Is Bitcoin suitable as an interim store of value for a payment rail?

By Bernard Lunn


TL:DR – the answer is no.

Bitcoin is back in fashion, for the simple reason that the price is rising. But Bitcoin has three use cases:

  • # 1 Asset to invest in/trade with (digital gold)
  • # 2 Currency to pay for stuff (pay for pizza)
  • # 3 An interim store of value for a payment rail

With the recent price action, use case # 1 looks healthy again. I don’t trade Bitcoin, so don’t follow this closely, but the best guess is that the base driver for Bitcoin price rise relates to Chinese getting money out of China and then speculators jumped on board. So I would expect to see continued volatility. People use Bitcoin to bye-pass exchange controls wherever they are, not just in China. It just happens that with a) a lot of Bitcoins mined in China b) a lot of wealth in China and c) the August crash in China, the motivation to get money out of China has gone up significantly. If you want to get money out in a hurry, a bit of volatility is a price you are willing to pay.

So far the positive price action has had no noticeable impact on people using Bitcoin as a currency i.e. use case # 2. If the positive price momentum sustains then more people will read about Bitcoin and that could have some positive impact on # 2 ie more people will want to be paid in Bitcoin. However if it goes up consistently as Bitcoin bulls are now forecasting again, it will have a negative impact on people wanting to pay in Bitcoin (because people will hoard). Use case # 2 needs a boring sideways price movement with no more volatility than a normal currency.

Use case # 3 has long been touted by Bitcoin bulls, but I am skeptical. The theory goes like this:

  • Statement # 1: You can send Bitcoins in real time to anybody at almost no cost.
  • Statement # 2: So you can send any currency to any currency (or, more broadly, any asset to any asset) using Bitcoin as the payment rail.

This use case # 3 is the one that I am skeptical of. Statement # 1 is incontrovertible. However it is useless unless Statement # 2 is also true and it is untrue because:

  • The on ramp and off ramps are regulated. This creates time delay.
  • Volatility means that delays in the on ramp and off ramp costs money and an unpredictable amount of money. It is better to pay traditional payment rail a predictable %.

Use case # 3 is using Bitcoin as an invisible interim store of value. Neither sender nor receiver cares about Bitcoin. If you wanted an interim store of value for this purpose, the last thing you would invent is Bitcoin. You would create something that was almost a mirror image of Bitcoin:

  • Had the lowest possible volatility against the major Fiat Currencies.
  • Was not perceived as a threat by the Governments that issue those Fiat Currencies.

What will the Bitcoin price do? When asked what the stock market will do, J.Pierpoint Morgan (1837-1913)  replied: “It will fluctuate”. He would say the same about Bitcoin price today.

Regarding use case # 2, the market jury is still out. The famous bet between the bear (Felix Salmon) and the bull (Ben Horowitz) will be coming due in just over 3 years:

“In January, 2019, we’ll poll a representative sample of Americans. If 10 percent or more say they have used Bitcoin to buy something in the past month, Ben wins. If it’s fewer than 10 percent, Felix wins.”

Today I would tend to go with Felix Salmon. However I also know how fast these things can change when they do start to change. So Ben Horowitz could still win his alpaca socks (and a few billion from A16V’s big VC bets on Bitcoin). It is possible that the price resurgence coming after so many people have learned about the underlying Blockchain technology will trigger this, but I doubt it; we have seen too many false dawns when it comes to Bitcoin transaction volume.

Daily Fintech Advisers provide strategic consulting to organizations with business and investment interests in Fintech.

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