Stumbling Blocks for Bitcoin as a Payment Method

Bitcoin seems to have awoken from its slumber in recent months. As of writing, it’s valued at around $8,000, up several thousand from the most recent low. While the reasons behind this bullish move are myriad, the primary driver is likely the various hedge funds and investment groups who’ve indicated their interest in the market.

At first glance, this is a win for the cryptocurrency. Its value will certainly increase as demand goes up. Financial interest will go a long way towards ‘legitimizing’ bitcoin in establishment circles. And the amount of positive press generated will make the public better informed as well as reducing lingering anxiety over bitcoin’s association with dark markets.

On the other hand, such a move is not going to do much in the way of bringing bitcoin to the masses — hedge funds and investment firms are just barely more comprehensible than crypto to the average citizen — and, worst case scenario, may throw another wrench in the bitcoin-as-payment use case.

Bitcoin has many virtues, but a payment method is not one of them. During its boom in 2017, one might’ve expected adoption rates to skyrocket, but just the opposite occurred. Valve, the company behind the computer game service Steam, dropped Bitcoin payments entirely. Microsoft did the same, if temporarily. The online payment provider Stripe, one of bitcoin’s early boosters, left the fold as well, canceling its bitcoin transaction functionality.

Cryptocurrency mining farm
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Required: one crypto farm to add transactions to the blockchain

Transaction Fees

Asked about their motives, each company gave a similar raft of justifications. First and foremost was the cost of transaction fees on the blockchain. The problem is baked into the infrastructure and cannot be fixed without a potential hard fork and new currency creation. Bitcoin miners are rewarded with new bitcoins for adding blocks full of transactions to the blockchain, but they also receive transaction fees as an added incentive. In an example of simple supply and demand economics, if more people are trying to use bitcoin, it causes a glut of available work for the miners, who will start charging astronomic fees for their services. This situation hit crisis point December ’17, when the cost of a single transaction was $37, costing users more than the value of most purchases.

You might ask, why doesn’t the demand lead to more miners? The problem is that setting up a bitcoin mining rig is a herculean endeavor. Because the way the blockchain algorithm works, mining becomes progressively harder with every new bitcoin mined. Thus, to set up an effective, profitable rig nowadays demands a massive amount of expensive hardware, to say nothing of the electricity demands. Even if a fleet of new miners does come online, the set-up time is too long to prevent expensive fees in the meantime.

If customers aren’t willing to pay the fee, transactions can take hours, days, or even weeks to process. Not only does this clash with our current instant-gratification driven commerce model, but all that dead time between payment and receipt opens up the businesses for fraud by bad actors trying to hijack the process. There’s also the very real possibility that the value of bitcoin will have tanked by the time the merchant finally gets the payment.

Lowering demand will lower transaction fees (currently 24 cents), but no merchant is going to accept a currency that no one uses. Low demand also means a low value for each bitcoin, something that will disincentivize Wall Street from getting involved on a large scale.

Volatility

Another fly in the ointment is bitcoin’s volatility. From November ’17 to February ’18, it increased around $13,000 in value, then fell by about $11,000. In the past two months value has fluctuated by thousands of dollars each way. Comparatively, the Euro has moved about 40 cents in value with the dollar. Bitcoin fails the basic premise of a currency — long-term stability. Techno-libertarians may sneer at the Federal Reserve and other centralized authorities which control monetary policy, but they have (as of writing) kept the major currencies on an even keel.

One of Bitcoin’s lofty goals is to provide a reliable currency to people everywhere in the world. Not only does this help merchants sell to new customers that were previously out of reach, fueling the capitalist machine of endless growth, but it also empowers citizens of countries where the currency is volatile or worthless (Zimbabwe recently, Venezuela now), and minority groups cut off from the banking system or denied credit by oppressive governments (too many to list).

But so long as Bitcoin continues to be volatile, difficult to use, and accepted almost nowhere, this dream will go unrealized. Next time we’ll take a look at other cryptocurrencies to see how they fare in defeating this problem, as well as other payment methods with crypto, such as BTC and ETH debit cards.

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Will Minor
Will is a writer-at-large for Block Telegraph. A prolific writer and futurist from New York City, he specializes in all things cutting edge. He holds a Masters in the Arts and has taught extensively abroad.

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SALT Lending’s Expansion Further Globalizes Crypto-Backed Lending

SALT expansion

SALT, a Global Expansion

SALT has announced its largest expansion to date. According to the company, the expansion covers seven additional international territories, representing an increase of 200 percent in international exposure. SALT is the world`s first provider of cryptocurrency collateralized blockchain-backed loans.

The company, founded in Denver, Colorado in 2016, has opened operations in 15 additional U.S jurisdictions. The expansion has included Massachusetts, New Jersey, Texas, and Washington. Even more, SALT added an additional seven territories including Hong Kong, Brazil, Switzerland, Vietnam, Bermuda, Puerto Rico, and the United Arab Emirates.

SALT claims to be the smart way to leverage blockchain assets. Their platform hopes to connect cryptocurrency with traditional finance. It allows cryptocurrency holders to secure cash loans through its membership-based borrowing platform by collateralizing their blockchain assets. In addition, its financial services give opportunities for indirect involvement into its new asset class. SALT currently has an international user base of 70,000.

The rapid expansion of SALT`s services follows its 20-state expansion announced in August. The company is working toward an ambitious goal of being fully operational in all 50 states. SALT works to elucidate a major problem of blockchain assets – illiquidity. SALT`s lending model dubbed “Hold Your Assets, Spend Your Cash” enables liquidity access for cryptocurrency holders. This enables the full realization of the power of a new class of asset without reducing holdings.

expansion
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Image credit: SALT

Competitive Edge

The global expansion has catapulted SALT to new heights. Its competitive offerings include flexible loan terms, no prepayment fee, no origination fee, and no servicing fee or closing costs. This has enabled SALT to maintain its position as a pioneer and global market leader in blockchain-backed loans.

The interim president and CEO of SALT, Bill Sinclair, said, “The number of cryptocurrency holders has already increased by more than 70 percent worldwide during the past year, which points to the potential of a dramatic increase in loan demand. Given that SALT is also one of the few companies that actually lends in fiat currency, we’re in a unique position to democratize loan access by providing a multi-faceted loan service to businesses and consumers across the world.” Sinclair expressed his enthusiasm for the Expansion. He posits that the expansion would bring greater flexibility for borrowers. This would support SALT’s mission to not only increase loan access but also grant its customers maximum utility of their assets.

With more than 60 percent of cryptocurrency trading in international currencies, SALT seeks to continue increasing international exposure and providing its services to crypto holders across the globe.

Sinclair continued to say that, overall, the company`s core objective is to provide more liquidity to the crypto-market. This could very well serve as another leap forward in allowing both the banked and un-banked to gain access to traditional financial institutions through their blockchain assets. The company seems to be committed to advancing Blockchain’s thriving ecosystem around the world.

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Morgan Stanley to Offer Bitcoin Swap Trading Product

morgan stanley bitcoin swap trading

Adding Bitcoin-Related Derivatives

Bloomberg reports that Morgan Stanley has plans to begin offering trading of complex derivatives linked to Bitcoin. This information came from an unnamed source that Bloomberg indicates is highly familiar with the matter. This source asked to remain unnamed due to the private nature of the information.

According to the source, the bank will offer the expected trading abilities for synthetic exposure regarding Bitcoin performance. This includes the ability to use “price return swaps” to go either long or short. Fees for using this service will be in the typical manner for this type of swap trading, via a spread charged by Morgan Stanley.

Followers of cryptocurrency in the banking world may remember that Morgan Stanley CEO James Gorman previously indicated that the bank would not offer buying and selling of cryptocurrency. The recent information from the company’s insider is consistent with Gorman’s statement. Instead, investments will be via swaps connected with Bitcoin futures contracts.

The latest information indicates that Morgan Stanley already has the technical structure in place to begin offering the Bitcoin swap trading product. However, there is no indication that the launch will be anytime soon. Morgan Stanley representatives have not commented on the Bloomberg report. Additionally, the internal source indicated that before offering Bitcoin swap trading, Morgan Stanley will have to complete its standard internal process to approve the product and also need to see enough demand to justify offering the product.

Other Major Banks also Entering the Bitcoin World with Derivatives

bitcoin swap trading morgan stanley
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Image Credit: TheDigitalArtist / pixabay

Morgan Stanley is certainly not the first bank that will offer Bitcoin swap trading. Citigroup Inc. and Goldman Sachs Group Inc. have recently indicated that they’re in the process of creating similar offerings.

Citigroup Inc. announced earlier this month that it’s working to develop a trading mechanism for cryptocurrencies, including Bitcoin. This mechanism involves digital asset receipts (DARs) that give investors the ability to trade by proxy instead of owning coins.

Goldman Sachs indicated in August that it was looking into offering custody for cryptocurrency funds. A spokesman told Bloomberg, “at this point we have not reached a conclusion on the scope of our digital asset offering.”

More recently, Martin Chavez, Goldman Sachs’s CFO, announced during the San Francisco TechCrunch Disrupt Conference that reports of the firm no longer looking into cryptocurrency trading were “fake news.” He went on to explain that Goldman Sachs is actively working to create a derivative product for cryptocurrency due to client demand, indicating that the company will be looking into “non-deliverable forwards” next.

There have also been indications that JPMorgan will enter the cryptocurrency world. Back in May, the company started exploring how it could work with clients to invest with crypto.

It seems likely that Morgan Stanley is just the latest large financial institution to begin exploring methods of offering cryptocurrency due to the growing demand from clients.

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