Bitcoin fell by as much as 16% on Tuesday just hours after El Salvador's adoption of Bitcoin as a legal tender came into effect and encountered some technical setbacks.
After reaching multimonth highs of more than $52,000 over the weekend, Bitcoin and other cryptocurrencies were in the red on Tuesday morning, falling steeply before recovering a bit to about $47,000 by noon, a loss of more than 9% over the past 24 hours. The plunge followed El Salvador's adoption of Bitcoin as a national currency.
The country first approved the bold move in June, and the decision has been hailed by Salvadoran President Nayib Bukele as an innovative step that could help propel El Salvador, a poverty-stricken and crime-plagued Central American country, into increased prosperity. The adoption of Bitcoin as legal tender became effective on Tuesday and is an enormous milestone for the cryptocurrency, which was just a blip on the world’s economic radar a few years ago.
To begin what is being dubbed Bitcoin Day, or B-Day, the government of El Salvador purchased 400 bitcoins, which is worth more than $20 million as of Tuesday morning. The country also introduced new federal e-wallets called Chivo (slang for “cool”) as part of the endeavor, which envisions Salvadorans using Chivo to pay for a wide array of products and services.
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After Bitcoin began to crash, which happened in just a matter of minutes, Bukele's government purchased even more of the digital asset.
"Buying the dip," Bukele tweeted along with a winking emoji. "150 new coins added."
The exact reason behind the sharp selloff was not immediately clear, although the drop came as the country faced some issues with its rollout of Bitcoin and Chivo. Chivo didn’t immediately appear on Apple’s app store, which is used by iPhones, and Google’s Play store, which is used by Android devices, at midnight local time. It did appear on Huawei’s store at about 2 a.m., according to the Wall Street Journal.
There were some glitches with the Chivo system, and hours before the sudden selloff, Bukele tweeted that servers were being temporarily taken offline as Chivo added capacity.
Bukele’s government has also committed to investing more than $225 million in dozens of Bitcoin ATMs across the country and incentivizing the use of the cryptocurrency by giving away about $30 in Bitcoin to those who use the Chivo system.
El Salvador’s decision came about two decades after it phased out its use of the Salvadoran colón and began using the U.S. dollar.
Peter St. Onge, a research fellow for economic policy at the Heritage Foundation, told the Washington Examiner on Tuesday that part of the reason El Salvador wanted to adopt Bitcoin is because of the country’s enormous reliance on remittances, which is largely money transferred from immigrants in the United States back to relatives in El Salvador.
Bukele has hailed sending those remittances in the form of Bitcoin because he thinks it will help avoid fees and be a cheaper way to send money. The president has said that a “big chunk” of the $6 billion in remittances sent each year is lost to intermediaries and that Bitcoin and Chivo will help low-income families by helping them avoid those intermediaries.
About 70% of Salvadorans do not have a bank account, and Bukele said he hopes that through the use of Bitcoin transfer apps such as Chivo and Strike, more people in the country will be able to have access to banking services.
The move has broader implications for the cryptocurrency market and offers more legitimacy to Bitcoin and so-called altcoins such as Ethereum and Cardano because it is being embraced by an entire economy. Other countries that have high inflation, such as Venezuela, will also be closely watching the rollout to see whether turning to Bitcoin may be an effective move for economic prosperity.
El Salvador will invariably face some hurdles in expanding its new national currency. Some will be technical in nature (such as how well Chivo functions), but another is simply the mercurial nature of Bitcoin and the cryptocurrency realm in general.
As of Tuesday morning, during the launch of Chivo, Bitcoin was valued at more than $52,000, but in a poignant example of the asset’s volatility, it plummeted to less than $44,000 in a matter of hours before making up some of those losses and clocking in at about $47,000.
It dropped to a low of just under $29,000 in July after soaring to a record high of more than $63,000 in April.
“Most people should not park their life savings in Bitcoin simply because it can go up. It can go down,” St. Onge said, noting that if poor Salvadorans start using Bitcoin to hold a large store of their overall wealth, it could create risk for them.
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Bukele, a young and tech-savvy businessman, tweeted on Tuesday morning that like all innovations, his country’s adoption of Bitcoin as a legal tender has a “learning curve,” but he said he thinks it has the potential to advance El Salvador “towards the first world.”