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El Salvador’s gamble on Bitcoin

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September 11, 2021

Why in news?

The world's largest cryptocurrency, Bitcoin crashed from the highs of $53,000 amid El Salvador's rollout of Bitcoin as a legal tender. 

What are cryptocurrencies?

  • Cryptocurrency is a digital or virtual currency designed to work as a medium of exchange.
  • It uses cryptography to secure and verify transactions as well as to control the creation of new units of a particular cryptocurrency.
  • Examples of cryptocurrencies include Bitcoin, Litecoin, Ethereum, Ripple,etc.

What is the recent development in El Salvador?

  • El Salvador became the 1st country to accept Bitcoin as the legal tender besides US dollar
  • Businesses will be required to accept Bitcoin for exchange of goods and services, except the ones who are technologically incapable
  • But Bitcoin crashed the day El Salvador accepted it as a legal tender
  • Technical glitches on El Salvador’s official digital wallet, Chivo was also reported
  • The downtrend has swept the entire market off its feet affecting other leading altcoins such as Ethereum, Cardano and Dogecoin

What are the reasons for the crash?

  • The market was running strong over the last eight weeks and became overvalued that sent the market plunging
  • Volatility of the crypto  market
  • US Federal Reserve’s readiness to harden its easy monetary policy might lead to reduced interest rates
  • This could eventually decrease the liquidity in the system, making investors cautious of risky assets like cryptocurrencies
  • Reported instances of order failures
  • Cryptocurrencies lack intrinsic value that is required for survival of any commodity

What is India’s view on cryptocurrencies?

  • In a 2018 circular, the RBI had banned banks from dealing with virtual currency exchanges and individual holders.
  • But the Supreme Court lifted the ban in 2020 stating that the circular didn’t pass the ‘test of proportionality’

 

Source: Livemint, The Indian Express

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