blind seedlings are common, just poor genes - a bother if you only have one seedling though.
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Could try leaving it on over night with a max/min to see what it gets up to/down to.
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Watch out for compost that has been sitting out in the weather for too long - especially over winter. We have problems with such compost.

Chillies like an open soil - grit/perlite helps - and they seem to prefer loam-based rather than peat-based (a pH issue probably). We usually answer the 'how often to water' question with 'if in doubt, don't'. It's more about keeping them from drying out than keeping them wet enough. For this reason it is much better to move the plants on in pot size gradually - put a small seedling in a large pot if overly wet soil, and that may be the end of it. If you think the root may have had a set back due to a certain amount of drowning, you could try re-potting into a free-draining mix.

Cheers, Steve.
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