Bitcoin nurses losses in wake of El Salvador’s glitched roll-out

A street vendor during a protest against the use of Bitcoin as legal tender, in San Salvador, El Salvador on Sept 7, 2021.
A street vendor during a protest against the use of Bitcoin as legal tender, in San Salvador, El Salvador on Sept 7, 2021.PHOTO: REUTERS

SINGAPORE (BLOOMBERG) - Bitcoin nursed losses on Wednesday (Sept 8) after plunging amid El Salvador’s troubled roll-out of the world’s largest cryptocurrency as legal tender.

The virtual coin was trading at about US$47,100 as of 11am in Singapore, having slid as much as 17 per cent a day earlier before paring some of the losses. The downdraft also swept across tokens such as Ether and Dogecoin, as well as the Bloomberg Galaxy Crypto Index.

“Social media platforms were very cautious over the weekend that a plunge could occur following El Salvador’s big day,” Edward Moya, senior market analyst at Oanda Corp, wrote in a note. Some investors likely bought in anticipation of the nation implementing its Bitcoin law Sept 7 and then moved to “sell the fact,” he said.

El Salvador’s experiment with Bitcoin - the biggest test of the token’s real-world usefulness - had a rocky start on Tuesday because of technical glitches to the official digital wallet that later appeared to be resolved. Protesters, meanwhile, took to the streets of the capital to denounce the move.

The country is the first to use Bitcoin as an official currency, encouraging businesses and citizens to use it in everyday transactions, and authorities struggled to smooth out glitches in the new system.

President Nayib Bukele wrote on Twitter on Tuesday morning that the digital wallet, which is called Chivo after a slang word for “cool,” would be available to Salvadorans in the United States and almost anywhere in the world. But even as large companies such as McDonald’s and Starbucks began accepting Bitcoin payments in El Salvador, for a time the wallet was not available to anyone, and the country slowed its roll-out.

Mr Bukele also announced on Twitter that servers were temporarily being taken offline as Chivo added capacity, and he acknowledged issues with downloads. “We prefer to correct it before reconnecting it,” he said.

When the law to adopt Bitcoin was passed in June, experts warned of potential instability and unnecessary risk to El Salvador’s fragile economy.

International financial regulators have also voiced legal concerns. Apart from the economic risks of Bitcoin’s volatility, the World Bank and the International Monetary Fund, which is considering a financing deal with El Salvador, have said making Bitcoin an official currency could leave a country open to money laundering and other illicit financial activity.

Bitcoin’s selloff on Tuesday is the most significant break in a rebound that had lifted the digital coin almost 75 per cent since late July. Overall cryptocurrency market value fell about US$280 billion in the past 24 hours, according to tracker CoinGecko. 

Some US$3.7 billion of cryptocurrency liquidations occurred over the same period, according to Bybt.com. These happen when leveraged positions are closed by exchanges for failing to meet margin requirements. 

Billionaire Mike Novogratz, chief executive officer of Galaxy Digital Holdings and a long-time cryptocurrency bull, said the market for digital coins was running strong over the last eight weeks and became overbought. Interest from individual investors spiked on the back of large institutions jumping on board the cryptocurrency wagon, he said.

Oanda’s Mr Moya argued that Bitcoin’s “fundamentals remain intact, as prices iron out a new trading range between the US$46,000 and US$53,000 levels.” 

While the El Salvador roll-out may have been a proximal cause of the swings in Bitcoin, other variables could also be at play in the famously volatile cryptocurrency sector. In particular, the prospect of reduced Federal Reserve stimulus is a challenge for speculative assets like digital tokens.

“Could it also be that the liquidity beneficiaries - which could include crypto - may be sensing more normalised future policy setting from major central banks,” Chris Weston, head of research at Pepperstone Financial, wrote in a note.