(Bloomberg Opinion) — Bitcoin had a rough Tuesday, slumping almost 10% on a day that should have been cause for a celebratory rally. For the first time, Bitcoin became legal tender in a sovereign nation, El Salvador. But technical glitches around the rollout and demonstrations against crypto adoption spoiled the debut and sent other digital currencies lower in sympathy.
The problems were the kind that can crop up with any mass rollout — especially by a government — and the immediate disruptions may turn out to be minor and short-lived. Yet they point to a greater unknown that may be far more significant in shaping Bitcoin’s evolution: Will people actually adopt it?
I’m reminded of the mid-1990s, when one of the biggest questions for internet investors was how many people would be willing to buy PCs, pay access fees and learn about computers and browsers to take advantage of the worldwide web. Only with mass adoption (which of course happened) would businesses, governments and other entities build the fiber-optic cables, servers and other infrastructure that would make the internet fast, cheap and ubiquitous.
The same is true of crypto. Some digital currencies can flourish in the background, with activity largely limited to small groups of specialist users and most people otherwise unaware of it. But much of the promise of crypto needs billions of people to incorporate it into their daily routines; this, in turn, will drive the hardware, software and other investments that can make crypto fast, cheap, user-friendly and, like the internet, ubiquitous.
Most crypto users to date fall into one of four categories: technophiles who love the idea; investors who love the volatility, leverage and unregulated nature of the market; people who really need it (including residents of countries with failed currencies and financial repression, people repatriating small amounts of money overseas and ransomware crooks); and specialists in niche applications. One reason there hasn’t been broader use is that no one has yet come up with the “killer app” so attractive and powerful that nearly everyone adopts it. But another reason is government disapproval and the sheer novelty of the idea.
El Salvador is a test case of how crypto can flourish with active government support and encouragement. An estimated 10% to 20% of El Salvador’s population was already using crypto — as is typical for Latin American countries that rely heavily on remittances from expatriate workers — and the government is giving $30 of Bitcoin to all residents, which should encourage more familiarity. If crypto cannot find rapid and enthusiastic adoption under these conditions, investors have to rethink its overall value proposition.
Success in El Salvador may invite imitation and could prompt multinational companies such as McDonald’s Corp., for example, to build out robust procedures for handling Bitcoin, including financial reporting, legal issues, custody, cash management, investment, hedging and other functions. Once these became standardized, it would make crypto adoption much easier everywhere. But that only happens if many customers truly use Bitcoin. If El Salvador remains U.S.-dollar based, with Bitcoin used only to buy dollars from the government, or if the government drops the experiment in a few months, this opportunity will be lost.
This was one day’s events in a small economy. The rollout had issues, but it wasn’t as much of a disaster as Healthcare.gov or Windows 8. And the decline in Bitcoin’s price is not an unusual event by historical standards for a digital currency that has had its share of even bigger swings.
To the extent that this is a big story, and I think it is, it’s not because of price moves now; it’s more about what happens over the next few months. A total failure in El Salvador won’t doom digital currencies, but it will force a downward revision in potential market share of many crypto ideas. A success in El Salvador could inspire equal-sized upward revisions.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Aaron Brown is a former managing director and head of financial market research at AQR Capital Management. He is the author of “The Poker Face of Wall Street.” He may have a stake in the areas he writes about.