Does the trader Bukele want to average down?

The prices in the crypto asset market have suffered significant pressure during most of this 2022. It is worth mentioning, their setbacks far exceed those experienced by the prices of other risk assets. Affected by various factors, it would be more reckless than ever to speculate on them.

Speculative purchases of Bitcoin (it could hardly be called an investment) made with capital from Salvadorans by the President of El Salvador, Nayib Bukele, have fallen by more than 50 percent. He has made 10 acquisitions so far: the largest, of 420 tokens for $59,000 each, loses more than 60 percent.

The price of Bitcoin, which seemed to be looking for a new bull run at the end of 2021 (with the big banks even predicting increases above 100,000 dollars), is less than 30% of what it came to trade in its all-time high in November. From 69,000 dollars it is bought at 20,500 with a drop of 70.30 percent.

Bukele sticks to his bet, although the outlook is not encouraging for cryptocurrency holders. The high correlation that this market has shown with the direction of the stock markets suggests that there is still a long way to go on the path by which the so-called digital currencies rush without support to trust.

The high inflation in the world, caused by factors such as the return to activities after the confinements due to Covid and the war between Russia and Ukraine; the less encouraging forecasts for the global economy, and the rises in interest rates are factors that maintain great pressure on the markets.

But despite the fact that the end of this context still seems far away and that with his operation he accumulates a loss of more than 54% according to the site, Bukele has asked again on his Twitter account, very much in the style of Tesla Inc. mogul Elon Musk on whether he should acquire more Bitcoin.

This question was asked in response to a Bitcoin Magazine comment that mentions that the drops in Bitcoin in El Salvador (which today is close to 50 million dollars) represent only 0.05% of the national budget. “Do you mean I should buy more Bitcoin?” the Salvadoran leader responded.

Beyond the responses, positive and negative, that the president received to the comment, this shows that Bukele is far from backing down or regretting making his nation the first to make Bitcoin legal tender. He thinks that the price will go up again and he feels comfortable in his positions.

average down

A new acquisition of Bitcoin by El Salvador would enter into the strategy known in the markets as averaging down. Downward averaging is what some traders do on the stock exchanges when they buy an asset because its price is going down, but its trend remains and continues to fall.

Far from selling, the trader who averages down in a stock increases his position and seeks to reduce the average price of purchases so that a future rally allows the losses from his initial mistake to diminish, disappear or even turn into profits. . But it is something that needs to be nuanced.

Investors who average down usually do so with shares of companies that distribute dividends (a quota of money that the issuers distribute periodically and sometimes in an extraordinary way, for each title that is owned). This makes the portfolio suffer less if the asset continues to decline.

But even in these cases, investors should investigate whether the falls in their share price are due to temporary circumstances or structural issues such as going into default with their creditors. In those cases the dividends could be reduced or disappear; a bankruptcy could bring the stock to zero.

For Octavio Pacheco, analyst and participant in the cryptoactive market, using the downward averaging strategy would not be the most recommended in Bitcoin “because there are no dividends or other advantages to keep you in the fall. In addition, it is very likely that it will continue to fall until there are more certainties.”

“As long as a recession is not declared or avoided, we cannot think of hitting a bottom. The price could easily break below $20,000 and yes, bounce similarly as before. The problem for Bukele is whether when he recovers his prices he will have won the race against inflation,” he said.

By keeping the US dollar as its legal tender, inflation in El Salvador correlates with prices in the United States. As of May, US annual inflation was 8.6%, the highest in 40 years. The data not only puts pressure on the Fed and Wall Street, but also on Nayib Bukele.

El Salvador has $3.65 billion in reserves, according to DBRS Morningstar, an outstanding marketable debt of $7.65 billion. In January, a payment of 800 million dollars is due, on a bond at 73.5 cents on the dollar with a rate of 67.6%, there are doubts about how he plans to pay his debt.

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