September 7th should have had a big day in El Salvador. Today’s accomplishment will still be remembered, bitcoin price drop notwithstanding. The government announced plans to make the digital currency legal tender alongside the US dollar starting on September 7th. El Salvador went ahead with the project, making history in the process. The country is the world’s first to make bitcoin legal tender. Many saw El Salvador as the kind of news that would further prop up the bitcoin price. The world’s most popular cryptocurrency has been on a prolonged rally since July 20th, when it traded at just under $30,000. But what happened on Tuesday was another bitcoin and crypto bloodbath, the kind we’ve witnessed before. This time around, it’s not clear what caused the incredible $10,000 drop in price, but there are some explanations for the flash crash.
Bitcoin has been hovering around the $50,000 price mark for a couple of days, and Tuesday started better than expected. Bitcoin reached $53,000 per coin in early trading, a figure unseen since the mid-May crash that Elon Musk helped cause. The cryptocurrency has been losing value ever since then. China’s renewed interest in banning cryptocurrencies, including bitcoin mining, further fueled the plunge during the summer.
What caused the bitcoin price drop on El Salvador day?
By 4:00 AM EST on Tuesday, the bitcoin price was already losing value, reaching $50,000 again. The real crash started shortly after 10:00 AM EST. In two hours, Bitcoin dropped from $50,700 all the way down to $42,900. That was a nearly 16% drop, or $8,100 in value erased. In total, bitcoin lost almost 20% in the early hours of Monday morning, or just over $10,000.
Needless to say that the entire crypto market took the plunge alongside bitcoin.
Ask any crypto enthusiast, and they’ll tell you that the high volatility we’ve witnessed on El Salvador’s big day is a trademark feature of cryptocurrency trading. We see massive price swings regularly, and they go in both directions. But almost always, it’s the losses that shock people. And some traders keep getting surprised that it happens.
Unlike this year’s previous bitcoin price crashes, there’s no apparent cause in sight. Elon Musk hasn’t been trolling the landscape by either mocking bitcoin or propping meme coins like doge. And China hasn’t taken any new action against cryptos.
The combination of inexperienced traders playing in the same league as versed bitcoin owners might have initiated the crash. What followed was a textbook crash that we’ve witnessed before.
It’s the whales who won
A wave of support for El Salvador’s big bitcoin day appeared on social media in previous days. Some people were calling for all bitcoin enthusiasts to purchase $30 worth of bitcoin on September 7th to support El Salvador. We saw this movie before in early February when XRP supporters “organized” online to pump the price similarly to what they had witnessed with GameStop. But rather than going up as intended, the XRP price crashed 55% on the day everyone was supposed to be buying. That’s where the people who know what they’re doing usually come in. Crypto-savvy holders of XRP had probably sold the price pump back in early February, especially large holders known as whales.
On Tuesday, bitcoin whales might have done the same thing with the bitcoin price, partially ruining El Salvador’s big day. They probably sold the El Salvador news, likely looking to rebuy at lower prices. Sure enough, bitcoin has already recovered much of its losses.
The temporary losers are those who bought at the top early on Tuesday, and those who gamble on exchanges with over-leveraged positions. As for El Salvador, the country did purchase 400 bitcoins late on Monday. It lost tens of millions during the price swings early on Tuesday.
El Salvador just bought 200 new coins.
— Nayib Bukele 🇸🇻 (@nayibbukele) September 6, 2021
Speculation aside, we’ll never know for certain what caused the sudden price drop in bitcoin on Tuesday. As of this writing, the bitcoin price has somewhat recovered, trading at around $47,000, around 11% lower than it was 24 hours earlier.