Here's why Bitcoin crashed the day El Salvador accepted it as a legal tender.
As the market saw on Tuesday, Bitcoin appears to be taking two steps forward for every one step it takes. During El Salvador's difficult rollout of Bitcoin as legal tender, the world's largest cryptocurrency plummeted and burned from highs of $53,000.
While the market has subsequently recovered slightly, Bitcoin remains significantly below the psychologically important $50,000 barrier. As of 14:20 IST, the token was trading for around $45,832, after plunging as much as 17 percent the day before. It's currently down more than 10%.
The market has been swept off its feet by the slump, with tokens like Ether, Dogecoin, and Cardano trading at 11, 15, and 12 percent lower, respectively. Only, Solana managed to withstand the storm; at 8 a.m. IST, the coin was trading at $178, up nearly 3% in 24 hours. However, it has also dropped about 12% at the time of writing.
Users on social media networks such as Twitter and Reddit, according to some analysts, had anticipated the pullback.
"Over the weekend, social media platforms were quite wary of a drop following El Salvador's huge day," Edward Moya, a senior market analyst, told Bloomberg.
El Salvador, a small country in Central America, became the first to accept Bitcoin as a legal tender in addition to the US dollar on September 7. Tweeps and Redditors had planned to buy $30 worth of Bitcoin to commemorate the occasion. The day has been designated as Bitcoin Day.
Businesses all around the country will now have to accept Bitcoin as payment for their services. Businesses that are technologically challenged, on the other hand, will be exempt.
The first day of using Bitcoin as a currency was a rough one. It was primarily due to technical issues with Chivo, the company's official digital wallet.
Bitcoin was trading at a three-month high of $52,000 a day before El Salvador's big day, a number it had only once reached on August 23. The coin was near to hitting $53,000 on Tuesday morning, a level it hadn't seen since May 2021. However, around 5 p.m. Eastern time, it was changing hands for $46,700, a drop of about 10%.
While Bitcoin supporters all over the world appeared to show their support at the start of the day, by the conclusion of the day, they were off to make money. At least, that's what the experts say.
Some speculators may have purchased Bitcoin in anticipation of the country enacting its Bitcoin law, then moved to "sell the fact," according to Moya.
According to CoinGecko data, the crypto market worth has dropped by nearly $300 billion in the last 24 hours.
El Salvador maintained a steely exterior despite the downturn. Nayib Bukele, the country's president, stated the country had purchased the dip for approximately 550 Bitcoins.
Why did the market crash?
Analysts feel it was just a matter of time. Over the last eight weeks, the market has been robust and has become expensive. El Salvador's implementation could have been the final nail in the coffin that drove the market crashing.
Kevin Kong of crypto hedge fund BKCoin Capital told CoinDesk, "The market has been overextended for the last six weeks without any substantial pullback."
He believes the rally in cryptocurrencies is an indication of market frothiness. Bitcoin Cash, Litecoin, and EOS are examples of altcoins that "usually make their move towards the conclusion of the cycle," according to him.
The cryptocurrency industry was slowly rebounding from the shocks of May, when Bitcoin's price dropped nearly 50% to $30,000 for a brief period. However, since then, rising interest from huge institutions and corporations has prompted investors to rejoin the bandwagon.
Other elements, though, are at play. Because it lacks economic underpinnings that may support its value, the crypto market is a volatile market.
Several analysts say the market is sensing the Federal Reserve, the United States' central bank, preparing to tighten its monetary policy. Reduced interest rates may reduce liquidity in the system, making risky assets like cryptocurrencies less appealing to investors.
Order failures were also reported by several traders. Coinbase, a cryptocurrency exchange, announced late Tuesday that it was looking into partial outages that were causing order failures. Another crypto exchange, Kraken, had experienced some payment delays due to problems with banking purchases.