Investors See Possible El Salvador Bitcoin Embrace as Too Little to Move Market

El Salvador's announcement was largely ignored by markets, possibly due to the country's small size, analysts say.

Jun 7, 2021 at 8:57 p.m. UTC
Updated Sep 14, 2021 at 1:07 p.m. UTC

A push by El Salvador’s president to embrace bitcoin as the country's legal tender is not seen as having much of an impact on the $663 billion bitcoin market, even if it does inspire other countries to do the same.

Investors, analysts and economists were assessing the potential price ramifications Monday after President Nayib Bukele said Saturday he will submit a bill this week to recognize bitcoin as the Central American nation's legal tender.

So far, the market isn't giving much weight to the announcement and bitcoin (BTC) has been trading in a tight range over the past few days around $36,000, still well off the all-time high near $65,000 reached in mid-April.

Traders are still reeling from last month's 35% price retreat, which came after authorities in China moved to put fresh scrutiny and clamps on the cryptocurrency industry.

“Crypto is seen as a way of hedging against political turmoil, but it will need to reach critical mass. El Salvador’s move is unlikely to counter China’s given its relative size,” Santiago Espinosa, strategist at the independent investment research firm MRB, said in an interview.

El Salvador has a gross domestic product of $27 billion versus Argentina's $445 billion or Brazil’s $1.8 trillion. China's GDP was $14.2 trillion in 2019, according to the World Bank.

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Bitcoin prices have barely moved since Saturday's announcement by El Salvador's president.

On the margin, the El Salvador bitcoin news might have helped to offset some of the bearishness in the market, according to Edward Moya, senior market analyst at Oanda.

“Bitcoin did not rally much on the news, but it did help counter some of the negative flows that stemmed from deepening China crackdown concerns,” Moya told CoinDesk in an email.

Other analysts pointed to bitcoin’s inefficient use as a medium of exchange as a reason for the lack of market enthusiasm following Bukele’s announcement.

“What El Salvador needs is a U.S. dollar-pegged stablecoin with low transaction costs and low latency, given their native currency is already pegged to the U.S. dollar,” wrote Campbell Harvey, professor of finance at Duke University’s Fuqua School of Business, in an email to CoinDesk.

“There are major obstacles both to making it work in a country with no functioning foreign exchange market and, even more importantly, getting the population to adopt it,” wrote Frances Coppola, columnist at CoinDesk.

Coppola pointed to other nations such as Venezuala where citizens often use digital U.S. dollars via payment apps such as Zelle versus bitcoin for everyday transactions.

Catalyst for adoption

Still, others viewed the El Salvador bitcoin move as another signal for the cryptocurrency's mainstream acceptance, which could be bullish for BTC over the long term.

“People can use bitcoin to reduce their tax liability with the government of El Salvador, creating a fundamental use case for bitcoin,” Ariel Zetlin-Jones, associate professor of economics at Carnegie Mellon University’s Tepper School of Business, wrote in an email to CoinDesk.

When Zap's Jack Mallers, on stage at the Bitcoin 2021 conference in Miami, introduced the video where Bukele made his announcement, Mallers described the move as "one small step for bitcoin."

"It's just another node on the network," he said. "But it's a giant step, and a giant leap, for humanity."

Longer term, according to Espinosa, there's the prospect that other emerging-market nations might follow the country's lead.

“Developing countries are way more prone to legitimize cryptocurrencies with a similar political backdrop,” Espinosa said.

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