Bitcoin Stabilizes. Don’t Expect the Calm to Last.

Indeed, while El Salvador may not be the best test case, the early indications are that people aren’t ready to swap their U.S. dollars (the other official currency) for Bitcoin. More than a thousand people protested in the capital, San Salvador, on Tuesday, with one sign reading that Bitcoin “will bring more corruption and poverty,” according to a report by Reuters.

Part of the fear, of course, is that Bitcoin isn’t a stable currency—if one can even call it that. Few other “fiat” currencies that are backed by governments lose 9% in a 24-hour span. Those that do are in war-torn or badly mismanaged countries. Many of these countries are also “dollarized,” meaning that people transact in dollars, as in El Salvador.

Nonetheless, some crypto backers view 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. “Prior to this, there were zero countries where it was legal tender,” he says. “Now there’s one. And it’s like other inflection points that were also zero-to-one changes.”

He points out that Bitcoin got a big vote of legitimacy 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 hedge funds. Another inflection point was Microstrategy ‘s purchases for its balance sheet, a move that led to a dozen publicly traded companies buying it for their treasuries, Hougan says.

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

Of more immediate concern to investors may be the leverage that’s built into Bitcoin and other cryptos. Traders who buy Bitcoin futures, or who use small amounts of collateral to amass large stakes, may be forced to sell their positions or be automatically liquidated by exchanges as the price plunges.

Around $3.7 billion worth of long positions in crypto markets were liquidated in the past 24 hours, including $1.3 billion in Bitcoin and $928 million in Ethereum, according to exchange data from Bybt. More than150,000 traders were 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 moves.

None of this is deterring some bulls from predicting higher prices for Bitcoin. Analysts at Standard Chartered Bank issued a “Bitcoin Investor Guide” on Tuesday, predicting the crypto will hit $100,000 in late 2021 or early 2022. The bank’s analysts structurally “value” Bitcoin between $50,000 and $175,000.

“As a medium of exchange, BTC may become the dominant peer-to-peer payment method for the global unbanked in a future cashless world,” they write. Bitcoin should theoretically be worth $120,000 in 2040, based on its decelerating supply compared with growth of the M2 U.S. dollar money supply, they estimate. If institutional portfolio managers allocate just 2% of global portfolios to the crypto, the demand could lift prices to $175,000.

Of course, Bitcoin and other cryptos have no intrinsic value, making valuation models more art than science. The crypto’s next move is anyone’s guess. For the people of El Salvador, one can only hope it doesn’t tumble again.

Write to Daren Fonda at daren.fondabarrons.com