Rising Bitcoin adoption emboldens crypto-enthusiasts

By:
Solomon Teague
Published on:

Despite the volatility in its price and its still-limited practical use, an increase in the number of merchants accepting Bitcoin in recent months has ignited optimism among digital-currency proponents.

Bitcoin has been trumpeted as the pre-eminent virtual currency, a digital gold, a revolutionary payments channel and a hedge against QE-induced inflation that never materialized.

However, after crypto-mania saw the price of Bitcoin break through the $1,000 mark in late 2013, its fall from grace this year has been dramatic, falling to $400 in April and now prices at $475.

The immense volatility of Bitcoin has often been explained away by its cheerleaders as a by-product of its youth, but Steven Englander, global head of G10 FX strategy at Citi, believes it might also have much to do with the way Bitcoin is mined.

Bitcoin mining has evolved from cottage industry to heavy industry during the past couple of years and mining equipment has become expensive.

"About 3,500 Bitcoin are mined daily," says Englander. "If the miners are a steady source of supply and there is no increase in final demand, we have this overhang of Bitcoin being sold into the market. In consequence, we have downward price pressures."

The genie is out of the bottle. The cryptocurrency
ecosystem is here to stay and will evolve and improve…

Zilvinas Bareisis

This is exacerbated by illiquidity. Bitcoin has seen daily trading of around 60,000 to 100,000 in recent months, or more when the price is falling, says Englander, adding: "For now we have miners looking to sell and not much of anyone looking to buy."

While Englander concedes this might change if demand for Bitcoin picks up, he is not convinced there is a clear business case for using Bitcoin.

"For corporations to receive Bitcoin and hold it would be an aberration," says Englander. "Corporations buy options and pay premia to avoid currency risk. Why would they then go out and unnecessarily hold an asset that is more volatile than any of the currencies whose risk they are otherwise paying to mitigate?"

Even if they did decide to hold Bitcoin for their own reasons, such a move would have accounting implications, says Englander, "since it would be viewed as a speculative position, not a hedge".

However, there is a more optimistic view: there is evidence of more merchants accepting Bitcoin as a form of payment. According to CoinMap, there are around 5,350 brick-and-mortar locations accepting Bitcoin, with Dell in July joining US online merchants Overstock.com and Expedia in accepting the currency.

According to CoinDesk, there are some 63,000 Bitcoin-friendly merchants, which could rise to 100,000 by year-end.

"[These merchants] appear to be converting it straight back into fiat," says Zilvinas Bareisis, senior analyst at Celent, a financial research firm. "This [Bitcoin-fiat currency swap] can still be a profitable strategy for them. There are services out there offering the ability to do this for less than 1% of the transaction charge, though it is unclear whether they will offer this long term or if it is just a way of attracting merchants."

"Certainly it can be cheaper than offering Visa or MasterCard, but using Bitcoin won’t eradicate those costs entirely because merchants are only going to offer Bitcoin in addition to cards, not instead of them."

Further reading
 
Bitcoin: special focus

Merchants are not going to invest in additional infrastructure to allow for Bitcoin payments unless they see demand for it among consumers, but, here again, the case for Bitcoin use by consumers is not compelling unless specific incentives are created, for example a reduction in the cost of transactions using the cryptocurrency.

So far, few merchants have offered those kinds of incentives. "Those consumers who do use Bitcoin under these circumstances are doing it for love, not money," says Englander.

The Bitcoin industry always accepted the currency would be blighted by severe volatility for the foreseeable future, so the dramatic drop in price comes as no surprise, even if its detractors view it as evidence it can never be viable. Neither was Bitcoin going to achieve widespread acceptance overnight, with the process of onboarding merchants inevitably slow.

However, at the grassroots level, new service providers have been popping up to take advantage of growing interest, such as accounting platforms to ensure Bitcoin investors comply with local tax rules (LibraTax) and financial services companies dedicated to cryptocurrencies (Delta Financial).

The argument for Bitcoin adoption is greatest in high-inflation economies, where Bitcoin might in due course prove better than local currencies as a store of value, but it is a tougher sell to developed economies, such as the US and UK, where inflation is under control.

Bitcoin growth might therefore be driven by emerging markets, where legacy infrastructure is also weakest and where the case for Bitcoin is consequently greatest.

Adopting Bitcoin would put Africa and other EMs on parity with the developed world in terms of financial infrastructure, Brock Pierce – founding partner of Crypto Currency Partners, which has invested in cryptocurrency businesses, including BitFury and BTC China – told assembled Bitcoin enthusiasts in London recently.