptocurrency fell far under $50,000, settling around $45,000 per coin by Thursday morning. This came even as the currency was officially made legal tender in El Salvador, leading some analysts to ask whether the dip represented a lack of faith in the Central American country.
However, others argue that the timing of the dip was a coincidence and unrelated to the recent legal tender switch in El Salvador. “I don’t think it had anything to do with El Salvador,” Alex Mashinsky, the CEO of Celsius Network, told Yahoo Finance. “Most of this volume has been on offshore exchanges, it has nothing to do with El Salvador. It’s just a coincidence,” Mashinsky insisted.
The question now, though, is whether the dip is part of a new pattern for Bitcoin, or if it’s a temporary blip before the standard returns to greatness.
Cashing Out Their Chips
There’s a distinct possibility that the majority of offshore sell-offs in Bitcoin yesterday were primarily related to investors deciding it was time to turn their Bitcoin into cold, hard cash. After all, Bitcoin was sitting at $29,000 back in July, so anyone who bought a good number of coins a few months ago did stand to gain quite a bit of money.
This is the inherent pressure in a speculative investment like Bitcoin. On the one hand, holding onto the assets means you can see your investment potentially grow. However, it also means you’re exposed to any volatility in the standard, and Bitcoin has proven itself to be extremely volatile.
That volatility is in place because cryptocurrency, in spite of its name, actually isn’t used for currency anywhere but El Salvador. In the US, if you have a wallet full of Bitcoin, you might as well be poor if no one is buying them for USD. You can’t pay your rent with Bitcoin. You can’t pay your bills with Bitcoin. However, you can make personal transactions between private citizens with Bitcoin, which is a huge part of the standard’s appeal.
After all, those transactions are anonymous. As such, criminals adore crypto: it allows them to safely move large values of untraceable currency without central banks noticing their income. This is part of why the SEC is looking into applying capital gains tax to cryptocurrency exchanges. The IRS will get its due, one way or another.
El Salvador Has Massive Exposure
Many eyes turned to El Salvador yesterday as the Bitcoin price drop coincided with the country’s adoption of the standard as legal currency. No longer was the goal of Bitcoin being a de facto currency just a dream: suddenly, it has become a de jure currency in a sovereign nation. This situation has massively exposed El Salvador’s economy to the whims of the unstable crypto standard, though.
There aren’t many international allies looking out for El Salvador’s financial position. Both the International Monetary Fund and the World Bank have gone out of their way to disavow El Salvador’s decision to take up the privately traded coin as legal tender.
Lack of faith in El Salvador’s financial future can be seen in the price of its sovereign bond. In short, a sovereign bond is somewhat like a stock you take out in a country instead of in a company. While the bond saw a brief bump in August, it has since plummeted down, with investors uncertain of what Bitcoin will mean for the future of the country’s economy.
Decentralized Currency as “Recession Proof” Haven
Crypto’s biggest proponents have talked at length about how Bitcoin shares some characteristics in common with gold. In times of global uncertainty, gold functions as a safe haven investment. Gold is largely considered to be safe against inflation, and this makes it a good long-term store of value.
Simply put, buying $20 of gold in 1900 and giving that to your child would result in that $20 coin being worth $100 in 1920, and perhaps $2,000 in 1950. Bitcoin’s biggest enthusiasts insist that something similar can happen with cryptocurrency. El Salvador hopes that it can occur on a national level.
Crypto’s biggest proponents argue that the standard’s decentralized nature makes it a safe haven away from the whims of regulators. Many point out that the US dollar is experiencing swift inflation right now, for instance, making many turn to Bitcoin as a potential hedge to shelter their money.
However, if Bitcoin continues dipping at its current rate in spite of investor sentiment, it might end up being less of a safeguard and more of an opportunity to flush money down the drain. While investors and El Salvadorans alike hope to see the standard stabilize and return to its winning streak, it’s impossible to tell what kind of movement the infamously volatile digital currency will take next.