How likely is Bitcoin to replace everyday currency?

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Could Bitcoin really be used to pay for your daily latte, take away, or a new car? Or perhaps HMRC would accept it as a method of settling your taxes?

The prospect in the near future looks to be unlikely.

At the start of this year Microsoft welcomed back customers using Bitcoin to pay for items in its Windows and Xbox online stores. The software giant had temporarily suspended the payment method due to Bitcoin’s volatility.

A handful of US companies are also recognising cryptocurrencies – has a bitcoin financial tracker on its financial app. Intuit, an American developer of financial and tax preparation software, has a programme that enables merchants to accept Bitcoin payments.

However, some businesses have trialled products linked to cryptocurrencies and then discontinued the project after finding that expensive transaction fees and long wait times rendered it unviable as a form of payment.

For example, Stripe, the $9 billion online payments company, is no longer offering a product that had enabled retailers to accept Bitcoin as payment.

The cost of transactions

In fact, recent research also shows that merchant acceptance of Bitcoin, the leading cryptocurrency, is at an all-time low. According to a new report from JPMorgan covered by Bloomberg and Business Insider, out of the leading 500 internet sellers, just three accept Bitcoin, down from five in 2017.

For merchants, SMEs and individuals wanting to spend their Bitcoin, a major issue is the cost of making small Bitcoin transactions. In order for Bitcoin to be traded, the transactions need to be logged and processed by a host of independent computers.

If you want your transaction logged quickly, then there is a cost to this, known as mining fees. As demand increased, mining costs peaked in late December 2017, when people were required to pay $37 on top of any transaction. This has now fallen to $6 per transaction, but future volatility can’t be ruled out.

Joe Pindar, Director of Product Strategy at Gemalto, says that two to three years ago, when Bitcoin was traded as a currency, it would only take ten minutes to settle a transaction and only a few pennies to settle because exchange costs were low.

“Now it can take hours or days to settle the transaction and the fee to do so can be £5,” he says. “The network transaction fee (separate to any exchange fee) is calculated in fractions of a bitcoin – called ‘satoshi’ – and is based on the demand on the network.

“Benchmarking against fiat currency values, and the value of real-word goods and services, takes into consideration the large appreciation of Bitcoin asset price. The highest recorded transaction fee on the Bitcoin network was $55.16 in late December 2017.”

He says the idea that Bitcoin could in the future be used to buy a cup of coffee or a pizza is now false. “The transaction fees for buying a pizza would cost more than the pizza itself.”

Only one-in-ten small business owners said they already take cryptocurrency payments

A clever marketing tool?

Mr Pindar says merchants are using Bitcoin as little more than a marketing tool.

“If you are using Bitcoin to buy products online the first thing that the merchant does at the shopping cart stage is to fix a price,” he says. “The merchant gives the buyer a fiat quote. That means that the conversion from Bitcoin into fiat currency in that individual transaction is fixed at a certain rate.

So, the volatility is all on the investor side and not on the retailer’s side.”

From the retailer’s standpoint, prices charged can’t be changing by 20% on a daily basis, which they might if linked to a cryptocurrency.

Big fluctuations also have implications for underlying measures of solvency, too. If the valuation of assets is unstable, particularly in companies where reserves are governed by regulation – eg banks, insurance companies, pension funds, then it is questionable whether a reliable valuation could be achieved.

“The idea of holding such a highly volatile asset as cryptocurrency on a balance sheet would be a nightmare in accounting terms,” says Mr Pindar. “It raises so many questions across the board regarding valuation and solvency etc.”

Volatility is the issue

Buyers and merchants want their transactions logged quickly because Bitcoin is an extremely volatile currency. It can rise and fall dramatically within the space of a few hours, or days. For people making large transactions, even small movements in the price tracked against the US dollar can mean they have over or underpaid by a significant sum by the time the deal is settled.

Due to their extreme volatility, the cryptocurrencies do not trade within a recognised range, unlike most Forex currencies where values are much more stable.

Bitcoin is around $9,000 currently, after reaching a high of close to $20,000 in December 2017. Investors have seen huge historic swings – for example prices fell by more than $200 in a single day in June last year.

Yet, surprisingly, over a third (35%) of SME owners in the UK expect cryptocurrency payments to become a reality on the high street within two years, according to new research from card machine provider Paymentsense. Some small business owners are even more optimistic about the its potential, with over a fifth (21%) predicting that cryptocurrency will start appearing within one year.

Nevertheless, only one-in-ten small business owners said they already take cryptocurrency payments (13%). Almost six in ten (59%) said they’d consider investing in it, with approaching a fifth (18%) already investing.

Guy Moreve, head of marketing at Paymentsense said: “It’s clear that cryptocurrencies are moving swiftly towards the mainstream. However, the value of unregulated cryptocurrency changes fast. This has significant implications for an SME’s revenue security.”

Joe Pindar says in order for Bitcoin and other crypto currencies to be taken seriously in the financial markets, they must come under some form of financial regulation & compliance

“At present, the focus is on anonymity, but the real concern for government is on taxation of the capital gains made on Bitcoin trading,” he says. “As the price of Bitcoin has increased 1000% since the beginning of the year, governments see they are missing much larger sums – simply because they don’t understand who is profiting from the trades.”

He also points out that currently there is no current way to short sell Bitcoin. This means that at present there is only buy-side pressure… hence the rocketing price. As CME group release their futures platform, that will introduce sell-side pressure and stabilise or possibly lower the market.

A question of trust

The JP Morgan report suggested that neither customers nor merchants had much to gain from adopting cryptocurrencies as payment because:

  • Customers who have the currency seem to be more interested in holding it to make money rather than spending it on goods that could be purchased in other currencies. When they do spend it, they incur high fees.
  • Merchants have not been investing in the infrastructure required to accept Bitcoin because there is little demand for it from customers.

Frans Labuschagne, UK & Ireland country manager for Entersekt, which provides mobile app security systems, says that what cryptocurrency is currently missing to become mainstream is trust.

“To keep eager traders’ money and data safe, these exchanges need to have transaction security in place,” he says. “And most of them do – except that currently, cryptocurrency exchanges still insist on using obsolete, not to mention risky, technology.”

Cryptocurrency traders should also be demanding better security from the platforms they use.

“It’s the only way that their investments will stay safe and avoid becoming the next horror story about a trader who has lost a significant amount of money due to incomplete security. After all, cryptocurrency is on the cutting edge of innovation – shouldn’t the technology backing up the exchanges be the same? Otherwise, it’s going to become the hacker’s next easy target.”

Marianne Curphey is an award-winning financial writer and columnist, and author of the book How Money Works. She worked as City Editor at The Guardian, deputy editor of Guardian online, and has worked for The Times, Telegraph and BBC.

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