More countries and even a central bank could follow El Salvador’s lead and adopt bitcoin as a form of legal tender and add it to its balance sheet, Fidelity said in a note last week. The investment firm believes a high stakes game theory is playing out that would leave early adopters of the cryptocurrency better off than their peers. “If bitcoin adoption increases, the countries that secure some bitcoin today will be better off competitively than their peers. Therefore, even if other countries do not believe in the investment thesis or adoption of bitcoin, they will be forced to acquire some as a form of insurance,” Fidelity explained.
El Salvador became the first country in 2021 to adopt bitcoin, with the country giving free bitcoin to its citizens and making it mandatory that all businesses accept bitcoin as a form of payment, in addition to traditional fiat.
For now, El Salvador’s adoption of bitcoin doesn’t look like a home run, solely based on the price of bitcoin, which has fallen about 40% from its mid-November high. One report suggests the country has lost about $10 million on its bitcoin purchases due to the recent decline.
But China is taking the opposite approach by implementing various bans on the mining and trading of bitcoin and other cryptocurrencies. That’s a big mistake, according to Fidelity.
“It isn’t surprising that we think an outright ban will be difficult to achieve at best, and if successful, will lead to a significant loss of wealth and opportunity,” the note said.
One milestone that has the potential to validate bitcoin and other cryptocurrencies is recent regulations targeting the sector that was included in November’s US infrastructure bill. The rules impacting crypto don’t go into effect until 2024, and there is potential for various amendments targeting the legislation between now and then, Fidelity noted.
“But what we think is most notable is that digital asset regulation becoming law is another milestone as the asset class comes of age and establishes itself,” Fidelity explained.
Ultimately, countries that are bitcoin curious could pay a small cost today and adopt it as a hedge compared to a potentially larger cost years in the future.
“We therefore wouldn’t be surprised to see other sovereign nation states acquire bitcoin in 2022 and perhaps even see a central bank make an acquisition,” Fidelity concluded.