El Salvador’s big Bitcoin experiment boomerangs on its bond market

"Bond Market Wall Street Sign" by investmentzen (licensed under CC BY 2.0)
“Bond Market Wall Street Sign” by investmentzen (licensed under CC BY 2.0)

Key Takeaways:

  • El Salvador’s Bitcoin launch had a rocky start.
  • The country’s move to adopt Bitcoin caused bond yields to spike.
  • Meanwhile, BTC prices are moving horizontally above immediate support.

NEW DELHI (CoinChapter.com) — El Salvador’s rocky start to its Bitcoin experiment also seems to have affected the country’s bond markets. On September 7, the Central American nation legalized Bitcoin as legal tender. However, technical glitches marred the launch, resulting in a Bitcoin flash crash, aptly named the ‘El Salvador Selloff.

However, it looks like emerging market bond investors don’t like the decision as a report published by Bloomberg reveals the yield curve on El Salvador’s bonds has inverted. It means bonds with short-term maturities are now yielding more than long-term ones.

Meanwhile, BTC is moving horizontally near its immediate support after September 7’s rout that saw prices fall to $43,000. Yet, billionaire crypto bull Mike Novogratz believes Bitcoin is a digital asset that is a store of value in the long run.

Salvador’s Bond Issues

El Salvador’s rocky launch of its Bitcoin experiment led to the flagship cryptocurrency’s flash crash. The Bitcoin selloff might be a reason that spooked the emerging bond market. In detail, developing countries issue emerging market bonds as debt instruments that tend to offer higher yields than treasuries or corporate bonds in the U.S.

Yields on El Salvador's bond. Source: Bloomberg.com
Yields on El Salvador’s bond. Source: Bloomberg.com

Another reason for the spike in yields could be a decision by one of El Salvador’s top courts that a sitting president could run for a second term, a move that clears the path for President Nayib Bukele’s re-election. However, human Rights Watch criticized the decision as being undemocratic.

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President Bukele’s faced criticism when he fired Supreme Court judges and the Attorney General in May. However, the country’s bonds began moving towards inversion in June, when the government passed its Bitcoin law.

El Salvador slipped on the first day of its new Bitcoin law. The bond market reaction is an unwelcome sign that the wide use of Bitcoin may have major implications

Ben Emons, Strategist at Medley Global Advisors

Whatever the reason, El Salvador’s yield curve has now inverted, which means a bond with near-term maturities yields more than the ones due later. It shows that investors consider shorter-term debts as riskier with increased uncertainty of pricing things in the long term.

Bitcoin Is Down But Not Out

Meanwhile, billionaire Mike Novogratz, CEO of Galaxy Investment Partners and crypto enthusiast, believes Tuesday’s Bitcoin plunge resulted from investors getting too excited.

Mr. Novogratz pointed out that various fundamentals, including Visa buying an NFT and Amazon posting a blockchain and digital job opening, caused the cryptocurrency market to become overbought.

Also Read: Bitcoin will get back on its feet soon enough, experts claim

The former hedge fund manager was also optimistic about El Salvador’s Bitcoin rollout. In an interview with Bloomberg, Mr. Novogratz asserted that the technical glitches which marred El Salvador’s experiment launch would be resolved soon.

I guess the real question is, come back in six weeks or 12 weeks and let’s talk about how it’s working for the people of El Salvador and for the system itself. Doing things at scale is not easy. I have a lot of faith that they will get this right.

Mike Novogratz said.

The billionaire CEO said it would be difficult to predict the market’s position in the short-term range. However, he stated that Bitcoin is a store of value in the long term and has enough institutional support.

Bitcoin prices move horizontally on the daily price chart. Source: BTCUSD on Tradingview.com
Bitcoin prices move horizontally on the daily price chart. Source: BTCUSD on Tradingview.com

Bitcoin stays above its immediate support at $45,946, near the 200-Day (Green) Moving Average trendline. If the downtrend continues, BTC can find support at $44,020. Further decline would find support at $41,989.

On the other hand, once the downtrend reverses, bulls will target resistance at $48,222, where the 26-Day (Yellow) exponential MA acts as a dynamic resistance. Finally, in a sustained uptrend, BTC would find resistance at $50,042 and $51,472 price levels.

Bitcoin prices are currently bullish in the short-term ranges. At the time of writing, BTC was trading at $46,154, down 1.51% on the day.

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