Bitcoin As A Medium Of Exchange

Bitcoin As A Medium of Exchange

Because bitcoin has no intrinsic value, its worth ultimately hinges upon its usefulness as a currency in the consumer economy.

Evidence of bitcoin’s footprint in daily commerce is mostly anecdotal, consisting of newspaper stories about people living only by spending bitcoin or estimates of large numbers of businesses that are willing to accept bitcoin.

To date, only one established business of have begun to take bitcoin such as the online retailer Overstock.com.

Most of the rankings of the top merchants accepting bitcoins are dominated by computer software and hardware companies selling products narrowly focused on bitcoin applications, and by marketplaces or exchanges providing investor services to bitcoin speculators.

Realistic insight into the adoption of bitcoin can be obtained from data drawn from the universal ledger of bitcoin transactions. According to data available at numerous websites, the

A recent article estimated Overstock.com’s daily bitcoin revenue at about $30,000. See

http://techcrunch.com/2014/03/12/overstocks-bitcoin-purchases-account-for-less-than-1-of-revenue-but-its-growing/

The most widely cited ranking of the top bitcoin merchants appears to be “The Bitcoin Ladder,”

https://en.bitcoin.it/wiki/Bitcoin_Ladder, but it is badly out of date, as it ranks the defunct and notorious Mt. Gox and Silk Road as the top two worldwide merchants.

However, it is widely understood that most of these transactions involve transfers between speculative investors, and only a minority are used for purchases of goods and services.

For instance, Fred Ersham, co-founder of Coinbase, the leading digital wallet service, estimated in a March 2014 interview that 80% of activity on his site was related to speculation, down from perhaps 95% a year earlier (Goldman Sachs, 2014).

If we take this estimate as correct, then perhaps 15,000 bitcoin transactions per day involve the purchase of a product or service from a merchant.

a world with 7,000,000,000 consumers, most of whom make multiple economic transactions each day, bitcoin appears to have a extraordinarily negligible market presence.

Ersham further states in his interview that 24,000 merchants are registered with Coinbase.8

worldwide bitcoin commerce occurred within this group (almost certainly an exaggeration),

these businesses would average well below one transaction per merchant per day.

In other words, bitcoin transactions appear to be rarities, even for the small number of merchants that accept them.

One obstacle to bitcoin becoming a widely used medium of exchange arises from the difficulty of procuring new bitcoins. Unless a consumer is successful as a bitcoin miner (an activity now dominated by supercomputers requiring massive capital investments), he or she must source bitcoins from online exchanges or dealers and then find a way to store them securely.

These purchases typically cannot be made using a credit card or PayPal, and instead

If all

See, for instance, https://blockchain.info/charts/n-transactions.

The co-founder of bitcoin payment processor BitPay estimated the number of worldwide businesses at 26,000

in a separate interview given contemporaneously. See http://money.cnn.com/2014/03/17/smallbusiness/bitcoin-bitpay.

the buyer must make a bank transfer or link an existing bank account to the exchange.

The existing bitcoin exchanges are often have low liquidity, significant bid-ask spreads, and a certain amount of execution and custody risk.

Finally, one cannot bypass the requirement of possessing bitcoins before procuring goods and services from a merchant.

Being able to purchase goods without cash in hand occurs routinely in most retail markets, as customers frequently buy with consumer credit financed by the merchant or a third-party credit card vendor.

These options are not available for bitcoins, as no bitcoin-denominated credit cards have yet been issued and consumer loans denominated in bitcoin appear to be unheard-of.

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