El Salvador's shaky bitcoin roll-out is an 'ill-conceived' experiment, but won't hurt the crypto market in the long term, JPMorgan says

• El Salvador's bitcoin mandate is a "problematic experiment," JPMorgan said.
• Analysts see Tuesday's bitcoin crash as a result of market froth, not El Salvador's glitchy roll-out.
• JPMorgan also explained why bitcoin is unlikely to unseat the dollar as a currency in the country.

El Salvador's bitcoin mandate is a "problematic experiment," but the country's shaky roll-out won't hurt the crypto market in the long-term, according to JPMorgan analysts.

The country's official adoption the cryptocurrency as legal tender on Tuesday was met with protests, technological difficulties, and a 17% drop in bitcoin's price. According to a team of JPMorgan analysts, the difficulties say more about the country's rushed mandate and less about the future use cases of crypto.

"El Salvador's ill-conceived experiment should not be critical for the future of bitcoin or cryptocurrencies. Crypto markets suffered from El Salvador's glitches this week, but that was from a frothy backdrop," the analysts said.

The analysts also laid out why the cryptocurrency is unlikely to unseat the dollar, or even equalize with the dollar as a parallel currency in El Salvador.

Bitcoin is too volatile to serve as a currency, and the fact that it is not backed by anything makes it difficult to serve as a unit of account or store of value, JPMorgan said.

"Few goods or services are priced or negotiated in bitcoin terms and bitcoin itself is priced in dollars," the analysts said. "While retailers and merchants in El Salvador will over time accept and list prices in bitcoin, these prices are likely to fluctuate wildly according to the price of bitcoin in dollars."

In the best case, El Salvador's experiment would end with more transactions in bitcoin, and also Salvadorans hold bitcoin as a store of value and alternative to gold.

Additionally, bitcoin's fixed supply of 21 million coins will create a deflationary system that is unsustainable to most economies, the analysts said.

Bitcoin's "buying power would naturally increase over time given its limited supply and therefore the price of goods and services denominated in bitcoin terms would fall over time. In such economy, the incentive by economic agents would thus be to hoard rather than spend the currency," they said.

Also, the experiment's reliance on payments network Strike, which is an additional layer over the Lightning Network on the bitcoin blockchain, will pose security and privacy risks that may outweigh the reduction in transaction costs.

And finally, El Salvador's $150 million Government Trust in bitcoin to ensure immediate convertibility to dollars might not be enough if a downturn in crypto markets drives citizens to sell bitcoin en masse, they added.

"Despite the above challenges, the El Salvador experiment is undoubtedly an important moment for cryptocurrencies and payments systems mostly in terms of the lessons to be learned about the application to real life, and to a lesser extent in terms of investors' sentiment towards cryptocurrencies," the analysts said.