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Bitcoin tumbles 10% as El Salvador adopts it as legal tender

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KEY POINTS

  • After breaking through $52,000 Monday night, bitcoin’s price fell Tuesday. It had reached its highest level since May.
  • This price action occurs on the same day that El Salvador will adopt cryptocurrency with the highest market capital as legal tender. It is the country’s first mover to do so.

After breaking through $52,000 Monday night, bitcoin’s price fell Tuesday. It had reached its highest level since May.

This price action occurs on the same day that El Salvador will adopt the largest cryptocurrency market cap to become a legal tender. It is the country’s first mover. Bitcoin dropped as much as 16% on Tuesday morning. According to Coin Metrics, it was trading at $46,741.00 and had fallen by 9.8% in the past. Ether dropped about 12% to $3.438.00.

Coinbase and MicroStrategy, which are crypto-related stocks, also dropped about 7% and 3 percent, respectively. Coinbase users were experiencing delayed or canceled transactions at “elevated rates” in the morning, the company said in an update on Twitter, but those issues were resolved by the afternoon. Gemini and Kraken, major crypto exchanges, were also looking into delays and performance issues.

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 fairly simple problem that cannot be fixed by the system connected.

According to Leah Wald (CEO at Valkyrie Investments), the market reaction is not surprising. She stated that the news was priced in the market “a while back.”

“When this move first was announced, it didn’t have as much impact on price as people might have expected. This could be because El Salvador’s population was smaller than New York City’s and also because the announcement was lacking in details and people were unsure about how it would be implemented.” She explained to CNBC that a large portion of El Salvador is poor and does not have access to the internet or smartphones required to join the bitcoin network. Wald said that transaction fees, processing times and other obstacles make this seem more like a test than a solution for many of the problems plaguing El Salvador’s poor.

The new law will require businesses to accept Bitcoin for goods and services. However, merchants who can’t accept bitcoin will be exempt. 200 bitcoin ATMs have been installed by the government in El Salvador. It also bought 400 bitcoins worth about $20 million and is preloading Chivo wallets with $30 worth of bitcoin for Salvadorans who register.

Social media users have been posting that traders will buy $30 worth bitcoin in local fiat currencies to support El Salvador’s new law at 3:00 p.m. ET However, bitcoin prices continued to slide into the afternoon.

Wald stated that it is worth paying attention to whether other countries in Latin America or around the globe adopt bitcoin as their currency. “If this happens, it is when we might see a parabolic move higher. The momentum gained from millions more people being able to access crypto should result in greater adoption, more HODLing and higher prices. HODLing, which is crypto-community slang, refers to the buy-and hold investment strategy.

Bitcoin supporters have held for years that there is strong support for Latin American markets using cryptocurrency for exchange, remittances, and central banks that experience high currency appreciation.

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,” he said on Twitter. He added that this “has the potential to create thousands and attract investment, and make the government transparent.”