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Bitcoin and other cryptocurrencies are selling off again, falling at least 5% in the past 24 hours.
The downturn is pressuring shares of crypto-related stocks, including
Coinbase Global
(ticker: COIN), which was off 2.6% in trading Thursday to around $245. Other crypto stocks were also down, including
Grayscale Bitcoin Trust
(GBTC),
Riot Blockchain
(RIOT),
MicroStrategy
(MSTR),
Silvergate Capital
(SI), and
Square
(SQ).
Crypto is under pressure for a variety of reasons: looming government and regulatory crackdowns on Bitcoin, environmental concerns over mining crypto tokens, and waning appetite for highly volatile risk assets.
Technical trading pressures may also be converging. Trading volume has lightened up over the summer, making cryptos more volatile and vulnerable to selling pressure.
“Bitcoin has been absorbing large gains from 2020 and early 2021 and remains in a choppy consolidating market for now,” according to David Grider, lead digital asset strategist at Fundstrat.
But some Wall Street bulls don’t appear deterred, arguing that crypto tokens and blockchain technology are only getting more entrenched in the financial system.
MoffettNathanson analyst Lisa Ellis reiterated a bullish call on Coinbase on Thursday, maintaining a $600 price target. She outlined four primary reasons why Coinbase investors “can feel optimistic” about the long-term success of crypto.
One is that blockchain technology offers improvements over traditional financial networks, enabling secure arm’s-length transactions without a centralized third party (like a bank or government entity). Once transactions are recorded in the blockchain, which is a decentralized ledger, they become part of an “immutable record,” she notes, impervious to manipulation or fraud.
Second, while the technology has some challenges, it’s maturing and overcoming technological hurdles.
Third, crytpos are gaining traction for more use cases. While Bitcoin isn’t useful as a medium of exchange, since it’s far too volatile, it can be used a “store of value” like digital gold. Other cryptos, like Ether, may be useful for transactions and “smart contracts.” And cryptos can be used for creating and identifying digital assets, such as non-fungible tokens (NFTs).
Her fourth rationale is that the crypto ecosystem is going mainstream with major companies adopting the technology, custodying crypto assets, and developing new use cases.
Mainstream companies now involved in crypto include
PayPal Holdings
(PYPL) and Fidelity Investments, Ellis points out. Banks are also tiptoeing into the digital token arena, including
JPMorgan Chase
(JPM), which is developing a JPM Coin for digital payments. A major digital token could be coming soon from
Facebook
(FB) and other backers of the pending Diem stablecoin.
One other positive for Coinbase could be the launch of central-bank digital currencies, known as CBDCs. China has already launched a digital version of the yuan in a pilot phase. All major central banks, including the Federal Reserve, are now studying or actively developing digital tokens of their currencies.
The issuance of CBDCs would be positive for Coinbase, Ellis writes, since it would add “tremendous credibility” to crypto technology and help drive its adoption. CBDCs could also displace stablecoins—privately issued digital tokens—a dynamic that could help Coinbase. And the exchange could get involved in developing CBDC infrastructure for storage and transactions.
These are all valid points. The problem is that they may already be well-known to the market. And it may take a reversal of the bearish narrative now in crypto to get the stocks moving up again.
El Salvador, meanwhile, is turning into a test case for how tough it may be for Bitcoin to go mainstream. The country passed a law in June that will grant Bitcoin legal monetary status starting in September.
But as J.P. Morgan analysts point out, the “Bitcoinization” of El Salvador isn’t going smoothly. “There are some early signposts that adoption could struggle, at least initially,” they wrote in a note on Thursday.
A survey of businesses and consumers in the country indicated widespread skepticism, with over a third of those surveyed saying they would distrust transactions in Bitcoin. Nearly all consumers also said they don’t want to be paid or receive remittances from abroad in Bitcoin, according to the survey, conducted by the El Salvador Chamber of Industry and Trade.
Further complicating matters is that international banks and financial institutions aren’t eager to allow Bitcoin into their financial models. The International Monetary Fund has told El Salvador that adopting Bitcoin as legal tender would complicate an aid package for the country.
Write to Daren Fonda at daren.fonda@barrons.com