What will be linked to the introduction of bitcoin in El Salvador? Dollar, says JP Morgan

In a research report released last week, JP Morgan analysts listed some potential problems with El Salvador’s plans to make Bitcoin its second official currency.

The dollar, the first official currency, turns out to be a big problem-at least according to Global Investment Bank analysts.

If local government can’t bolster infrastructure, BITCOIN probably won’t match the dollar very well as a way to send bank transfers, says JP Morgan. Citing a new Johns Hopkins University study, the bank notes that the cost of transfers in bitcoins is “almost double” the cost of similar transactions in US dollars, although it acknowledges that these figures can be overly pessimistic.

It’s not a small problem. The country is heavily dependent on remittances, usually in U.S. dollars; according to the World Bank, such remittances accounted for about 24% of El Salvador’s GDP in 2020.

JPMorgan struggles to find “tangible benefits” for El Salvador’s bitcoinization
A complicating factor is el Salvador’s transition from colon to dollar in 2001. Researchers believe dollarization in a two-year system makes the country more susceptible to price fluctuations. And bitcoin is already a volatile Sunday. 

JP Morgan has noticed several other shortcomings in El Salvador’s plan to make bitcoin a legal tender, including the blockchain’s failure to make new payments “on the chain” and high fees for every transaction on the bitcoin network. As the price increases and total bitcoin trading increases, so does the cost of using the blockchain.

President Nayib Bukele said Salvadoran traders would have to accept bitcoin along with the US dollar, but as the bank pointed out, bitcoin is a formidable medium of exchange. Much of the current bitcoin delivery has been”blocked in illiquid entities,”with”more than 90% not going hand in hand for more than a year.”

JP Morgan also points to the International Monetary Fund’s recent skepticism about El Salva

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