Earlier this month El Salvador made headlines by being the first country to officially accept Bitcoin as legal tender. This would seem like a great thing for the overall value of Bitcoin, but strangely the price dropped 10% on the announcement.
For many Bitcoin investors an event like this would seem like the ultimate proof of concept that the cryptocurrency has a permanent place in world finance. However, many challenges still remain for widespread adoption acceptance of the currency even after hitting this milestone.
First, there is still the volatility. The government of El Salvador has mandated the acceptance of bitcoin as tender, but also allows for the exchange of bitcoin into USD freely for businesses so that they are not forced to hold the cryptocurrency. So, although merchants must take payments in Bitcoin, prices will still be set in dollars. This makes sense unless you want $500 cheeseburgers when bitcoin’s price jumps around, and acknowledges that fact that the currency is far too volatile set prices in. The country did state that their main reason for making this transition is so that it is easier to send money made in other countries back to El Salvador to be spent.
The other issue that Bitcoin has with world adoption is that China is firmly on the other side of this issue. They have been making headlines all summer for not only saying that they will not accept the currency, but for shutting down businesses who were making software to facilitate it.
As far as becoming a global currency, China’s actions as exporter of 15% of world goods and home to 1.4 Billion people are a much bigger deal than El Salvador’s currency acceptance for their country of 6.5 million. If China and other countries won’t accept it, Bitcoin will still need to be exchanged to be spent there which kind of defeats it’s whole value proposition and will always put Bitcoin in the context of what it’s worth in another currency.
While El Salvador’s move may be a drop in the bucket for the price of Bitcoin, it did force the World Bank to take its first serious look at implementing it as legal tender and will be a case study for developing nations to see if its acceptance helps with their global commerce efforts. It will be interesting to see if any other countries follow suit and how that could affect Bitcoin’s price stability going forward.
Even though El Salvador accepts Bitcoin as currency, it still just feels like a more convenient way of transferring value in US Dollars and as long as dollars define its worth, Bitcoin’s status as a stand-alone currency is questionable at best.