El Salvador Makes History with New Bitcoin Law
Bitcoin experienced notable price fluctuations over the span of only a few months in the first half of 2021, even considering that volatility is built into its design as a nascent asset class.
Although bitcoin reached an all-time high in April of $64,829.14, by June 8 it had dropped by almost half. Looking at bitcoin’s value over the entire preceding 12 months, however, its price still remained up by more than 230 percent. The continued interest is driven largely by growing confidence on the part of big corporations such as Elon Musk’s Tesla, and by institutional investors generally.
El Salvador makes it official
One country had enough confidence in the world’s best-known cryptocurrency to officially make it legal for use in all transactions. On June 9, media reported that El Salvador became the first nation to pass legislation declaring bitcoin to be legal tender within its borders. The so-called Bitcoin Law cleared the small Central American nation’s congress with a strong majority, with 62 of 84 legislators voting in favor.
The new law allows citizens of El Salvador to pay their taxes in bitcoin, and merchants can display prices in bitcoin. Additionally, bitcoin will not be subject to taxes on capital gains. Within days of the passage of the law, even small neighborhood stores in the economically distressed country were posting signs saying they accepted payment in bitcoin.
Shortly after El Salvador’s vote, the price of Bitcoin rose to $34,239.17, an increase of 5 percent.
But is it viable?
Critics noted that it remains undetermined exactly how El Salvador’s government will be able to roll out use of bitcoin in the real world. Based on bitcoin’s history of mercurial price fluctuations, there are still plenty of experts who doubt its stability as any type of approved national currency over the long term.
Before the new law, the only current official currency of El Salvador was the United States dollar. The country’s Bitcoin Law provides that the exchange rate between the cryptocurrency and the dollar will be “freely established by the market.”
A geothermal edge
Furthermore, El Salvador plans to mine bitcoin using geothermal energy from volcanoes. Only hours after the Bitcoin Law was passed, President Nayib Bukele ordered the state-owned geothermal energy company to come up with a plan for using geothermal energy to facilitate bitcoin mining. El Salvador and its neighbors have recently focused heavily on developing their geothermal power, given the region’s hundreds of volcanoes.