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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