El Salvador’s gamble on Bitcoin: Much too dicey

What is the news?

El Salvador became the first country to adopt Bitcoin as legal tender. But the launch was marked by Chivo app (state-backed wallet app) glitches and crash in the Bitcoin price.

This shows the volatility associated with Cryptocurrency is real and the adoption of Bitcoin as the official currency can turn out to be disastrous in the future.

What benefits El Salvador expects?

Its recent decision is based on potential benefits, like

Savings on remittance fee: By embracing an online currency that costs nothing to transfer across borders, El Salvador expects annual savings of $400 million on remittance fees.

Financial inclusion via digital wallets was another goal: Chivo gets preloaded with $30 of Bitcoin every year by the state. A kind of universal basic income.

What are the risks associated with El Salvador’s recent decision?

The problem with El Salvador’s adoption of costless digital payments is its choice of instrument.

Limited supply and high volatility: Bitcoin is limited in supply, which makes it a store-of-value rather than a good means-of- exchange. As its demand rises, so does its conversion value, and vice-versa; and thanks to speculation, high volatility is assured.

China’s potential crackdown on miners: Should China crack down on the carbon exhaust of Bitcoin mining, for example, crypto markets will face another crash. For transactional use, however, a currency’s stability is crucial. 

El Salvador’s move was brave, but the recent crash was only one among many and definitely not the last.

Source: This post is based on the article “El Salvador’s gamble on Bitcoin: Much too dicey” published in Live Mint on 9th Sep 2021.

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