El Salvador recently added Bitcoin as legal tender. In barely over a decade, an open-source, cypherpunk, radically new money system, with no publicly known creator and open to participation in both using and building from anyone in the world, has gone from zero value and branded as a tool for criminals to now being accepted by a government as a legitimate legal tender. To say this has been a wild ride is an intense understatement. Now, for the first time in history, a fully decentralized digital money is recognized by a state as being just as legitimate as said state’s own currency.
That being said, there’s some devil in the details of this otherwise wonderful announcement: The law specifically mentions Bitcoin (BTC) rather than cryptocurrencies as a whole and includes a government partnership with Strike, a payments company based around the Lightning Network, the primary off-chain scaling solution for Bitcoin. Because of the current scaling limitations of the first layer and the state of development of the second, this historic adoption could come with some headaches.
I’ve been using cryptocurrency for about eight years now, living unbanked off of them for five. I also run my own Lightning node, and as such can compare and contrast the relative experiences between Bitcoin and what other networks could offer. Let’s dive into why the Salvadoran experiment could move the whole crypto space forward, though possibly not in a Bitcoin-first direction.
Related: Adopting the Bitcoin standard? El Salvador writes itself into history books
Potentially hundreds of thousands of businesses are about to be forcibly onboarded. Rather than simply allowing and encouraging the adoption of Bitcoin, the new law in El Salvador specifically compels all merchants to accept it as payment:
“Every economic agent must accept bitcoin as payment when offered to him by whoever acquires a good or service.”
This compulsion will trigger a mass onboarding of new merchants to accept Bitcoin, whether they want to or not. This will result in hundreds of thousands of businesses, potentially more, seeking access to a network that already processes about that number across its entire ecosystem in a day. Imagine each merchant receiving a Bitcoin payment per day, doubling the number of transactions on a network that is already past capacity and creating a user-experience nightmare. Of course, the intent here is to use the Lightning Network to put as little activity on-chain as possible. However, even this may prove difficult. Here’s why, with a couple of different potential situations.
Related: An asset for all classes: What to expect from Bitcoin as a legal tender
First case: Businesses integrate Lightning directly
Let’s first imagine a case where a majority of businesses onboard to Bitcoin directly, using the network in a decentralized manner. On-chain fees fluctuate wildly but are frequently in the several-dollar range, if not higher. Even if customers are willing to pay those fees for smaller items, the merchant must pay those fees to move those funds eventually, incurring high fees (expected to be significantly higher after the additional pressure on the network). This is not a situation any merchant would likely appreciate.
A more likely scenario is that they onboard to the Lightning Network, which in theory can allow them to both receive and send small payments for sub-cent fees. In reality, its structure and complexity would pose significant initial onboarding issues.
To begin, using Lightning requires opening at least one channel, which necessitates an on-chain transaction. This, in turn, triggers the congestion and fee issues mentioned above, as well as maintaining the infrastructure online at all times. Additionally, one cannot receive funds without having them in a channel, meaning you need to either have someone lock up their own funds in a channel to you (which may necessitate payment), or you have to open a channel yourself to another node with your own money, then send that money through the channel to another source (such as making purchases, or to a separate wallet/node you control) in order to free up inbound liquidity.
In short, a business must either be technically competent and initially possess the number of funds that they expect to receive before they have to rebalance a channel, or they must pay a service provider. The amount of funding and technical know-how necessary to make this happen may seem doable by upper-class standards, but the chances that most merchants in a developing country can afford a Raspberry Pi and several dollars of extra startup capital just to receive Bitcoin are slim.
Second case: Businesses integrate via custodial solutions
Now, there’s a second case where businesses simply onboard to a centralized, custodial solution that settles in fiat currency directly to their bank account. This certainly solves many of the issues posed by direct exposure to the Bitcoin ecosystem, though not all, and additionally, it introduces new ones.
First, if a service like Strike actually does open Lightning channels for all users, then each new user onboarded represents one on-chain transaction. Even though this is fewer than in the previous case, this still represents X transactions or the entirety of Bitcoin’s on-chain capacity for Y days straight. And lest we forget, Strike itself needs to scale in addition to the network, and a fledgling company will certainly face growing pains when jumping to onboarding an entire country’s merchants. Does anyone remember the numerous times when exchanges like Coinbase have gone offline when faced with an influx of new customers? Imagine that, only worse.
Additionally, let’s not forget the entire reason this was thought of as helpful to begin with: Many Salvadorans are unbanked and have issues getting access to key financial services. A world in which most businesses accept Bitcoin through just those financial services faces the same challenges which prevented them from being included before. How many Salvadorans lack the necessary documentation to open a bank account? How will they be able to instantly convert to fiat currency without a bank account? Those problems will not only still be present under a mass adoption scenario, but they will be amplified by unfamiliar infrastructure and nascent services.
The likely scenario will be a mix of both cases, but predominantly the second. This will invariably result in a user experience and onboarding nightmare which, while exposing many more people to cryptocurrency, will cause a lot of them to come away with a negative opinion, and possibly seek alternatives.
Comparison with a key crypto payments competitor
Let’s take a quick look at what an alternative scenario might look like. I have the most experience with Dash since it’s what I use for my daily money, but any cryptocurrency with successful on-chain scaling — Bitcoin Cash (BCH) or Nano, if the latter solves its recent spam problems — should provide a similar, though not equivalent, experience. Because of Dash’s masternode network of incentivized nodes and emphasis on mass on-chain scaling, all transactions are finalized in under two seconds for a fraction of a cent. Any merchant can create a wallet at no cost, waiting period or stress to the network (unless they use custodial solutions and are at the mercy of the centralized architecture’s scaling concerns). Any user can easily download an app, receive DASH, and send it smoothly for a negligible cost, with the payment secured instantly without a realistic chance of failure. The merchant can then move those funds instantly, any number of times, also for fractions of a cent. Moreover, the DashPay username wallet leveraging decentralized digital identities, already publicly available on testnet, will soon make the experience even better by eliminating confusing and long cryptographic hashes.
Contrast this with Lightning, where every customer and merchant has to pay an on-chain transaction fee (and merchants must solve liquidity) in order to operate in a decentralized manner. When using centralized solutions, there must be a certain level of trust between each party to ensure that the perfect conditions to enable a relatively smooth experience are met. A major hub node going down, a spike in on-chain congestion, an influx of new users, or difficulties in a service provider maintaining profitability can all result in an inability to route payments, higher fees, long wait times, critical features turned off or service refused to customers altogether. And remember, all costs must ultimately be passed on to the consumer, meaning that the numerous variables, infrastructure and capital investment involved in running Lightning infrastructure at scale will be passed on to the end-user.
Bitcoin opens the door
How will this exciting new chapter in cryptocurrency’s history pan out? It’s impossible to know for sure, but if it extensively leverages the Bitcoin Lightning Network, we may be in for a bumpy road in the short term. Even if it fails, however, it will likely be a success in that it will pave the way for all types of cryptocurrency to be used in commerce and considered as official as money, which will inevitably continue the global financial revolution.
While the Salvadoran experiment will certainly accelerate the space forward, it may be too much usage for Bitcoin to comfortably handle at this point. Thankfully, hundreds of other cryptocurrencies are waiting in the wings to step in. Bitcoin bottleneck or not, the crypto space is going to be just fine.
Bitcoin Price Flash Crashes for Second Time in a Month in the US
The price of bitcoin (BTC) on Binance.US, the US-based exchange affiliated with Binance, briefly crashed to as low as USD 8,200 today – a drop of 87% – before recovering again. The crash marks the second time in a month when bitcoin prices in the US have briefly disconnected from the rest of the world.
Today’s flash crash, which was one of the most significant on a major exchange in bitcoin’s history, all happened within less than 1 minute, the BTC/USD price chart from Binance.US showed.
Although the flash crash was all over within a minute, the trading volume showed that a significant number of coins did change hands during the crash, indicating that some traders may have been able to fill orders for bitcoin at extremely low prices.
Flash crashes can happen when large market sell orders are sent to exchanges without sufficient liquidity on its order books, for instance, because a large trader accidentally placed the order as a market order instead of a limit order.
Today’s flash crash on Binance’s US exchange is the second such incident in a month in the US. On September 20, a data feed for crypto prices called Pyth that is used by some of the largest financial institutions on Wall Street showed a 90% crash in the price of bitcoin.
The feed briefly showed bitcoin at a price of USD 5,402. However, a similar price crash was nowhere else to be seen. Two days later, in a report about the incident, Pyth concluded that the abnormally low price was indeed a technical glitch, “caused by the combination of (1) two different Pyth publishers publishing a near-zero price for BTC/USD and (2) the aggregation logic overweighting these publishers’ contributions.”
Discussing today’s incident on Twitter, many traders complained about being forced by US regulations to use exchanges such as Binance.US, which has thin order books and low liquidity compared to the international version of the exchange.
No statement has yet been made from Binance or Binance US regarding today’s flash crash.
At 16:11 UTC, BTC trades at USD 63,180 and is down by almost 6% in a day, trimming its weekly gains to 10%.
Mt. Gox Bitcoin Payouts On Horizon After Creditors Approve Plan
The light finally appears to be at the end of the tunnel for the Mt. Gox creditors, who have approved a plan that will let them choose to receive some of the coins they have been waiting years for.
In a translated letter, Nobuaki Kobayashi, the Japanese lawyer and trustee for the now-defunct bitcoin (BTC) exchange, explained that “approximately 99%” of the creditors had voted in favor of an offer that has since been put before a branch of the Tokyo District Court.
A voting process that began back in May this year wrapped up earlier this month.
The court has since confirmed the order, although there was no mention of an exact timescale for the token refunds.
The trustee wrote that an announcement “will be made to rehabilitation creditors on the details of the specific timing, procedures and amount of such repayments.”
However, Kobayashi wrote that the process would “finalize” and become “binding” in “approximately one month from” October 20.
The creditors will then be able to file their claims through a website, by filing a proof of rehabilitation claim.
Kobayashi wrote that the trustee “would like to express sincere gratitude to all involved parties for their understanding and support.”
The BTC exchange was once the world’s biggest, but spectacularly folded in 2014 following a spate of hacking attacks that saw raiders make off with thousands of BTC tokens.
Creditors have been trying to recover their funds ever since, but have been locked in a protracted legal struggle that has rumbled on over the years.
The Fortress Investment Group has previously offered creditors some 80% of claims. But the trustee promised a higher figure, closer to about 90%. The tokens lost in the hacks will likely have to be written off, however, meaning that payouts are going to be a fraction of the original amounts held.
JPMorgan: Inflation Hedge Narrative Propelled Bitcoin’s Price to ATH
According to some JPMorgan analysts, bitcoin hit an ATH because people started investing in it as a better hedge against inflation than gold.
Strategists at the financial institution JPMorgan Chase & Co. argued that the reason behind BTC’s all-time high price is not the launch of the ProShares Bitcoin Strategy ETF. Instead, concerns about the rising inflation made the digital asset an attractive investment option, and that led to its recent rally.
Gold Failed, BTC Prevailed
The moment, which many people in the cryptocurrency community have been waiting for, finally arrived on October 19th when the ProShares Bitcoin Strategy futures-backed ETF, named BITO, started trading on the New York Stock Exchange. It became the first such product approved in the United States.
During the first day of its launch, it generated massive trading volumes and even became the second-highest traded fund ever. Shortly after, BTC’s USD value headed straight north towards a new all-time high at roughly $67,000.
Still, according to JPMorgan strategists, including the managing director Nikolaos Panigirtzoglou, another factor drove bitcoin to that milestone. The specialists indicated that the cryptocurrency had replaced gold as a hedge against inflation in recent months, which had propelled the price north:
“By itself, the launch of BITO is unlikely to trigger a new phase of significantly more fresh capital entering bitcoin. Instead, we believe the perception of bitcoin as a better inflation hedge than gold is the main reason for the current upswing, triggering a shift away from gold ETFs into Bitcoin funds since September.”
JPMorgan’s team noted that the last couple of weeks were not that successful for the precious metal. Taking a look at a broader period, bitcoin ETF’s have significantly outpaced gold ones, as the strategists revealed:
“This flow shift remains intact supporting a bullish outlook for Bitcoin into year-end.”
Can BTC Now Change The Stance of The Big Boss?
Jamie Dimon – Chief Executive Officer of JPMorgan – is among the most prominent critics of the leading digital asset. Still, it seems like he has started releasing the tight grip on it.
It all started in 2017 when the top executive called bitcoin a “fraud.” Dimon did not stop there and warned that “it’s worse than tulip bulbs. It won’t end well. Someone is going to get killed.” Shortly after, though, he regretted making that comment, and his financial institution became much more accepting of BTC.
Last year, Dimon weighed in on the matter once again. This time he was softer in his comments saying that bitcoin is not his “cup of tea” and that he has no personal interest in it.
A few days ago, the CEO returned to his negative phase, describing BTC as “worthless.” Nevertheless, he acknowledged that most of JPMorgan’s clients do not share his opinion and show an increasing demand for digital asset services.
With BTC charting a new all-time high, the crypto community is yet to find out whether Dimon will maintain his hostile viewpoint on the matter or rather soften a bit and allow more offerings to his bitcoin-hungry customers.