According to analysts from JPMorgan, the adoption of Bitcoin by El Salvador, might not be the best decision stating the issues of price volatility and also hesitation of the policy by the populace.
According to a team from JPMorgan Chase & Co., El Salvador’s proclamation of Bitcoin as legal tender could pose issues for both the country and the cryptocurrency.
Bitcoin trade volumes typically reach $40 billion to $50 billion per day, but the majority of that is internalized by big exchanges, according to a JPMorgan analysis released on Thursday by Steve Palacio, Joshua Younger, and Veronica Mejia Bustamante.
A major percentage of Bitcoin is stored in illiquid entities, with more than 90% of it not changing hands in more than a year with a “significant and growing fraction held by wallets with low turnover,” they added.
According to the report, daily payment activity in El Salvador would account for 4% of recent on-chain transaction volume and more than 1% of the total value of tokens transferred between wallets in the previous year, with the illiquidity and nature of the volume “potentially a significant limitation on its potential as a medium of exchange.”
El Salvador’s President Nayib Bukele’s desire to make Bitcoin legal cash has sparked a flurry of debate about whether it’s a good idea and what the consequences might be.
Bukele, who is 39 years old, believes that Bitcoin would assist the country to overcome its low banking penetration rate and reduce the cost of sending remittances.
However, the International Monetary Fund, which is now in talks with El Salvador regarding its lending program, is one of those who have questioned such logic.
Even many Bitcoin supporters admit that, while it may be argued that Bitcoin is a decent store of value, its utility as a payment system is limited.
“Bitcoin is the most inefficient payment method ever devised. In a recent video interview, William Quigley, co-founder of stablecoin Tether and a pioneer in numerous parts of the cryptocurrency sector, remarked, “It’s bad.”
“Almost any token is a superior payment method than Bitcoin.”
Other obstacles to El Salvador’s use of Bitcoin as legal tender, according to JPMorgan:
- According to recent polls, there is considerable scepticism and hesitation about Bitcoin as a medium of exchange.
- In a monetary system with official dollarization, Bitcoin’s extreme volatility offers a particularly significant difficulty.
- There is a chronic demand/supply imbalance for Bitcoin in the United States. Dollar conversions on the government platform could “cannibalize onshore dollar liquidity,” posing fiscal and balance-of-payments risks in the long run.