JPMorgan says El Salvador’s Bitcoin Adoption Creates a Challenge for the Cryptocurrency

The banking giant points to strain on the largest network due to growing usage by El Salvadorians but fails to mention Lightning Network, which is actually being used and seeing its network capacity and the number of nodes and channels hitting new peaks continuously.

JPMorgan Chase says the declaration of Bitcoin as legal tender by El Salvador could create challenges for both the cryptocurrency and the country.

In its latest report from last week, a team from the banking giant pointed to Bitcoin’s usage in the country potentially straining the largest network.

The trading volume of Bitcoin commonly exceeds $40 billion to $50 billion per day, but most of it is internalized by major crypto exchanges, said the group. They further noted that a big portion of Bitcoin is locked up and illiquid, with more than 90% of the supply not changing hands in over a year.

A “significant and rising fraction held by wallets with light turnover,” they wrote.

Now, El Salvador has joined in, whose daily payments would represent about 4% of recent on-chain transaction volume and more than 1% of the total value of tokens transferred between wallets in the past year, wrote the JPMorgan group.

This, combined with the illiquidity, is “potentially a significant limitation on its potential as a medium of exchange,” it added.

However, what they fail to mention is that the majority of this daily transaction in El Salvador is happening on layer two solutions such as the Lighting Network, a scalable and cheap network built upon the Bitcoin blockchain.

The growing usage of the Lightning Network by the people of El Salvador has actually increased the capacity of the layer 2 solution to an all-time high of nearly 1,800 BTC, more than an 81% increase in the last year.

Much like its network capacity, the number of nodes and number of channels are also hitting new highs every day, currently at 22,661 and 55,278, respectively.

El Salvador President Nayib Bukele aims to help reduce the country’s low banking penetration rate and cut the cost of sending remittance through his Bitcoin initiative.

Meanwhile, besides the limited utility of Bitcoin as a payment mechanism, JPMorgan sees Bitcoin’s high volatility as a large challenge to this adoption.

A persistent imbalance of demand for BTC and USD conversions on the government platform could “cannibalize onshore dollar liquidity” and eventually lead to fiscal and balance of payments risk, they added.

JPMorgan also mentions the recent survey, which suggests high skepticism among the country’s citizens to this decision as a challenge to El Salvador’s adoption of Bitcoin.

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