El Salvador's bitcoin move puts best, worst crypto impulses on display

·Editor focused on markets and the economy

Wed, Sep 8, 2021, 2:07 AM3 min read

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Wednesday, September 8, 2021

A country's embrace of bitcoin puts 2 competing crypto visions on display

Tuesday marked what one observer called the “start of a new world,” as El Salvador officially became the first country to accept bitcoin as legal tender.

The eagerly anticipated move is a big test of cryptocurrency's staying power, and foreshadowed what could lie in store for other countries, namely Panama, as more economies adapt to the suddenly hot global cryptocurrency movement.

“I believe this is a threshold moment in the evolution of digital currency and that it ushers in the start of a new world as we can expect more nations, especially those with developing economies, to follow El Salvador’s historic lead,” said Nigel Green, founder and CEO of deVere Group, a financial advisory firm.

Green’s remarks echoed those of Cathie Wood, an irrepressible bull who runs Ark Invest. She's exposed to the crypto market via levered stocks like Coinbase (COIN) and Square (SQ) in her various innovation focused exchange-traded funds (ETFs).

In an interview with Yahoo Finance Live last week, Wood declared that crypto will usher in “a new global monetary system. It's a rules-based monetary policy, which is completely decentralized and therefore is not subject to the whims of policymakers."

She added that crypto is “a hedge against the whims of policymakers, especially in emerging markets.”

Despite El Salvador’s move and Wood’s bullish endorsement, crypto couldn’t quite outrun its reputation as a highly volatile asset. The duality is best encapsulated by what one El Salvadorean entrepreneur told The Wall Street Journal: “My mother believes that bitcoin is a thing of the devil, but bitcoin has a lot of advantages."

Indeed. Quicker than you could say “Chivo”, bitcoin revealed its devilish side, tumbling below $50,000 and swooning over 17% intraday as some long positions got liquidated en masse. El Salvador's electronic wallet also suffered first day glitches that temporarily disabled the technology.

The sell-off also weighed on newcomers like Solana (SOL1-USD) and Cardano (ADA-USD). Both are quickly becoming two of the hottest tickets in crypto investing, as Yahoo Finance’s David Hollerith highlighted earlier this week — but Cardano posted a double-digit drop in Tuesday's whipsaw trade.

In fact, Wood’s comment exposed the central paradox at the heart of Tuesday’s active day in crypto markets. If you’re an investor that embraces digital currency based on its decentralized appeal, is it really constructive to have a central government (especially one with the checkered past of El Salvador’s) act as a major market player?

Bitcoin’s inexplicable reversal also underscored an element that Barry Bannister, Stifel’s chief equity strategist, emphasized on Tuesday. Speaking to Yahoo Finance, he called the digital currency a “speculative asset” that's light years from being a safe-haven like gold (GC=F), the U.S. dollar or the Japanese yen (JPY).

“Bitcoin is an asset that moves with global liquidity,” and waxes and wanes with global money supply growth, which has been declining since March, Bannister explained. He enumerated reasons like a Federal Reserve that may start tapering stimulus, a tightening of monetary policy by China, and a surge in COVID-19 infections that will feed flight-to-safety bids for safe-havens.

“When all of that hits, bitcoin, being a spec asset, is just going to plunge” — perhaps as low as $15,000, he said. ”I think it’s going to be a terrible performer by year-end.”

By Javier E. David, editor at Yahoo Finance. Follow him at @Teflongeek