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

Volatility in bitcoin eased on Wednesday, a day after El Salvador adopted the crypto asset as legal tender, but the threat of a U.S. lawsuit against crypto exchange Coinbase.

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 closed down 3.2% at $258.20.

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

It would be a mistake to view the SEC's scrutiny as isolated to Coinbase, which happens to be in the spotlight, said Cowen & Co, a unit of financial services firm Cowen Inc, in a note to investors.

"This is part of a broader regulatory pushback on crypto," said analyst Jaret Seiberg. "As we have long argued, crypto should expect to be regulated the same as the traditional product it is trying to replicate or replace."

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 slid 1.64% to $46,095.97.

While a historic day for bitcoin as El Salvador became the first country to make the digital currency legal tender, Tuesday proved a bumpy start.

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

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 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.