Updated: Oct 4, 2020
If you’ve been in the crypto space long enough, I’m sure you’ve heard the famous story of the first retail Bitcoin transaction. A Florida resident purchased two Papa John’s Pizzas for 10,000 Bitcoins, which were worth around $41 that day but as of this writing, is worth $104,500,000. Many people (for good reason) feel as if the days of us spending our crypto assets on everyday transactions will never arrive. The current financial system makes it easy for us to transact using fiat currency. We have contactless payments like Apple Pay, Google Pay, and Samsung Pay, however, most people are unaware of the fact that behind all of the convenience offered by paying with fiat lies a plethora of administration and three-day settlement periods. Peer-to-peer payments can easily solve this issue, settling transfers quicker and cheaper. To someone like me, peer-to-peer crypto payments definitely looks like it will be a mainstream feature in our future, but why isn’t it the present? This article is going to go explore that idea along with what it’s going to take for crypto to be the mainstream medium of exchange, and how I see this process unfolding.
So just to make things clear, it’s already possible to make purchases small and large with cryptocurrency, as this has been done many times. You can use your crypto to purchase hotel rooms, books, event tickets, cars, and property. The process for any of these transactions are as simple as sending your crypto to the receiving parties wallet address right from your cell phone. Or, if you like the traditional way, you can get setup with crypto reloadable debit cards such as Bitpay or Crypto.com. These services allow you to send your crypto from your wallet or exchange onto your debit card so that you can go and spend your crypto from your card, anywhere where Visa or Mastercard is accepted. The rate gets locked in at the time of the transaction so that the merchant doesn’t get underpaid and so that the consumer doesn’t overpay for the transaction. Settlement payments for merchants usually happen automatically, every business day. The card company collects all payments processed since the previous business day’s settlement and deposits your balance into your account according to your settlement preferences. The consumer pays with crypto from their card but the transaction can be received by the merchant in fiat, crypto or both. They even have online apps that track all of your transactions so that you can export them to upload into a tax software for your taxes.
This all would’ve been extremely difficult to do 5-7 years ago. Fortunately, Bitcoin itself has gained a lot of mainstream popularity in recent years due to its performance and security. This has led to companies being motivated to stay ahead of the game, resulting in them aggressively building out the infrastructure/on and off ramps to make it easier for the average individual to buy,sell, and transact in crypto. This has also led to companies being more open minded to accepting Bitcoin as a form of payment, as they look to set themselves apart from their competition and keep some in reserves due to a lot of people feeling like the U.S. dollar is on its last leg.
Now, you probably won’t find many places that offer cars or houses for sale with a sign that says “Bitcoin Accepted Here”. It is entirely up to the owner of the car or property whether they will accept bitcoin as a form of payment. If you are talking to a real estate agent, you will have to tell the agent to ask the property owner if they would be open to accepting payment in crypto for the house. If you're looking to buy a car, you can try searching Craigslist for a car for sale by the owner so you can talk to the owner directly. While there are a few dealerships that accept crypto as a form of payment, I wouldn’t expect to walk into a random Toyota dealership and pay with crypto, there’s probably a higher chance of small car dealerships accepting bitcoin, you just need to ask. Coming from a former car salesman, you’d be surprised as to the lengths some dealerships will go to make a sale. Lets now go over some reasons why crypto is currently not being used as a means for everyday transactions.
First off, crypto is still extremely volatile which makes it impractical for everyday transactions. The entire crypto market usually mirrors Bitcoin’s price trends, meaning if Bitcoin is up, the market will follow and vice versa if Bitcoin tanks downward. This in part, led to the invention of stable coins (Teather, Dai, USDC, etc) with the goal of stabilizing the value/price by simply having its value tied in whole or in part to another asset. While the economics of stable coins have yet to be proven, I think it’s definitely a step in the right direction. Ultimately, there is no “quick fix”. For consumers and traders to embrace digital assets, a high volume of transactions will be necessary. This will reduce the wild swings and make crypto a more practical alternative. Thankfully, the expeditious advances in technology necessary to make this happen are already being built-out. This brings us to our next issue on why crypto has yet to see everyday use from individuals.
Speed and scalability is of the utmost importance if cryptocurrencies are going to be used in everyday transactions. This takes into account two major things, transaction speed and transactions per second (TPS). Bitcoin, with its ability to handle 7 TPS, was brutally outpaced by multiple altcoins on both counts while the race still continues. Big players like Ethereum, can handle up to 30 TPS and Bitcoin Cash can handle 60. However, these numbers still do not come close to the capacity of traditional centralized systems like Visa, which can comfortably process north of 40,000 TPS. In Bitcoin’s defense, it was created to be a non-sovereign form of hard money, not a competitor to Venmo and Square Cash. I don’t think using Bitcoin (as it is today) for small everyday transactions is realistic given its 7 TPS capability. This would be equivalent to using an airplane to drive down the street. Historically, with any technology there is a 3-way triangle of attributes that consumers can enjoy. Those attributes are speed, security, and quality. Each technology can fulfill two of these three qualities at one time. Bitcoin accomplishes security and quality while sacrificing speed (hence the 7 TPS). This is why layer two solutions like the lightning network are being built out so that Bitcoin transactions can be processed off chain allowing more TPS. Other altcoins like Stellar Lumens, XRP, and Dash are aiming to act as everyday payments but are still subject to the issues of high price volatility.
The final reason why crypto still isn’t used in everyday transactions is because of what the IRS considers a taxable event. Currently, the IRS considers it a taxable event when you sell your crypto for fiat, exchange your crypto for crypto, or when you use crypto in exchange for goods and services. For the context of this article we’ll just stick to the 3rd taxable event. With this law in place people will never spend their crypto because they’ll have to keep track of their cost basis and fair market value to know their capital gain or loss at the time of the transaction. People are not going to make it harder on themselves when they can keep doing what’s easy. The confused mind will always say no.
Now that you know the main reasons why cryptocurrencies aren’t being used in everyday transactions, let’s now go over my opinion on how the future will unfold and what it will ultimately take for crypto to be the dominant medium of exchange.
Like I covered previously in this article, people aren’t going to use an extremely volatile currency as a medium of exchange in everyday transactions. Given that crypto is still in its beginning stages, there are still a ton of speculators. This results in people hoarding these digital assets instead of spending them, with the hopes of selling them later, at a higher price to another speculator. This is synonymous to the adoption process that gold had to go through before it became a medium exchange. Gold had to be proven as a reliable store of value first. It achieved this by being consistently scarce underground for centuries. This meant that no matter how much the demand increased for gold, it was still expensive to increase the supply, resulting in maintaining/growing the wealth of individuals with gold savings. Bitcoin and some digital assets share this same quality. Having that said, there will always be price volatility in a new asset class before there can be stabilization.
So what is it going to take for the crypto market to stabilize you ask? That’s an easy answer, it’s going to require the same thing it took for any asset class to stabilize, large inflows of capital from institutions and high networth individuals. At the time of this writing, the crypto market cap is north of $339 billion, which is less than 1% of the entire world's money ($97 trillion). The majority of the holders of digital assets are retail investors, which explains the volatility. Retail investors buying patterns are much different from institutional investor buying patterns.
Retail investors buy and sell for many different reasons. They could be trying to put their kid through college, buy a car part, funding vacations and holidays, etc. These retail investor patterns result in unpredictable buying and selling activity with smaller amounts of capital. Institutional investors on the other hand, usually invest with one goal in mind, and that’s to generate a decent return for their limited partners. So what happens is that these institutional investors start buying into their positions with their billions and trillions of dollars in investor funds, which sends prices through the roof (at this point, the retail investors buying patterns won’t affect the price as much).
Whenever you have major demand from institutions in conjunction with a supply that can’t meet that demand, it will always result in major price increases. After that happens, markets begin to plateau (stabilize) as there is only so much capital in the world that can be allocated towards different asset classes. In other words, after institutions have their capital invested into the crypto market, the market cap could reach between $5-$10 trillion or higher (the crypto market cap was more than $1 trillion during the peak of the 2017 bull rally). At that point, it would take trillions of dollars of capital inflows in order to double the crypto market cap, (highly unlikely) versus the $339 billion of capital inflows needed to double the market cap where it stands today. Now, as usual, I’ll end this article with one of my favorite quotes as it pertains to this article, ”There is a large fundamental difference between a sale to an early adopter and a sale to the early majority.”