El Salvador’s Bitcoin announcement might create challenges for both the nation and the cryptocurrency itself, according to a group at JPMorgan Chase & Co.

Bitcoin volume usually exceeds $40 billion to $50 billion each day, but most of this is internalized by top exchanges, said analysts from JPMorgan in their report. A large part of Bitcoin is kept in illiquid entities, with over 90% not moving hands in over a year — with a “rising and significant fraction kept by wallets with low turnover,” they said.

“Daily payment movement in El Salvador would be ~4% of recent on-chain volume and over 1% of the total tokens which were transferred between crypto wallets in the previous year,” the report says, with the nature and illiquidity of the volume being “possibly a significant restriction on its potential as a means of exchange.”

President Nayib Bukele’s drive to make Bitcoin legal in his nation has created a wave of debate regarding whether it’s helpful and what the consequences might be. The 39-year-old leader has said that Bitcoin will help reverse the country’s low financial penetration rate and decrease the cost of sending remittances. But the IMF — which is speaking to El Salvador about the nation’s credit program now — is among the groups who have questioned this rationale.

Even many supporters of Bitcoin say that, while there is a good argument for it being a good store of value, its utility as a mechanism for payment is limited.

“Bitcoin is a terrible payment system. It’s the worst one ever invented,” said William Quigley, the co-founder of Tether and a founder of multiple parts of the cryptocurrency sector, in a new video interview. “Any other token is more effective than Bitcoin as a means of payment.”

Other challenges that JPMorgan sees for the nation of El Salvador’s use of Bitcoin as tender include:

Recent polls suggest great skepticism and hesitance about using Bitcoin as money.

Bitcoin’s greater volatility gives a large challenge in a bimonetary system with official dollarization

An ongoing imbalance of demand for Bitcoin and dollar conversions on the official government platform might “eat onshore dollar liquidity” and then introduce a balance of payments danger.

Author: Blake Ambrose

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