El Salvador fascinates world with Bitcoin move, but cryptocurrency's volatility risk udercuts charm

After the El Salvador move, countries like Argentina, Brazil, Panama, and Paraguay have also endorsed the move on social media

FP Trending June 10, 2021 21:11:53 IST
El Salvador fascinates world with Bitcoin move, but cryptocurrency's volatility risk udercuts charm

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El Salvador might not have a currency of its own, but this tiny Central American nation scripted history when its Legislative Assembly approved the cryptocurrency Bitcoin as a legal tender in the country in a first such move for any nation in the world.

What happens to the US dollar in El Salvador

Although the US dollar will continue to be El Salvador's currency, the digital currency can be used in any transaction and any business will have to accept payment in Bitcoin. The exchange rate between the two currencies will be established by the market and all prices will be able to be expressed in Bitcoin - though for accounting purposes, the dollar will continue to be the currency of reference.

President Nayib Bukele said Bitcoin would increase financial inclusion, investment, tourism, innovation and economic development.

The government will promote training for people to be able to carry out transactions using Bitcoin as according to the country's economy ministry, 70 percent of Salvadorans do not have access to traditional financial services.

What El Salvador's move does to cryptocurrency

"According to experts, El Salvador’s move has changed the fundamentals of the bitcoin market. Moreover, the Latin American nation’s announcement is expected to address the concerns of many individuals. The most common objection that people had regarding bitcoin is its backing and volatility," a Mint report said.

India Today went on to call the El Salvadorian president the new 'godfather' of cryptocurrency over Tesla boss Elon Musk.

"Bitcoin gained popularity because it was backed by some prominent names including Elon Musk. It had a heartbreak moment last month when Musk announced that Tesla will not accept payments in Bitcoin and raised questions around the digital currency’s environmental concerns. Bitcoin has largely been on a slide and Bukele might be the new godfather it needs," the India Today piece said.

After the El Salvador move, countries like Argentina, Brazil, Panama, and Paraguay have also endorsed the move on social media.

According to a report in Business Indsider, "South American country Paraguay has become the second country to consider regulations that will be favourable towards the crypto business this week. First reported by Coindesk, Carlos Rejala, a Paraguayan Congressman is set to present a bill that will set favourable regulations for crypto mining and crypto exchange businesses that want to set up shop in the country."

What about India?

In India, the love for cryptocurrency is at a nascent stage but the government is not turning a blind eye to it.

"A lot of negotiations and discussions are happening around the cryptocurrency with the Reserve Bank of India. RBI will be taking a call on what kind of unofficial cryptocurrency will have to be planned and how it has to be regulated. However, we want to make sure that there is a window available for all kinds of experiments which will have to take place in the crypto world," Union Finance Minister Nirmala Sitharaan had said at the CNBC-TV18's IBLA townhall.

Cryptocurrency and safety quotient

While cryptocurrency may be creating a new buzz because of El Salvador, the risk factor in this digital currency terrain is immense.

Quoting the Basel Committee on Banking Supervision, a report in Business Standard said that "the banking industry faces increased risks from crypto-assets because of the potential for money laundering, reputational challenges and wild swings in prices could lead to defaults".

For those willing to invest in Bitcoin, investment analyst James Emanuel in Seeking Alpha gave a fair bit of warning in no uncertain terms.

He said, "In the first instance Bitcoin is so volatile that it could never be considered a safe haven 'risk-off' asset. Its volatility is off the scale compared to most other assets and this introduces a great deal of unwelcome risk."

Apart from volatility, investment cryptocurrencies also have other huge risks.

"Cryptocurrencies are currently unregulated by both governments and central banks. However, recently they have started to attract more attention. They are susceptible to error and hacking and there is no perfect way to prevent technical glitches, human error or hacking," said a CMC Market study.

"Cryptocurrency trading carries additional risks such as hard forks or discontinuation. You should familiarise yourself with these risks before trading these products.

"When a hard fork occurs, there may be substantial price volatility around the event, and one may suspend trading throughout if we do not have reliable prices from the underlying market," it added.

Bitcoin, the first decentralised cryptocurrency was created in 2009. Intended as an alternative to government-backed money, Bitcoin is based largely on complex math, data-scrambling cryptography - thus the term “cryptocurrency" - lots of processing power and a distributed global ledger called the blockchain, which records all transactions.

No central bank or other institution has any say in its value, which is set entirely by people trading Bitcoins and which has wobbled wildly over time.

With inputs from AP

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