Out of the many different use cases envisioned by cryptocurrency advocates when the technology first emerged, it was arguably the use of cryptos as a payment method that many thought would define the future of the sector. However, now that cryptocurrencies have been around for a little over a decade — with the industry having grown to be worth a staggering $830 billion, down from a peak high of $3tn in 2021 — it is worth reflecting on whether this has proved to be the case.
Crypto as a payment method
One of the primary reasons that cryptocurrencies were initially developed was the growing need for a fast and efficient digital payment system that could operate in the online world. In this context, cryptocurrencies such as Bitcoin appeared to provide a technological solution to this increasingly pressing need.
With this in mind, it is perhaps little surprise that one of the first, and arguably most infamous, uses of Bitcoin led to one individual exchanging 10,000 coins to have two pizzas delivered to his house. Although at the time this probably didn’t seem like too bad a deal given that the transaction was only worth around $41, given the heights to which the price of Bitcoin has climbed, this transaction is now remembered as ‘Bitcoin Pizza Day’.
On the one hand, this story represents a somewhat light-hearted moment in the long and storied history of cryptocurrencies. On the other hand, it also tells us much about the tensions that lie at the heart of using cryptocurrencies such as Bitcoin as a payment method.
Most obviously, it raises the question of whether cryptos such as Bitcoin are best thought of as a currency you use to make small daily purchases such as a pizza, or whether they are really just a kind of digital asset that we invest in like a stock in the hopes that it will appreciate in value one day.
How does crypto work as a payment method?
Although in most countries it has not achieved the status of being legal tender, which is usually reserved only for the official currencies issued by a country’s central bank, thousands across the world still manage to use crypto every day to make a wide range of purchases.
This includes everything from paying for goods and services, to being used by gamblers and sports bettors on online betting platforms.
To do this, individuals will usually set up an account with a cryptocurrency exchange, which they will then use to acquire units of cryptocurrency. Users will simply choose which one they want to acquire from a cryptocurrency list and then click to purchase. This will be stored in a digital wallet. When you want to pay for something, you then send the specified units of crypto from your digital wallet to the wallet of whatever retailer or platform you are making a transaction with.
Although traditional payment methods such as debit and credit cards can easily be used to do this, cryptocurrencies offer several advantages. This includes the anonymity benefits that come with using a decentralized currency, as well as the fact that transactions can be fully processed in a matter of seconds.
The problems with crypto as a payment method
Regardless of the many benefits cryptocurrencies have over more traditional payment methods, the total volume of cryptocurrency transactions for consumer purchases is still relatively low — at least compared to the billions of dollars’ worth of ecommerce transactions processed every day.
Of the many problems cryptos face as a payment method, the volatility of crypto prices is arguably the biggest.
For the last several years, the value of cryptocurrencies such as the price of Luna have proved to be incredibly volatile. Although most cryptos are worth thousands of times more than they were when the technology first emerged, they have generally seen their prices rise and fall numerous times over the course of the last few years.
Price instability is a big obstacle to cryptos being used for everyday transactions, as users will generally be slow to part with their crypto if they think it might be worth more in the future.
This is in addition to some of the other problems cryptos have as a payment method, which includes relatively high fees, tax implications and the numerous steps it takes to get started buying and selling crypto to begin with.
Will cryptocurrency be the future of payments?
With all these issues in mind, it is not yet clear whether cryptos such as Bitcoin or Ethereum have a future ahead of them as payment methods.
In addition to the issues with the price of cryptos, they also face many regulatory hurdles which might stop them being used to any great extent. The Biden administration has high hopes of resolving many of these hurdles.
Nevertheless, there is still a huge amount of innovation and technical expertise in the industry. If history has shown us anything, it is that crypto enthusiasts love a challenge!