Bitcoin Prices React to Its Approval as Official Currency in El Salvador

Bitcoin prices rebounded on Wednesday after El Salvador became the first country to approve the cryptocurrency as an official currency. El Salvadoran legislators voted in favour of a bill that formally adopts Bitcoin as legal tender and that goes into effect within 90 days of being officially published. The new law is expected to provide alternatives for the 70% of the El Salvadoran population that does not have a bank account. Bitcoin jumped immediately after the results of the vote were announced, only to retreat by 0.3% on Thursday morning.

Some analysts expect other small countries to join in on approving Bitcoin (BTCUSD) as legal tender. Developing nations may react differently than more established countries as they may not have the same concerns regarding their currency being used as a global reserve. Most small central banks are also unlikely to be able to move markets through their fluctuations.

Prior to the announcement of El Salvador’s decision, Bitcoin had lost nearly 35% of its value in the last month after reaching a high of more than $64,000 in April. Several factors may have contributed to the crypto’s decline, including Tesla’s decision to stop accepting Bitcoin due to the environmental impact associated with Bitcoin mining. Additionally, in the past week, a sell-off may have been triggered due to the U.S. recovering approximately $2.3 million in Bitcoin that had been paid to the cyberhackers who attacked the Colonial Pipeline in May.

El Salvador is turning to Bitcoin as one way to send funds internationally cheaply and quickly. Around 20% of the country’s GDP is made up of remittances from citizens working abroad. Bitcoin offers one way to send these funds back to El Salvador without relying on third-party remittance firms. The new law will also force businesses to accept Bitcoin for payments unless they lack the technology to do so.

One potential downside of using Bitcoin for daily transactions is that the cryptocurrency  is extremely volatile. According to the new law, Bitcoin’s value in relation to the U.S. Dollar, El Salvador’s national currency, will be strictly governed by the free market. This means that El Salvadorans might see rapidly changing levels of currency valuation as Bitcoin’s price moves up and down.

Could Bitcoin Adoption Help the Larger Crypto Market?

El Salvador is doing away with capital gains taxes for exchanging between Bitcoin and other currencies. Experts have suggested that this may spawn a crypto boom by making banking easier for crypto-native companies who may wish to work with cryptocurrencies like Ethereum (ETHUSD) and Litecoin (LTCUSD). This comes at a time when Ethereum’s market dominance is nearing that of Bitcoin, with 19% of the market versus Bitcoin’s 42%. 

However, some analysts have countered that El Salvador is a poor nation, and while its adoption of Bitcoin may be good for the cryptocurrency, it will not likely have much impact on the crypto ecosphere as a whole.

It remains to be seen whether the reliance on Bitcoin and other cryptos will bring monetary success to El Salvador, or if the crypto’s volatility will upset the country’s fragile economy.