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Bitcoin (CRYPTO:BTC) bears find it difficult to see how Bitcoin might be widely adopted in developed nations. After all, the developed world's modern financial infrastructure is fairly efficient, especially with fintech companies improving the system by the day.

Making things more difficult, Bitcoin is still highly volatile, as this year has shown, and double-digit-percentage daily moves are a regular occurrence. That makes it a dubious store of value or medium of exchange, versus more stable currencies such as the dollar.

Of course, not everyone lives in developed nations, and if you lived in hyperinflationary countries such as Yugoslavia in the early '90s, Zimbabwe in 2007-2008, or even Venezuela or Argentina in more recent years, Bitcoin may actually look like a pretty attractive option.

In that spirit, one developing nation is currently pulling out all the stops to make Bitcoin an alternative legal currency. The most recent step includes giving away $30 in Bitcoin to all adult citizens.

El Salvador is giving away bitcoin to its citizens. Image source: Getty Images.

There is, perhaps, no head of state more enthusiastic about Bitcoin than Nayib Bukele, the young and recently elected president of El Salvador. At a recent Bitcoin conference, Bukele said he would push the legislature to make Bitcoin a legal tender in El Salvador. The Salvadoran Congress followed through on the promise shortly thereafter.

Now, Bukele and El Salvadoran officials are taking things a step further, offering every citizen 18 and older $30 in Bitcoin, provided they open accounts with the government's official Bitcoin wallet called Chivo. Salvadorans will be able to transact in both Bitcoin and U.S. dollars through Chivo, once the Bitcoin law is implemented on Sept. 7.

In addition, El Salvador has hired Chicago-based company Athena to roll out 1,500 Bitcoin ATMs throughout the country. "Bitcoin ATMs" are portals where consumers can either buy Bitcoin with dollars or sell them for dollars. This is because only 45% of Salvadorans have internet access and 70% don't even have a bank account. So Bukele is not only establishing an alternative to the dollar, but also building out a more modern financial infrastructure.

It may be surprising that El Salvador is the first country to officially back Bitcoin and encourage its use as an alternative currency, since El Salvador uses the U.S. dollar and not its own currency, which may prove more vulnerable to hyperinflation.

El Salvador officially adopted the dollar in 2001 and phased out its prior currency shortly thereafter. This was because the country had an outsized trade relationship with the United States, which accounted for a majority of its exports.

Furthermore, after years of conflict and civil war in the 1980s and 1990s, many El Salvadorans emigrated to the U.S. Today, there are a huge number of remittances flowing into the country from the U.S. In 2016, remittances from the U.S. made up a whopping 17 percent of El Salvador's entire gross domestic product (GDP).

Fixed-fee crypto remittances have the potential to be faster and cheaper than existing alternatives, which can be costly and time-consuming. Beyond remittances, some local politicians believe the use of the dollar may be a cause of El Salvador's slower economic growth relative to some neighbors. Salvadoran officials may also desire more independence from U.S. influence, in general, since under the dollar, El Salvadoran economic outcomes are at least somewhat affected by the U.S. Federal Reserve and U.S. spending policies, which are out of its control.

Not everyone is on-board with this Bitcoin experiment, of course. The World Bank has declined to help with El Salvador's Bitcoin implementation, and the International Monetary Fund (IMF) has also expressed concern over the program. That's important because El Salvador is in discussions with the IMF about a $1 billion loan program, so this Bitcoin gambit could complicate those talks.

Bulls and bears have a wide divergence of opinion on Bitcoin. Bears believe the cryptocurrency is worthless, but bulls like Cathie Wood believe the alternative currency could be worth up to $500,000 or more.

Whether or not Bitcoin has any value will likely be determined by its utility as a medium of exchange or store of value, and the El Salvador experiment could be a crucial proving ground for those two theoretical criteria. If El Salvador's experiment works, or at least doesn't cause severely adverse outcomes, it could be a big boost for the world's leading cryptocurrency. If the experiment fails, it would be a setback for Bitcoin adoption, and likely, its dollar value.

This summer, Bitcoin investors may want to take their focus off China's recent mining crackdown and focus instead on the relatively small country of El Salvador. The results of its landmark experiment could shape the trajectory of Bitcoin's value and standing in the world in the near to medium term.

This article represents the opinion of the writer, who may disagree with the official recommendation position of a Motley Fool premium advisory service. Were motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Why El Salvador Is Giving Every Citizen $30 in Bitcoin ...

China in recent weeks has stepped up efforts to rein in the countrys cryptocurrency industry, banning crypto mining operations and ordering major banks not to do business with crypto companies.

The latest move came Tuesday as the government acted against a company for allegedly providing cryptocurrency-related services. The company's business registration was cancelled by the authorities, and all the financial and payments institutions are warned not to provide virtual currency-related services directly or indirectly.

Despite Bitcoins promise of being a decentralized cryptocurrency that is based everywhere and nowhere, about 65% of the world's Bitcoin mining takes place in China. Thats because a handful of powerful Chinese mining hubs embraced the worlds biggest cryptocurrency by competing against other miners to solve the computational puzzles that create more bitcoin.

The Chinese miners helped raise Bitcoins value by more than 1,000 percent in a year to an all-time high of nearly $65,000 in April. After the Chinese miners began shutting down their machines, the value plummeted, closing out the first half of the year down almost 50% from its record.

Volatility vs stability

Bitcoin is the most popular of numerous new cryptocurrencies, which are not backed by precious metals or government credit. Instead, its price reflects only speculation on its future value. As a young currency, it is considered a risky investment with highly volatile value. Over the past ten years, Bitcoin suffered four separate losses of at least 50%, something other sectors rarely experience.

While there could be a wide range of factors that prompted China's crackdown, one thing was made repeatedly very clear by authorities: Bitcoin's wild price moves are a threat to the nations economic and financial stability.

The government said cryptocurrencies disrupt economic order and that it will "resolutely prevent the transmission of individual risks to the wider society, according to the State Council's Financial Stability and Development Committee, which held a meeting chaired by Vice Premier Liu He, president Xi Jinping's top representative on economic and financial matters.

China first moved in 2013 to restrict its banks from using Bitcoin as currency, citing concerns its inherently speculative nature threatens the country's financial stability. Over the years, the government has become even more wary. Since May, Beijing moved to effectively shut down all crypto mining operations in the country. In late June, the central bank also required payment firms and banks shut down the accounts of individuals involved in crypto transactions.

"The Chinese state in my reading has a fine-grained control over fluctuations in markets for important goods and assets," said Isabella Weber, an assistant professor of economics at the University of Massachusetts Amherst.

Weber noted in an interview with VOA that China not only bails out stakeholders after financial bubbles burst, but the government actively tries to prevent bubbles from bursting in the first place. As a result, authorities are also very sensitive towards rapid speculative expansions and price hikes such as the one that occurred in the Bitcoin sector in recent months.

"Currently, there is growing concern around financial stability in China. In this context, the crackdown on cryptocurrency is an attempt to contain a potential source of instability," she added.

Ross Darrell Feingold, a lawyer and political risk analyst who advises clients doing business in Asia, told VOA that if a governments political legitimacy does not come from elections, then it needs to come from other sources such as economic achievements.

"This applies even more in China, where the party organization, alongside other stake holders such as government agencies, has a significant role in economic policy making," said Feingold.

The right to mint money

Although protecting Chinas economic growth is a primary concern of Beijing, analysts believe the deeper reason the government carried out the sudden crackdown on Bitcoin is that cryptocurrency fundamentally represents a threat to state monetary sovereignty.

Established in 2009 by an anonymous programmer known as Satoshi Nakamoto, Bitcoin by design has no central authority making policy choices that affect its value, unlike traditional fiat currencies issued by governments. Many cryptocurrency advocates tout the currencys purely market-driven value as superior to government-issued currencies that fluctuate with central banks monetary policy.

"Central banks globally likely view cryptocurrencies as a threat to fiat currencies," said Brendan Ahern, the Chief Investment Officer of Krane Shares, a China-focused provider of exchange-traded funds. "It's outside of their purview, their jurisdiction. Their ability to pull the levers within the economy is threatened by it," he added in a telephone interview with VOA.

In this view, the more popular Bitcoin becomes among a countrys citizens, the less power their government has to shape economic policies.

China first declared that Bitcoin was not a currency in the real meaning of the word in 2013 when the virtual currency was beginning to gain popularity. In its most recent move to restrict the use of Bitcoin as currency, the government further stated that Bitcoin is not a real currency and should not and cannot be used as currency in the market.

This points to the question about who has the right to issue money, said Weber, the author of book "How China Escaped Shock Therapy."

Weber pointed out that the desire of the state for monetary sovereignty is not uniquely Chinese: "Once this private currency evolves into something more than a fringe phenomenon, states that have the power to do so will tend to step in to reclaim its monopoly over the right to issue money."

In the case of China, however, the issue goes beyond mere economics because the governments political legitimacy is heavily reliant on the success of the countrys economic growth, said Zennon Kapron, founder of Kapronasia, a fintech research and consulting firm. "Any challenge to that economic stability and development, or the financial system that supports it, is similarly challenging for the political system," Kapron told VOA in an email.

Kapron believes crypto does little to further China's growth agenda and may even undermine it by keeping a form of value outside of the governments control. "It then becomes a relatively straightforward decision for the government and regulators to alienate the likely few million people in China that are involved with Crypto rather than risk upsetting the entire economic system."

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Why China Is Cracking Down on Bitcoin - Voice of America

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Bitcoin had a solid start to 2021, hitting an all-time high of nearly $65,000 in April. But the digital coin closed out the first half of the year down about 47% from its record and a number of looming risks could result in further pain ahead.

While proponents appear to be holding onto bitcoin for now, other investors are wary about wild volatility in the market and what it means for their portfolios. With that in mind, here are five of the biggest risks facing the cryptocurrency as we enter the second half of the year.

One of the biggest risks for bitcoin right now is regulation.

In recent weeks, China has clamped down on its cryptocurrency industry, shuttering energy-intensive crypto mining operations and ordering major banks and payment firms like Alipay not to do business with crypto companies.

Last week, the global crypto crackdown spread to the U.K., where regulators banned leading digital currency exchange Binance from undertaking regulated activities.

Simon Yu, co-founder and CEO of crypto cashback start-up StormX, told CNBC that China's moves should be viewed as a "positive" thing for bitcoin and other cryptocurrencies like ether as it will lead to more decentralization. However, he added that "over-regulation" of crypto in the United States could be a problem.

"As a country, the U.S. has too many departments regulating it from different angles is crypto a security? A commodity? A property?" Yu said. "As of now, the U.S. hasn't figured out how to properly regulate the industry, which oftentimes leads to decisions that are difficult for crypto to operate."

U.S. Treasury Secretary Janet Yellen and other officials have recently warned about the use of cryptocurrencies for illicit transactions.

Last year, former President Donald Trump's administration proposed an anti-money laundering rule that would require people who hold their crypto in a private digital wallet to undergo identity checks if they make transactions of $3,000 or more.

"We've long warned that shifting investor sentiment or regulatory crackdowns could pop bubble-like crypto markets," UBS wrote in a note this week.

Another big risk is persistent, extreme swings in the price of bitcoin and other digital currencies.

Bitcoin rallied to an all-time record of around $64,829 in April this year, on the day of crypto exchange Coinbase's blockbuster debut. It then tumbled as low as $28,911 in June, briefly sliding below $30,000 and turning negative for the year. It's since risen back above $34,000.

Bitcoin bulls see it as a kind of "digital gold" an asset uncorrelated to the wider marker that could provide sizable returns in times of economic turbulence. But while volatility can be good when the price of an asset is going up, it goes both ways.

While you would have doubled your money if you bought bitcoin in January and cashed out in April, today those year-to-date returns would be 18%. Still, that's above the performance of the S&P 500 index, which is up 16% since the start of the year. And over the last 12 months, bitcoin has more than tripled in price.

"Limited, highly inelastic supply on single cryptos can exacerbate volatility," says UBS. "Limited real world use and extraordinary price volatility also indicate many buyers are seeking speculative gains."

Meanwhile, the trend of traders who have made highly-leveraged bets on bitcoin getting flushed out of the market has led to intense price fluctuations this year.

While continuous volatility could put off some investors, Ross Middleton, chief financial officer of decentralized finance platform DeversiFi, said that volatility in itself isn't a barrier to institutional adoption.

Volatility "can actually be a significant draw as the potential for large price movements means that funds can make significant profits with a relatively small allocation compared to the size of their overall portfolio," he told CNBC.

"The longer that Bitcoin moves sidewards in the $30-$40k range," Middleton added, "the greater the perceived 'base-building' and the sooner that new capital will flow into both the asset and the wider crypto market."

Musk's electric car firm stunned both fans and skeptics of bitcoin this year when it bought $1.5 billion worth of the digital currency and began accepting it as a method of payment. But he subsequently roiled crypto markets after deciding to halt bitcoin payments due to the currency's "insane" energy usage and a reliance on fossil fuels.

It raises some questions for asset managers who are under heightened pressure to limit their investments to ethically-conscious assets.

"At the very least it may deter some investors from holding Bitcoin," analysts at Citi wrote in a research note earlier this year, adding it could also "spur government intervention to ban mining, as seen in parts of China."

So-called stablecoins, whose prices are meant to be pegged to real-world assets like the U.S. dollar, are also facing growing scrutiny.

Last week, Federal Reserve Bank of Boston President Eric Rosengren said tether, a stablecoin that ranks among the world's largest digital currencies, was a risk to the stability of the financial system.

Tether maintains that each of its tokens are backed 1:1 by U.S. dollars held in a reserve, the idea being that this keeps the price stable. Crypto investors often use tether tobuycryptocurrencies, as an alternative tothe greenback But some investors worry tether's issuerdoesn't have enough dollar reservesto justify its dollar peg.

In May, the company behind tether broke down the reserves for the stablecoin, revealing that around 76% was backed by cash and cash equivalents but just under 4% of that was actual cash, while about 65% was commercial paper, a form of short-term debt.

Tether has been compared to traditional money-market funds but without the regulation and, with almost $60 billion worth of the tokens in circulation, has more deposits than that of many U.S. banks.

There havelong been concernsabout whether tether is being used tomanipulate bitcoin prices, withone studyclaiming the token was used to prop up bitcoin during key price declines in its monster 2017 rally.

"Tether is a massive problem," Carol Alexander, professor of finance at the University of Sussex, told CNBC. "Regulators seem unable to stop them so far."

"Traders need tether to open accounts and trade. Or other crypto. But since most large traders are U.S.-based, tether is the obvious choice."

Rising speculation in crypto markets could prove another risk for bitcoin.

Dogecoin, a cryptocurrency that started out as a joke, surged wildly earlier this year to record highs as growing numbers of retail investors piled into digital assets in search of outsized gains.

At one point, dogecoin was worth more than Ford and other major U.S. firms, thanks in no small part to support from celebrities like Musk. Its value has depreciated significantly since then.

Elsewhere in the crypto market, a decentralized finance, or DeFi, token called titan crashed to zero. Self-made billionaire investor Mark Cuban was a holder.

"Another concern is the number of scams that have appeared throughout the year," StormX's Yu said. "With certain meme coins, we've seen many pump and dump activities and have seen retail investors getting burned."

"Whenever retail gets burned, the government steps in. And if things are over-regulated to a point, as we have seen with 2018 and ICOs (initial coin offerings), the industry as a whole could be negatively affected."

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Bitcoin had a wildly volatile first half. Here are 5 of the biggest risks ahead - CNBC