Bitcoin prices are stabilizing. Don’t expect the calm to last.

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The time of dreams

Bitcoin traded slightly lower on Wednesday, leveling off around $ 46,400 after falling more than 9% in one of the worst sales since May.

The plunge came as El Salvador adopted the token as its official currency, becoming the first country to make Bitcoin (BTC) legal. This should have marked an important step for crypto, a threshold towards financial legitimacy. But this has sparked protests as citizens of the country fear they will be forced to accept the highly volatile currency.

Indeed, while El Salvador may not be the best test case, the first indications are that people are not ready to trade their US dollars (the other official currency) for Bitcoin. More than a thousand people protested in the capital, San Salvador, on Tuesday with a sign indicating that Bitcoin will bring more corruption and poverty, according to a Reuters report.

Part of the fear, of course, is that Bitcoin is not a stable currency if you can even call it that. Few other government backed fiat currencies lose 9% in 24 hours. Those who do are in countries torn by war or poorly managed. Many of these countries are dollarized as well, which means people do their transactions in dollars, like in El Salvador.

Still, some crypto proponents see El Salvador’s adoption of Bitcoin as a turning point. Matt Hougan, chief investment officer of Bitwise Asset Management, calls it a zero-to-one event. Before that, there was no country where it was legal tender, he says. Now there is one. And it’s like other inflection points that were zero-to-one changes as well.

He points out that Bitcoin got a big legitimacy vote in the hedge fund world after Paul Tudor Jones built a 2% stake for his portfolios in early 2020, sparking a wave of interest from other hedgehogs. funds. Another inflection point has been Microstrategy’s purchases for its balance sheet, a move that has led a dozen public companies to buy it for their cash, Hougan says.

It was early in Bitcoin’s life to be the primary transaction currency in any economy, he says. But if we look back five years from now, it will seem like an inflection point.

The leverage built into Bitcoin and other cryptos may be of more immediate concern to investors. Traders who buy Bitcoin futures, or who use small amounts of collateral to raise high stakes, may be forced to sell their positions or be automatically liquidated by the exchanges when the price plunges.

About $ 3.7 billion in long positions in crypto markets have been liquidated in the past 24 hours, including $ 1.3 billion in Bitcoin and $ 928 million in Ethereum, according to exchange data from Bybt. More than 150,000 traders have been liquidated in the past 24 hours, according to Bybt.

Open interest in Bitcoin futures has been rising for months, reaching nearly $ 20 billion in early September. It’s still below a peak of around $ 28 billion in April 2021, but it’s enough to cause cascading price movements.

None of this stops some bulls from predicting higher prices for Bitcoin. Standard Chartered Bank analysts released a Bitcoin Investor Guide on Tuesday, predicting that crypto will hit $ 100,000 by the end of 2021 or early 2022. Bank analysts structurally rate Bitcoin between $ 50,000 and $ 175,000.

As a medium of exchange, BTC could become the dominant peer-to-peer payment method for the unbanked world in a future cashless world, they write. Bitcoin is theoretically expected to be worth $ 120,000 in 2040, based on its decelerating supply relative to the growth in M2 US dollar money supply, they estimate. If institutional money managers allocate just 2% of global portfolios to crypto, demand could push prices up to $ 175,000.

Of course, Bitcoin and other cryptos have no intrinsic value, making valuation models more of an art than a science. Everyone’s guess is the next move in crypto. For the Salvadoran people, we can only hope that it does not fall again.

Write to Daren Fonda at [email protected]

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