El Salvador’s adoption of bitcoin as legal tender fails to stop sell-off

Bitcoin investors and miners taking profits from the market have forced the price of the largest cryptocurrency by market valuation to drop to $44,772 on Wednesday from $53,000 on Tuesday, according to experts at Luno and Arcane Research.

This is despite the cheery news that El Salvador has embraced bitcoin as legal tender and to incentivise adoption, the country plans to airdrop $30 worth of BTC to every Salvadorian downloading the Chivo Wallet.

Nayib Bukele, El Salvador’s president has already confirmed that the country has purchased 400 BTC, but the incentive system from the government-supported Chivo app will require further bitcoin purchases onwards.

The adoption of bitcoin according to the country is firstly due to the high dependence on remittances in the country and the current inefficiencies involved with remittances. A World Bank report showed remittances made up a whopping 24 percent of El Salvador’s entire gross domestic product (GDP). fixed-fee crypto remittances may be faster and cheaper than existing alternatives, which can be costly and time-consuming.

Another reason for bitcoin becoming legal tender in the country’s plan to attract new businesses to the country and position itself as a crypto-friendly hub.

On Tuesday the country’s announcement pushed the price of bitcoin upwards to above $50,000 for the first time since May. The price surge continued an upward trend that has characterised most parts of the year. Bitcoin saw its all-time high of about $64,000 set in April after a long bullish run that began in January. It was followed by a decisive drop to under $30,000 as recently as July 20, before the recent rise back to $50,000.

Read also: Bitcoin rallies back above $50,000, heres why

Investors that have waited since the July drop may have decided to sell some of their assets for overdue profits. It also pushed mining revenue back to July 2019 levels of $380,000 per exahash according to a daily report from Glassdoor.

“As BTC prices hover around the $50,000 range over the last few weeks, some of these miners have started spending a portion of their coin balance to lock in profits. This week, around 2,900 BTC have been spent from miner balances, equal to around $145 million at a $50,000 BTC price,” the report noted.

Glassdoor explains that it could be that affected miners in China are obtaining fiat liquidity to cover costs, or operational miners taking profits and de-risking after the May sell-off. It is also likely that some of this revenue is earmarked for redeployment into facility expansion, acquiring hardware from second-hand or new ASIC markets.

The experts at Luno and Arcane Research said in a weekly report that the sell-off is a normal reaction when events are overhyped in the market.

“It will now be interesting to see if the $50,000 mark could act as a new support level. If not, we’re likely heading down to the $48,000 area again. As noted last week, it would not be surprising to see a new trading range from somewhere between $42,000 and $50,000 after the massive recovery over the past month,” the researchers noted.

While El Salvador’s adoption of bitcoin is important it doesn’t seem likely it would sustain investors’ interest for the long term.

According to DataReportal, only 50.5 percent of Salvadorans have internet access, equalling approximately 2.2 million adults.

Assuming all these adults register on Chivo, 1301 BTC will be paid out to the country’s inhabitants. To circumvent the limited Internet access, El Salvador will roll out bitcoin ATMs throughout the country where others may buy or sell bitcoins for dollars.

The legal tender decision has been a hotly debated topic both within El Salvador and outside of the country. The IMF has raised concerns, and within the country, there have been protests against the bill.

Some polls run within El Salvador suggest that many El Salvadorians are skeptical towards bitcoin and the bill and have little knowledge about bitcoin.