What JPMorgan is doing wrong with Bitcoin in El Salvador

JPMorgan analysts have shared their views on the adoption of Bitcoin as a legal currency in El Salvador, Market Insider reported. The bank presents the step as a “problematic experiment” which demonstrates a high principle of time preference and a profound lack of understanding of Bitcoin and its incentives.

“El Salvador’s ill-conceived experiment shouldn’t be critical to the future of bitcoin or cryptocurrencies,” the analysts said. “Crypto markets suffered from the El Salvador mishaps this week, but that was against a frothy backdrop.”

Volatility? That’s old news, JPMorgan

The analysts also explained why, in their opinion, Bitcoin is unlikely to replace the dollar or even offset it as a parallel currency in El Salvador. JPMorgan claimed Bitcoin was unsuitable for use as a currency because of its high volatility and the fact that it is “not backed by anything”.

However, JPMorgan fails to understand that the volatility is inherent in Bitcoin’s current early phase of adoption. It is important to remember that the peer-to-peer money web was only created over a decade ago and has only recently become a widely accepted store of value. El Salvador’s move is a leap into uncharted territory, bringing promising but nascent money to the fore to test its use as a legal medium of exchange in a country. With increasing global acceptance, volatility will decrease.

On the other hand, the claim that Bitcoin cannot be used as money because it is “not backed by anything” is the most deceptive argument of all as the US dollar isn’t actually backed by anything. The dollar is only supported by an artificial demand sustained by totalitarian governments in the Middle East that have pledged to sell oil in dollars and buy American bonds in exchange for military aid.

In contrast, Bitcoin is backed by a distributed network of Proof-of-Work (PoW) miners and validating peers, which allow BTC users to assign any value of value anytime, to and from anywhere in a trustworthy, permissive and peaceful manner make. No other monetary system in the world has this capability. For this reason, in Bloomberg’s words, Bitcoin may have “solved the age-old problem of a global reserve asset that is easy to transport and transactional, has 24/7 pricing, is relatively rare, and does not represent anyone’s liability or project.”

Bitcoin is not yet a unit of account, but that’s fine

“Few goods or services are priced or negotiated in Bitcoin terms, and Bitcoin itself is priced in dollars,” JPMorgan said. “While El Salvador retailers and merchants will accept and list bitcoin prices over time, those prices are likely to fluctuate widely based on the price of bitcoin in dollars.”

Traders will actually not list prices in BTC as it would be just insane if it were a developing monetary good at the beginning of its introductory cycle. Bitcoin can and is expected to take over the role of currency as a medium of exchange without and before the unit of account one is taken. But if adoption grows enough, then Bitcoin could be fit to become a widely accepted unit of account and take on all of the roles of money.

“In the best case scenario, El Salvador’s experiment would end with more transactions in Bitcoin, and Salvadorans also hold Bitcoin as a store of value and an alternative to gold,” the analysts claimed, according to the report.

Some of these arguments are correct. Bitcoin will actually see more transactions despite being abstracted into the Lightning Network, and Salvadorans will certainly use BTC as a store of value. However, you will also use it as a medium of exchange.

JPMorgan seems to be forgetting that nearly 70% of Salvadorans do not have a bank account and 25% of the country’s GDP comes from cross-border remittances. Much of the way these transfers are currently sent is lost as fees to intermediaries like Western Union. However, with Bitcoin, people can now opt out of centralized services to increase transaction efficiency and send more money home.

Greater savings and lower spending would not paralyze the economy

Bitcoin’s fixed supply of 21 million coins would create a deflationary system that “is unsustainable for most economies,” according to JPMorgan. “The purchasing power of BTC would of course increase over time due to the limited supply and therefore the prices of goods and services expressed in Bitcoin would fall over time,” the analysts said.

Although some mainstream economists suggest that inflation is necessary for an economy to function and thrive, this premise is highly controversial and far from an indisputable truth. Technology, for example, is inherently deflationary, as Jeff Booth argues in “The Price of Tomorrow”. So productivity gains and technological innovation should push prices down, but we are currently seeing the opposite due to mainstream monetary policies by governments around the world.

In either case, Bitcoin is not deflationary. Supply is limited, but inflation will exist until the last BTC runs out – which will happen in the 22nd century. There is a predictable money and issuance plan that reduces inflation every four years until the supply cap is reached.

Similarly, however, gold is also scarce, and the world worked pretty well on a gold standard. Or at least until the U.S. government took an urgent step to print excess cash to fund a war it couldn’t win. The action reversed the convertibility of the dollar to gold and triggered the petrodollar, which relies on totalitarian governments to buy US bonds to maintain demand for the imposed global reserve currency.

Either way, people wouldn’t stop spending altogether if they just used Bitcoin, but they’d actually be spending less. The obvious opportunity cost of spending now versus later would put pressure on them to increase their savings and reduce debt. But that shouldn’t necessarily be negative.

Society today is mostly driven by unnecessary spending, an action that is influenced by heavy marketing and driven by ever increasing quantitative easing and loose monetary policies by governments. In a Bitcoin standard, people would instead have incentives to save for the future, spend less on non-essentials, and be able to make more significant investments that could last for generations. Today’s wedding preference culture of senseless purchases and ephemeral ownership is, among other things, a product of the current incentive structure to borrow and spend instead of saving and investing.

Unlike the dollar, Bitcoin gives people freedom of choice

“In addition, the experiment’s dependence on the Strike payment network, which is an additional layer on top of the Lightning network in the Bitcoin blockchain, will bring security and privacy risks that can outweigh the reduction in transaction costs,” the report said.

Layer 2 solutions and some apps actually bring compromises compared to transactions in the Bitcoin base layer. Unlike the current monetary system, however, with Bitcoin, people have a free choice. Bitcoin gives the masses choice and allows each individual to freely choose between different options, taking into account their tradeoffs. Whether or not such compromises are worthwhile, however, should be left to the discretion of the Salvadoran people, rather than a bunch of suits in a Manhattan office.

In either case, users do not need to use Strike; They are free to choose the Lightning wallet of their choice to pay for the goods and services they want to buy. You can use your own nodes running anywhere in the world to trustworthy payments with your Lightning mobile wallet in El Salvador. Retailers can also use various tools, as McDonald’s uses OpenNode, for example. This is what freedom and empowerment look like.

The Salvadoran Trust’s liquidity problem

Finally, the El Salvador government’s $ 150 million trust in Bitcoin to ensure instant convertibility to dollars may not be enough if a downturn in crypto markets causes citizens to en masse Bitcoin for sale, ”JPMorgan added, according to the report.

The trust’s liquidity is a real risk. The trust could run out of cash to enable Bitcoin to US dollar convertibility and face some more serious problems. However, it is also up to people to decide what money to use. And in the long run, if the demand for bitcoin increases while the demand for dollars decreases, then trust may not be needed at all.

The bottom line is that Bitcoin, with its clear advantages over the dollar, has the ability to get many people to adopt it and prefer it over the green bills. Already a better store of value and with the clear potential to be a much better medium of exchange, Bitcoin could also become a superior unit of account in the years to come.

But that will be decided by the market – we can only control the incentives and properties of any monetary good, something the US government has not done well with the dollar.

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