Bitcoin trading subdued after chaotic debut in El Salvador; Coinbase faces lawsuit

© Reuters. FILE PHOTO: A sign reads: "Exclusive Bitcoin register" in a Starbucks store where the cryptocurrency is accepted as a payment method, in San Salvador, El Salvador September 7, 2021. REUTERS/Jose Cabezas

By Herbert Lash

NEW YORK (Reuters) - Volatility in bitcoin eased on Wednesday, a day after El Salvador adopted the crypto asset as legal tender https://www.reuters.com/business/finance/el-salvador-leads-world-into-cryptocurrency-bitcoin-legal-tender-2021-09-07, but the threat of a U.S. lawsuit against crypto exchange Coinbase (NASDAQ:COIN) https://www.reuters.com/technology/sec-threatens-sue-coinbase-over-crypto-lending-programme-2021-09-08 Global Inc underscored the rocky road ahead for cryptocurrencies.

The Securities and Exchange Commission issued Coinbase with a Wells notice, indicating the U.S. regulator will sue if the crypto exchange goes ahead with the launch of its interest-bearing "Lend" product for crypto assets.

SEC Chair Gary Gensler has called the crypto universe a "Wild West" that is riddled with fraud and investor risk.

Coinbase said it would delay the launch until at least October. Shares of Coinbase fell 2.50% to $260.02.

Coinbase is not the only cryptocurrency platform to come under regulatory scrutiny. Several states have cracked down on BlockFi.

Trading in bitcoin was less hectic after the cryptocurrency suffered its heaviest losses in 2-1/2 months on Tuesday, when it hit a near four-month high of $52,956 before ending the day down 11.1%, its largest percentage drop since June 2.

At one point on Tuesday, the digital currency fell as much as 18.6%, wiping out more than $180 billion in market value.

Bitcoin on Wednesday was down 0.92% at $46,369.72.

Tuesday was a historic day for bitcoin as El Salvador's decision to make the digital currency legal tender got off to a bumpy start.

Technological glitches hampered its use while street protests by mistrustful citizens broke out in the Central American country.

As bitcoin wobbled, Salvadoran President Nayib Bukele said his government purchased an additional 150 bitcoins on Tuesday, worth around $7 million.

"That has underscored the difficulty in trying to protect the value of bitcoin as its own currency," said Nana Otsuki, chief economist at Monex Securities. "The buying didn't seem to be effective in halting its fall."

Analysts said the move by El Salvador showed crypto currencies are here to stay but as with any innovation, they will suffer birthing pains as the currency's volatility must be resolved.

Bitcoin has been pitched to a largely unbanked population in El Salvador as an effective savings vehicle and a store of value for users, said Ganesh Viswanath-Natraj, assistant professor of finance at Warwick Business School in Britain.

"High volatility in a medium of exchange corresponds to high volatility in the macroeconomy. Users who hold bitcoin will now see wild swings in their savings," Viswanath-Natraj said.

Bitcoin has experienced daily trading moves of 10% or more 10 times this year, as it did both in 2020 and 2019, according to Refinitiv data. In 2018 and 2017, there were 17 days each year of 10% moves or more, per Refinitiv.

Citing volatility in crypto markets, Robinhood Markets Inc (NASDAQ:HOOD) said on Wednesday it would roll out crypto recurring investments, allowing customers to buy digital coins commission-free and with as little as $1 on a schedule of their choice.

Tuesday's trading frenzy included bouts of delayed transactions at U.S. cryptocurrency exchanges Kraken, Gemini and Coinbase.