The future of Bitcoin as an alternative currency is tied to one simple metric – merchant acceptance and the velocity of money through those merchants.
Bitcoin has potential as a) a payment network, b) a store of value that you can invest/speculate in and c) a currency. This article is only about bitcoin as a currency.
Like others before me, I have become more positive about the future of bitcoin the more that I learn about it. A few months ago I would have leaned to the view that Bitcoin the payment network had a great future but that bitcoin the currency would be a footnote in history. Today I am more positive, because the trend lines and motivations around merchant acceptance are positive.
If mainstream merchants accept bitcoin, it will thrive. If not, anybody owning bitcoin will need to first transfer bitcoin into Fiat currency and the regulatory off ramp problem will kill it as an alternative currency. Without mainstream merchant acceptance, bitcoin the currency will live on only in the shadow economy and become a footnote in history. Forget the headlines about bitcoin price fluctuations or the latest VC deal; these are “noise on the line” compared to merchant acceptance.
We have been through two phases of merchant acceptance and we may be about to start the third phase (phases overlap i.e. one does not have to end before another one begins):
- Phase 1. Illegal online transactions, made famous by Silk Road. This got some media attention and confirms the old saying that, “there is no such thing as bad press”.
- Phase 2. Attracting rich Bitcorati for legal products. This is the phase we are in today. The merchant logic here is very simple. If a rich person wants to pay me in some unusual currency, I am motivated to accept that currency. Enough people got rich speculating in bitcoin or mining bitcoin in the early days for this to be a real niche market. These Bitcorati are bitcoin enthusiasts, so if they see two objects they desire equally and one says “we accept bitcoin” then that rich Bitcorati will choose the merchant who accepts bitcoin. This is fundamentally different from phase 1 because a) it is legal and b) we will start to see merchant success stories akin to the merchants who were early adopters on the Internet.
The enabler for phase 2 is the elimination of the volatility problem. The same volatility that is a boon for speculators is a showstopper issue for merchants. There is no value in getting rid of those hated 2-3% Credit Card fees if the bitcoin price moves more than that before you can use it to pay your suppliers and live your life.
The two leaders in processing Bitcoin for merchants are Coinbase and Bitpay. At time of writing both claim 35,000 merchants. Both have raised a lot of money from top tier investors. Their pitch to merchants is that accepting Bitcoin is as easy as accepting a credit card – with lower fees. Coinbase’s pitch to merchants for example:
“When a sale is made, you can instantly sell the bitcoin received to Coinbase to avoid exposure to bitcoin volatility.”
A leader in merchant adoption could be the first VC backed Bitcoin success, analogous to the Netscape moment. An IPO would give the venture mainstream visibility and kick-start the next wave of Bitcoin innovation, funding and adoption. It’s a pity that the bar is so much higher for an IPO than it was 20 years ago, but that is another story.
The tipping point is simple. It comes when merchants switch from asking, “why should I bother accepting bitcoin?” to, “is there any good reason not to accept bitcoin?” When that happens and consumers see the bitcoin symbol on more merchants checkout (online or offline) they will be more interested in paying by bitcoin.
2014 has been a good year so far for merchant adoption with the following big e-commerce players announcing that they are accepting Bitcoin – Overstock, Dell, DISH, TigerDirect and Newegg. Overstock was the bridge from Phase 1 to Phase 2. Patrick Byrne, the founder CEO of Overstock is known as a critic of the establishment while running a large mainstream business.
We have to move beyond the Bitcorati to get to the tipping point. Somebody who has not got Bitcoins from mining or speculating early in the game has to be motivated to buy using bitcoin instead of a credit card. I have been talking to some small merchants to ask them what might trigger them to accept bitcoin. These are merchants who do not have an obvious Bitcorati customer base; some may do so and the merchant won’t know until they try which speaks to the “is there any good reason not to accept bitcoin?” story. Most had been totally put off Bitcoin due to the volatility issue and the story that the volatility problem has been fixed has not yet reached them.
However in their busy lives, there still has to be a good reason to take the time and trouble to accept bitcoin. One story that made these merchants think about accepting bitcoin came up a couple of times and this could become Phase 3 of bitcoin merchant adoption:
- Phase 3. Micro-multinationals who want to accept international customers. Big businesses have already got doing business globally nailed. Small businesses don’t have very good solutions that are a) easy to implement b) inexpensive. Getting international payments via credit cards is easy but expensive; you pay a lot for the currency transfer back to your home currency. You could accept payment in foreign currencies but that gets complex. First, you have to decide which foreign currencies to offer and Murphy’s Law says that the one currency that you omitted is the one that your ideal customer wants to use (an American merchant may enable EUR and GBP and miss the Swiss customer who really wanted that high margin upmarket product as long as she can pay in CHF). Then you will have the hassle of getting your bank to accept multiple deposits in foreign currencies and when they do that you will find that you lose a lot when your bank converts it back to your home currency.
Doing this via bitcoin won’t be simple, but at least Bitcoin will be solving a real problem for merchants. Nobody has sized the micro-multinational market, but anecdotally it is large and tools such as VOIP now make it more natural to transact across borders, so this is likely to increase. This Phase is important because it will get more consumers (who have not mined or speculated) to use bitcoin. Lets say a consumer wants to buy something online that is priced in a foreign currency. If consumers see a simple calculator that tells them how much cheaper it is to pay via bitcoin than their credit card or debit card and it looked as easy as using their credit or debit card, consumers may give it a go.
- Phase 4. When Bitcoin becomes universal, just another option alongside cash and the usual Credit Cards in main street shops and e-commerce sites. To look at how could Bitcoin to cross the chasm from early adopters (Bitcorati and Micro-multinationals) to a universal payment option, we need to move into some speculative futurology and understand the switchover to EMV Chip and Pin cards in America. This switchover happened in Europe before merchants had any interest in Bitcoin, but will be happening in America just as the Bitcoin story gets more mainstream attention. The switchover to EMV Chip and Pin cards will happen in America for the simple reason that merchants will become liable for fraud from October 2015. Magnetic stripe cards are terribly insecure, particularly if merchants don’t even check the signature. When the POS terminal vendor comes calling about the dreaded switchover, a few merchants will ask them “can I accept Bitcoin with this new device?” It is a logical question. Merchants don’t know if Bitcoin will take off but they would feel annoyed if it did and their neighboring store was taking orders from their Bitcoin-enabled POS terminal while they were stuck in the past. So it is likely that some POS terminal vendors will add bitcoin to their functional checklist. If this happens we will cross the chasm, go past the tipping point or whatever other analogy we use for Bitcoin changing the world. There is a lot of money at stake in this switchover and the established payment companies will be torn between lowering their fees in response to the Bitcoin threat and fighting it at the regulatory level.
Moving from speculative futurology to real traction today, there may be a hoarding problem. Adoption is one thing, but what really matters is transaction volume (what economists call velocity of money). I asked both Coinbase and Bitpay to point me towards any data on this. Coinbase responded quickly saying “we don’t share stats around bitcoin transactions”. Bitpay revealed that they “process over $1 million per day in bitcoin transactions” and pointed me towards the Coinmetrics site which shows Daily Transaction Volume ($ value) and Daily Transaction Value. The Daily Transaction Volume at about $44 million is tiny compared to $16 BILLION for Visa; its no surprise that Bitcoin has a long way to go. Looking at the trend-lines shows some spikes that I will be digging into in a future post (I want to find out what triggers these spikes).
My next post is about bitcoin as a store of value ie as an asset that you invest in/speculate in hoping that it will go up in price. This is related to transaction volume because one reason for lack of volume is hoarding by people who own bitcoin.