LAST Tuesday, bitcoin prices slid after breaking through US$52,000 level, reaching its highest level since May.
Some investors turn panic and have been searching for a reason on this decline. Analysts gather the cause of this crypto fall comes from a Latin country.
Late Monday in US hours, El Salvador announced its adoption on the largest crypto-currency by market cap as legal tender, and is the first country to do so. Today, bitcoin is the largest capitalised crypto-currency and sits on US$860 billion.
After the news release, bitcoin prices fell about 16 per cent and traded at US$46,000 level. Separately, the second largest crypto-currency Ether fell 12 per cent to US$3,440 area.
Following that, El Salvador temporarily disabled its government-run bitcoin wallet, called Chiyo, in order to increase the capacity of the servers and smoothen the speed of transaction.
Nevertheless, the hindrance of installing the e-wallet by many new users caused a false alarm and triggered a sharp price decline after the announcement by President Nayib Bukele.
As part of the new law, businesses in El Salvador will begin to accept bitcoin for goods and services, though some merchants who are not tech-savvy will be exempted.
The government has installed 200 bitcoin ATMs throughout the country and bought 400 bitcoins at an estimated US$20 million for paying a US$30 bonus to the new installer of the Chivo e-wallet.
Looking at past records while many Latin currencies have experienced the volatile depreciation of fiat currencies, bitcoin has actually become a popular medium for payment for past years in the Latin region.
Hence, the adoption of bitcoin by El Salvador might influence other neighboring countries to follow suit in coming months.
Apparently, the intention is to steer away from political influence of US dollar and become independent in its economy without the local currency pegged to greenback.
However, no one can predict what will happen in the long run of adopting bitcoin as a legal tender on national base. Perhaps the trial run of this economic transformation might cast an ordeal in just another 12 months.
Fundamentally, the event of bitcoin hitting US$100,000 level in future will indicate the wealth of the citizens in El Salvador will grow by one-fold at 100 per cent.
On the contrary, the other possibility of seeing bitcoin bursting its bubble and devaluing to US$10,000 will equate to a devaluation of 80 per cent!
Theoretically, it is the management of the government and its people to live with a happier lifestyle or picking up broken pieces from the devastation of the crypto-currency.
Relying on a crypto-currency as a replacement to national fiat currency, it will be a test to fall back on other reserves if the safety net of the main economic tool is ruptured.
The question is, how well have El Salvador and other countries prepared themselves to weather such storm when the black-swan strikes on one of these days?
We are not sure yet but you have to make sure that the whiplash does not whack you.
Dar Wong is a professional in financial industry since 1989. The expressions are solely his own. He can be reached at [email protected].