Cryptocurrencies are – finally – emerging as a genuine alternative payment method to fiat money. But how do they actually work, and are they worth the hassle?
Satoshi Nakamoto, the mysterious individual (or team of coding experts) that invented bitcoin, originally set out to develop a pure super-currency that would work as an effective medium of exchange, combining the best qualities of cash transactions and electronic transfers. And as distrust in governments and financial institutions reached unprecedented heights in the wake of the financial crunch of 2008, the aim evolved to establishing a decentralised system that bypassed any intermediaries.
Nakamoto wasn’t the first with the ambition to digitalise money. What he brought to the table was blockchain, the underlying technology that could make it happen. But the original rationale behind bitcoin was hijacked from the start. Not being pegged against any tangible assets or currencies, bitcoin’s volatility doomed it to becoming a speculative investment rather than a viable currency. The 2011 flash-crash, for example, saw a 99.4 per cent fall in its value within an hour.
There have been other roadblocks to bitcoin becoming a widely accepted alternative currency. In his 2017 book Radical Technologies, Adam Greenfield listed its inadequacies. How could it be an alternative to fiat money, he argued, when it’s hard to acquire, hard to spend and too volatile to hold?
Three years after Greenfield’s commentary on cutting-edge digital technologies was first published, his insights are still relevant. Cryptocurrencies failed to cause any major disruption in the payment industry. However, having looked at the payment landscape of 2020, Greenfield might go on to qualify his statement today.
Suppose you are of the opinion that mining bitcoin – or indeed any cryptocurrency – is too much of a faff, but you would still like to get hold of some. Where do you go? Options include one of the 24,500 tobacco shops in France, for example, or the dozens of cryptocurrency bankomats in Prague, or Binance, a leading cryptocurrency exchange headquartered in Malta.
Withdrawing bitcoin from ATMs sounds the most straightforward method, although according to Coinmap, an inventory of locations that buy and sell crypto-assets around the world, some ATMs only allow certain denominations to be withdrawn. Parisian tobacconists may be a more cumbersome route – you’ll get a ticket with a QR code that you scan with your mobile to get your bitcoins – although it’ll cost you a 7 per cent commission.
Coinmap lists approximately 16,000 venues worldwide where you can use the bitcoins in your wallet to buy a wide range of goods and services. You can also have your own royal blue Coinbase card, a contactless Visa debit card that’s been available since last April, that syncs directly with your account with the company. Cryptocurrency debit cards are a bit of self-indulgence as they mostly incur issuance, loading, conversion and other fees. However, since its debut in the UK, not only did Coinbase enter a number of other markets creating new crypto-merchant locations, it also secured principal membership with Visa.
But what’s in it for merchants? The most important driver of crypto-payment adoption in their case is brand exposure. Responding to customer demand for crypto-payment and acquiring a throng of young punters by offering the service can be a way of future-proofing their business. But it’s only worth it if they don’t need to gamble the house.
And payment service providers have recently entered the scene to ensure that won’t happen. Czech payment gateway provider GoCoin can make merchants bitcoin-friendly, while liberating them from the tremendous amount of hassle and risk that dealing with cryptocurrencies involves. Flexa, a crypto-payments network with the ambition of making crypto spendable in every store, protects merchants from the volatility of bitcoin, Ethereum or Litecoin by getting their funds insured and custodied through its crypto-exchange partner.
Another answer to the volatility issue is stable coins. The exchange rate of cryptocurrencies can plunge or soar in a matter of minutes, which makes transaction confirmation time crucial to its utility as a means of exchange. For bitcoin this currently stands at between 10 and 30 minutes, while other, cheaper cryptocurrencies designed for speed – such as Litecoin or Stellar’s Lumen – can confirm the transaction in a few minutes.
But even with speedier versions, you would be advised to use tools that check network load prior to initiating any transactions to make sure there’s no congestion. Stable coins, such as Facebook’s proposed Libra, frowned upon by business competitors and governments alike, would, meanwhile, be pegged against a basket of international currencies, including Sterling.
Although bitcoin may fall by the wayside in the race for dominance over crypto-payments, the fact that prominent figures such as Mark Zuckerberg and – more recently – former Bank of England governor Mark Carney, have visions of decentralised digital super-currencies will definitely please Satoshi Nakamoto – whether he’s a real person or an avatar for something else entirely.
By Zita Goldman