Bitcoin's hasty retreat from $50,000 in the wake of El Salvador's widely publicized move to allow the digital coin to be used as legal tender left many in the marketplace scratching their heads.

In whipsaw trading on Wednesday, Bitcoin (BTC) was down by nearly 2% on the day, though off its steepest declines of the day. Since hitting its Mid-July low of $29,000, Bitcoin has rallied, hitting nearly $53,000 early Tuesday morning before plummeting to a low of $45,000.

As investors mulled a "flash crash" that washed out an estimated $3 billion to $4 billion worth of long positions in offshore trading, some discounted the impact of El Salvador, which suffered glitches upon the rollout of its electronic wallet.

"I don't think it had anything to do with El Salvador," Celsius Network CEO Alex Mashinsky told Yahoo Finance Live in an interview, citing technical resistance and "flash liquidation" from traders that resulted in billions in selling.

"Most of this volume has been on offshore exchanges, it has nothing to do with El Salvador. It's just a coincidence," he added, dismissing the idea of a sentiment shift. Mashinsky predicted a retest of levels above $53,000 that could carry the unit as high as $160,000 by next year.

Bitcoin drop: 'I get a little scared'

Whatever the cause, bitcoin's unexpected swoon caught many off guard, with the momentous occasion of the first sovereign power to accept the digital currency as legal tender expected to give it added credibility — despite its obvious volatility.

The country's government purchased more than $25 million in BTC, installed hundreds of Bitcoin ATMs — and launched its own digital wallet that goes by "Chivo" (slang for awesome or cool). Social media users across the world even bought $30 in bitcoin as a sign of support, and perhaps in anticipation they might enhance a price swing.

Unfortunately, any potential goodwill or positive impact from El Salvador's crypto-friendly adoption was swamped by leveraged bitcoin selling. A steep price drop may have been a sign of too much leverage on derivatives traders hoping for the price to swell.

A total $1.2 billion liquidation in levered long positions occurred just before noon on Tuesday according to exchange data aggregated by The Block.

“When you see such a huge asset drop almost ten percent in an hour, these are the days when I get a little scared,” Gabor Gurbacs, director of digital assets strategy for VanEck, the ETF and mutual fund provider.

“In light of a lot of Bitcoin getting liquidated [on Tuesday], the price volatility is not very good for El Salvador,” Gurbacs continued.

In the bond market, El Salvador’s sovereign bond has also sold off —driving up borrowing costs — since the International Monetary Fund and the World Bank expressed opposition to the new law, which was hastily announced in June.

After a brief rally in August, El Salvadorian bond prices recently dropped by 5 cents, to 87.6 cents on the dollar, according to Bloomberg data. This sell-off comes from uncertainty triggered by the International Monetary Fund’s refusal to service its requested $1.3 billion loan.

Because of bitcoin’s high volatility, Gurbacs expects that most of the country’s citizens will still use U.S. dollars to do most of their transactions.

Beyond the head-spinning price action, the analyst expressed concern about whether the hurried law will enforce legal action on businesses who still cannot readily accept bitcoin, and about the technological learning curve most Salvadoran business operators must now face when trying to accept bitcoin for the first time.

“These people have smartphones but not every business is comfortable with using a completely new monetary technology to run their enterprise after getting only a few months' notice,” Gurbacs explained.

Bitcoin as 'doomsday insurance'

Nonetheless, at least some Salvadoran businesses now accept Bitcoin. Tuesday morning, journalist Aaron Van Wirdum, posted a QR code after using bitcoin to make a purchase at a McDonald's in the capital city of San Salvador.

However, the irony of El Salvador's new reality was on full display: Van Wirdum did not use the government's Chivo wallet, and the purchase was made at a global food chain that has the resources adapt to cryptocurrency use with far greater ease than smaller, local businesses.

In fact, the latter constituency has been the most vocal locally, with anti-bitcoin protests springing up around the capital city.

Still, proponents of the initiative remain optimistic that adopting cryptocurrency can help enhance the wealth of the impoverished country. They believe crypto companies can offer more inclusive banking services to its population — 70 percent of which don't own bank accounts. For example. Bitcoin is also seen offering a potential boost to El Salvador’s economy, via cross border remittance fees close to zero.

That idea would be pivotal for a nation that earns 24 percent of its gross domestic product from remittances. But the full measure of El Salvador’s new law will take several months to untangle, especially after technical glitches and a rushed rollout.

“Will the educational efforts be effective? I know most Salvadorans have phone and can use bitcoin, but will they? Will we see families start to send value from abroad,” asked Alex Gladstein, Chief Strategy Officer for the Human Rights Foundation.

A human rights advocate and Bitcoin proponent, Gladstein told Yahoo Finance that while the country could see gains from the bitcoin law, any benefits might also be undermined by the current administration’s efforts to clawback elements of the democratic process. Since his election two years ago, El Salvadorian President Nayib Bukele has taken control of the country’s supreme court, and managed to bypass the limits to presidential re-election.

However, Celsius Network's Mashinsky argued that bitcoin "is effectively a doomsday insurance policy," Mashinsky said. "It's the best insurance policy you can buy because it has scarcity, because no matter what government or law is enacted, there's not going to be ever more than 21 million bitcoin."

David Hollerith covers cryptocurrency for Yahoo Finance. Follow him @dshollers.

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