Jimmy Song Examines Next Steps For Bitcoin’s Payment Adoption Path
Bitcoin’s whitepaper describes bitcoin as a form of electronic cash designed for easy electronic payments. Nearly ten years after its release, however, bitcoin is far from a mainstream method of payment.
Where does bitcoin go next to become a method of payment? What steps does bitcoin need to take to become a method of payment?
Jimmy Song attempted to answer that question in a recent blog post.
Why Do People Want Bitcoin?
Bitcoin’s market movements are based entirely on supply and demand. This supply and demand, according to Song, is fueled by the difference between “easy money” and “hard money”:
“A money that’s abundant will tend to have less demand and a money that’s scarce will tend to have larger demand. We call a money that’s abundant easy money because it’s easy to add to the supply. We call a money that’s scarce hard money because it’s hard to add to the supply.”
Bitcoin, of course, is hard money. There’s a built-in 21 million cap to the number of bitcoins in existence. That 21 million bitcoin cap will not change. There will never be more than 21 million bitcoins.
Song believes humans have “an inborn instinct…to want scarce things.” This is part of the reason why bitcoin is attractive. Worldwide, there are approximately 36 million millionaires. It’s impossible for everyone one of these millionaires to own one bitcoin simultaneously. As demand for bitcoin goes up, and supply remains the same, price will inevitably increase.
Scarce supply is just one reason people want bitcoin, of course. Bitcoin is seen as a store of value that’s immune from market movements and governmental decisions. It can also be used as a method of payment.
Is Bitcoin A Store Of Value Or A Method Of Payment?
There’s big controversy in the bitcoin community over the purpose of bitcoin. Some argue that bitcoin isn’t a good method of payment. Instead, bitcoin is an effective store of value – it’s like digital gold.
This is where Song brings up an interesting point: the fact that bitcoin users are obsessed with price movements shows us that it’s more of a store of value than a method of payment – at least in its current form:
“For people that use Bitcoin for its scarcity, that is, as a store of value, price matters quite a bit. Talk to anyone who owns Bitcoin and price is something they keep track of obsessively. This is prima facie evidence that most people don’t use Bitcoin as a method of payment, but as a store of value.”
Does Bitcoin Have Any Advantages As A Method Of Payment?
Let’s say you give someone two payment methods.
- One payment method is a credit card from Visa. That credit card can process 30,000 global transactions per second. Your payment is completed instantly. You don’t pay any fee, although the retailer pays a small fee.
- The second payment method is a bitcoin wallet app. You need to preload it with bitcoin you purchased from an exchange or elsewhere. If you want to make a payment, then you’ll need to wait 10 to 30 minutes for the transaction to be confirmed. You may face high fees depending on network congestion. There’s no guarantee that retailers will accept it.
Obviously, as it stands today, credit cards are superior payment methods compared to bitcoin.
We haven’t even mentioned other payment solutions like Venmo in the United States, PayPal, Google Wallet, Apple Pay, Samsung Pay, or even a paper check from your bank.
In virtually every way, these payment methods are superior to bitcoin in its current state. They’re faster, cheaper, more widely-accepted, and easier to integrate with your current financial services.
Why Would You Spend Something If You Believe It Will Increase In Value?
If someone offered to sell you a $7,000 car today in exchange for a single BTC, would you accept it?
If you believe the price of bitcoin is going to go up, then you’d probably answer no. Why would you spend $7,000 of bitcoin today when that same bitcoin could be worth $14,000 in a few months?
Consumers have little incentive to spend their bitcoin.
At the same time, merchants have little incentive to hold bitcoin. Merchants need to pay suppliers and cover other expenses. They can’t pay these expenses in bitcoin. They also can’t trust that the bitcoin they accepted today is going to be worth the same amount tomorrow. That’s why merchants typically instantly convert their bitcoin into a fiat currency. They can’t risk holding a large amount of funds in bitcoin.
Merchants that do accept bitcoin, meanwhile, typically use POS providers. These providers will charge fees for accepting bitcoin payments. They’ll charge fees for converting bitcoin into foreign currencies. At the end of the day, merchants might pay roughly the same fees as they would with their normal Point Of Sale system. There’s no incentive to accept bitcoin.
This creates an ineffective payment system: consumers don’t want to spend their bitcoin and merchants don’t want to accept it.
How Bitcoin Can Become A Method Of Payment
Everything we mentioned above makes bitcoin look like a bad method of payment. There’s little incentive for people to use bitcoin as a method of payment. However, Song outlines a way for bitcoin to move forward as a method of payment.
Song believes two main things need to happen if bitcoin is to succeed as a method of payment:
- Merchants have to want to use bitcoin. Today, many merchants accept bitcoin mostly for marketing purposes. If bitcoin is to succeed as a method of payment, then merchants need to see bitcoin as a store of value. Song mentions the fact that merchants in Venezuela, for example, accept bitcoin because it’s a more stable method of payment than the Bolivar. They believe in bitcoin, and that’s why Venezuela has one of the world’s biggest bitcoin-using populations.
- Consumers need to desire a good or service so much that they’re willing to spend their precious bitcoin. Savers plan to hold their bitcoins for a long time, and that means they’re resistant to flashy sales tactics. If bitcoin wants to evolve as a method of payment, then merchants need to advertise goods and services that make it worthwhile for savers to spend their bitcoin.
“In other words,” explains Jimmy Song, “the merchant has to want Bitcoin as a store of value and produce higher quality goods to entice Bitcoin holders.”
This leads to the crux of Song’s argument:
“At this point, merchants aren’t desperate enough for Bitcoin; they don’t even want to keep it when they get it. Furthermore, Bitcoin holders aren’t tempted by what merchants are selling and use fiat instead. Until this gap closes, there won’t be much Bitcoin flowing from holders to merchants, which is another way of saying that there won’t be much usage as a method of payment.
People used gold as a method of payment for thousands of years and not just as a store of value. Yes, it’s uncommon to swap a gold bar today. But gold coins and other metal-backed coins were commonly-accepted currencies for – quite literally – thousands of years of human history. These types of hard currencies are far more proven than today’s fiat currencies.
Could bitcoin follow a similar path and become a store of value and a method of payment? Bitcoin isn’t there yet – but Song clearly believes it can reach that point.
You can read the full blog post from Jimmy Song here.