Bitcoin’s Prospects as an Economic Ecosystem

Bitcoin’s Practical Value as an Alternative Currency

Someone who may be unfamiliar with bitcoin may ask why anyone would prefer to trade with it, and we might want to point out the benefits of bitcoin’s anonymity as a main reason, where one’s transactions are not tracked by authorities and therefore one can transact with the peace of mind of all of this.

While this may appeal to some people out of a matter of principle perhaps, the truth is, very few people care about this, because there really isn’t any need at all to look to evade anyone in most cases.

Bitcoin’s Prospects as an Economic EcosystemShould someone actually prefer to be evasive here, those who actually do have a need or a benefit to hide their activities, then bitcoin is going to be quite appealing to them. Criminals love cybercurrencies, and bitcoin is very popular among them, or anyone who is looking to hide their activities from the government.

It is safe to say though that the overwhelming majority of people would not have any use for any of this, where the anonymity of bitcoin is not seen as a benefit at all, nor should it really be. If the main reason for something like bitcoin has such a narrow appeal, it is not surprising that its use as a currency remains on the periphery.

Those who have dreamed that bitcoin may one day make a big dent at least in the currency markets, whether for online payments or anything else, have to deal with the fact that if this ever happens, the reasons behind this move will have to do with much more than just the ability to do anonymous transactions, since the market for this is so small.

Bitcoin though may have potential beyond this narrow appeal though, at least in theory, although a lot of things will have to change before that dream has much of a chance to flourish, the dream of building an economic ecosystem around bitcoin, where people may choose to use it as a primary currency.

It Really is a Head to Head Battle

When people choose between currencies, if they are acting rationally, they will choose the currency that provides the greatest utility. Traditional, so called hard currencies, are the incumbent, and it will take a lot to unseat them generally, and even require quite a bit to do so in more limited situations, such as online purchases.

In the world of face to face payments, there may be the potential for merchants to widely accept payments from bitcoin wallets, and if and when the demand for this among consumers rises to a high enough level, we will see this happening widely.

It is the market that ultimately determines what merchants accept, and although other factors such as costs and ease of use do play a role, if the people speak, merchants ultimately listen. No merchant would prefer to take credit cards when cheaper options to them are available for instance, but those who do not accept credit cards will see a lot of their customers go elsewhere, so the costs of lost business become more of a concern than the additional transaction costs involved.

Therefore, for bitcoin to achieve a level like this, where merchants would be forced to accept bitcoin payments or lose business, bitcoin is going to have to achieve a level of popularity as a payment choice that losing business by not accepting bitcoin becomes more of a concern than the trouble involved in accepting bitcoin payments.

We are nowhere close to this yet on the whole at least, but this is something that may indeed come to pass in the future. We have to ask ourselves what would need to change though for enough people to prefer bitcoin over domestic currency, and quite a bit would have to change for this to ever happen.

Hard currency has such a tremendous advantage right now, and it all starts with the fact that virtually everyone gets paid in hard currency. If you get paid in a currency and want to make a purchase in another, this is going to require currency conversion, which at a minimum involves going to the trouble of converting it and bearing conversion charges.

No currency gets converted without some sort of fee, at a minimum involving a spread, and when people convert one hard currency to another, there is a rate that the bank or other institution pays for currency and another that it sells it at, and the spread between the two is their profit. No business performs services without seeking a profit, or they wouldn’t be in business for long, as they need to at least cover their costs and seek at least a modest profit over that for their efforts.

It All Starts with The Currency of the Money You Receive

If you are employed, you might imagine what it would take for your employer to pay everyone in bitcoin rather than in hard currency, and for most employers this isn’t even imaginable right now, as they receive their inflows of funds in hard currency and this would involve an inconvenience to them at the very least.

Businesses and employers in general really like efficiency, and would have a lot of difficulty justifying going to the trouble of even offering compensation in alternative currencies to those who desire it enough, let alone going with an alternative currency such as bitcoin as a general payout method.

Hard currencies are very well entrenched into our economic ecosystem for this to change anytime soon, and at a minimum we would need a lot of employees clamoring for it, and enough competitive employers to offer it such that employers would become so concerned about losing people over this issue that they would be forced to offer it at least as an option.

The currency that people receive will therefore enjoy a big advantage over alternative currencies, by virtue of it being in the default position, where doing nothing keeps people using that currency, and one must make an effort and go to at least some expense to convert it over.

Bitcoin as a Practical Alternative Payment Option

It is far more likely that any meaningful migration to bitcoin will involve people converting the money they receive from hard currency to bitcoin, or at least that is likely where any meaningful transition to bitcoin will begin.

We can’t say that it has begun yet though to any meaningful degree, although we’ve certainly made some real progress here as far as the sheer number of merchants accepting bitcoin is concerned.

This has raised the hopes of those who want to see bitcoin more widely accepted, although we’ve really just gone from virtually no one accepting it to a good but still small percentage of merchants taking it.

The progress that we have seen has been in the world of online payments, not surprisingly given that this is where bitcoin is more at home and has advantages over some means like cash or debit cards that work fine with point of sale transactions but must be converted into something else like cards that use a major processor such as Visa or Mastercard to be used online.

Since bitcoin is a digital currency, it does not suffer from the need to convert it to something that can be used online. Credit cards though or debit cards that use Visa or Mastercard payment processing do not suffer from any of these challenges either, and are at this point in time at least a far more efficient means of making online payments.

There are actually two main challenges in growing bitcoin’s presence as a payment method, with the first one being concerned with the ability to use it in more places, and ideally everywhere one shops online, and the second being the need for this to be able to be done with an acceptable degree of efficiency.

If you can pay for something with a credit card in a matter of a few seconds, but it takes a lot longer for your payment to go through by paying with bitcoin, this is going to be an issue, with both the customer and the merchant.

Neither may want to wait as long as it takes to see a bitcoin purchase confirmed, and while we have made some real progress here lately, where the average time to confirm a transaction is now back to a more reasonable 5 minutes to a half an hour, down from the several hours it could take not long ago, the longer waits were mostly due to all of the increased demand brought on by the amount of speculation, so it’s not that this problem is really fixed.

Even 5 minutes is a long time compared to a few seconds, and while some may find this to be acceptable in some situations at least, not all online purchasers want to wait this long, and no one wants to or could do so with face to face transactions.

Imagine yourself at a store and you have to stay at that store for up to a half an hour for your purchase to be confirmed. If we ever get to the point where bitcoin becomes much more widely used, it’s hard to say how much longer this would take, but it would take far longer than would be ever acceptable.

This has us able to say with a high degree of confidence that bitcoin is simply impractical for face to face transactions period, although there are other cryptocurrencies that are more actively looking to allow their currencies to be more scalable and are looking to achieve far more practicality.

So, it’s not that we may never see a cybercurrency that can be used practically in all situations, but given the structure of bitcoin, it is hard to imagine this being possible with it. Sure, we may see some improvements in the way that bitcoin payments are confirmed, where we end up seeking more of a balance between confirmation and practicality, but some major changes indeed would be need to be made to even get bitcoin more competitive with credit card payments online, let alone with point of sale purchases, where one does not really have the luxury of waiting very long at all before the transaction needs to be confirmed.

Overall, it’s hard to imagine bitcoin becoming any more than a niche payment method, and those who wonder whether bitcoin may ever compete with hard currency probably don’t have much to wonder about.

Still though, this doesn’t serve to make bitcoin uninteresting, and it especially becomes interesting if a domestic currency is really suffering from inflation and especially hyperinflation. At this stage, bitcoin may step in as the currency of choice, by default. Hard currencies do enjoy huge competitive advantages over something like bitcoin normally, but should things turn sour for the currency, bitcoin can end up being a very desirable alternative.

So, while we hopefully will not see bitcoin develop an encompassing economic ecosystem, as this would involve seeing currencies collapse and bitcoin coming in to fill the void, bitcoin can achieve more of its potential generally, but only on a much more limited basis, and hard currencies are for now here to stay and won’t be unseated very easily.

Andrew Liu

Editor, MarketReview.com

Andrew is passionate about anything related to finance, and provides readers with his keen insights into how the numbers add up and what they mean.

Contact Andrew: [email protected]

Areas of interest: News & updates from the Consumer Financial Protection Bureau, Trading, Cryptocurrency, Portfolio Management & more.