Local business accepting bitcoin payments in El Salvador Alex Pena/Anadolu Agency via Getty Images
JPMorgan stated that El Salvador's bitcoin mandate was a "problematic experiment".
Analysts believe Tuesday's bitcoin crash was caused by market froth and not El Salvador's glitchy rollout.
JPMorgan explained that bitcoin will not be able to replace the dollar as the currency of the country.
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According to JPMorgan analysts, El Salvador's bitcoin mandate may be a "problematic experiment" but its slow roll-out will not harm the market long-term.
Protests, technological problems, and a 17% drop of bitcoin's value were all part of Tuesday's protests against the country's official adoption of cryptocurrency as legal tender. The difficulties are more indicative of the country's rush to adopt cryptocurrency as legal tender, and less about future uses of crypto, according to JPMorgan analysts.
"El Salvador's poorly-conceived experiment should not be seen as a threat to the future of cryptocurrency or bitcoin," analysts said. Analysts said that although crypto markets were affected by El Salvador's glitches, it was a temporary setback.
Analysts also explained why cryptocurrency is unlikely to replace the dollar or even be equal with it as a currency of El Salvador.
JPMorgan stated that Bitcoin is too volatile for use as a currency. It is also difficult to use as a store of value or unit of account because it isn't backed by any government.
Analysts stated that few goods and services can be negotiated or priced in bitcoin terms, while bitcoin is itself priced in dollars. "While merchants and retailers in El Salvador will accept bitcoin prices and list them in bitcoin over time, prices will fluctuate greatly depending on the bitcoin price in dollars."
If El Salvador were to succeed, it would have more bitcoin transactions. Also, Salvadorans may hold bitcoin as an alternative to gold and a store of value.
Analysts also stated that bitcoin's 21 million-dollar fixed supply will lead to a deflationary system which is not sustainable for most economies.
Due to its limited supply, bitcoin's "buying power" would naturally rise over time. Therefore, the price of goods or services in bitcoin terms will fall. They stated that in such an economy, economic agents would be more inclined to save than spend currency.
The experiment's dependence on Strike, a payments network that is an extra layer on the Lightning Network, may pose privacy and security risks that could outweigh any reductions in transaction costs.
Finally, El Salvador's $150 Million Government Trust in Bitcoin to guarantee immediate conversion to dollars may not suffice if citizens decide to sell bitcoin in large numbers, they said.
Analysts stated that "despite the above difficulties, the El Salvador experiment was undoubtedly an important moment in cryptocurrencies and payment systems mainly in terms of lessons to be learn about the application of real life and a lesser degree in terms investors' sentiment towards cryptocurrency."
