El Salvador’s gamble on Bitcoin

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