I often hear people claiming that Bitcoin will replace our current currencies. And with the rise in value these voices grow louder. But unfortunately it seems they don’t understand the basics of the financial system.
Don’t get me wrong: blockchain is an interesting concept with lots of useful applications. It may even revolutionize different fields in our society. But Bitcoin will never be a mainstream currency. The average person will never buy its daily coffee with Bitcoin. And here is why:
First: transaction fees. The rise in value has one huge downside for everyone not trading at an exchange (where you never actually do a Bitcoin transaction): the transaction fees are paid in Bitcoin and based on the needed amount of data, not the value. This means you pay approximately the same fee for a coffee as for buying a house, at the moment roughly 9$ per transaction… That’s one expensive coffee. And if the number of transactions is rising (which it would a lot if everyone starts paying with Bitcoin) the fees will go up even further.
Second: transaction time and amount. It’s part of the Bitcoin Technology to only create one new block approx every 10 min. This reduces the number of transactions per second to about 4. Visa says they have over 1000 transactions per second. And this doesn’t count all the cash transactions. Meaning Bitcoin is far away from being able to serve those needs. Additionally it takes minimum 30 min to have a transaction deep enough in the chain to consider it confirmed. And who is willing to wait 30 min at the cashier? Not gonna happen!
So Bitcoin itself is definitely not fit for the job. But what about all the new services offering debit cards based on your Crypto-coins? Since those transactions (like the once on exchanges) never make it directly to the blockchain those constraints don’t apply. It’s basically like a normal credit-card and that means losing the major arguments for Bitcoin: the blockchain is decentralized and unregulated. Any company offering transactions based on Bitcoin (but not real Bitcoin transactions) is centralized and will get regulated over time. With the same reasons why there are regulations for banks and credit cards. If you use such a service you don’t need Bitcoin. It’s all back to any abstract value and the trust in the service that they convert it back to your currency at regular times.
But even if you accept all that and Crypto-cards count as “using Bitcoin” there is still the Third point: Deflation.
As we see it at the moment: Bitcoin is rising. If you have 5 Bitcoin and think about buying a car with it, you have to choose: buy a nice car now, or wait 6 months and buy a much nicer car (or maybe two). If you don’t need the car now, the choice is clear. That’s why economists fear deflation: it reduces spending and therefor slows down economy which leads to a downward spiral. That’s why federal banks print money to keep inflation at a “healthy” level. But the amount of Bitcoin is limited. So there is no way of preventing deflation. And that’s what makes Bitcoin an investment and not a currency.
Paying your coffee with Bitcoin is like paying it with your stock-portfolio. You can, but the average person will never do that.
Make sure to leave a comment and tell me what you think about Bitcoin as a currency.