Is cryptocurrency the future of payments?
In recent months cryptocurrency has become a cultural craze that has gained the attention of retail investors, Wall Street, and even Worldwide governments. I believe there are three main factors one must consider when assessing crypto’s efficacy as the future of payments.
Lack of adoption
Although it has grown massively in popularity since its inception, with a now estimated 14% of Americans owning some form of cryptocurrency, the number of people that actually use it as a form of payment is unknown. The percentage is estimated to be quite small. A recent poll ran by the Gemini Exchange stated that about 13% of Cryptocurrency owners are planning to use their funds to purchase digital assets in the future. Overall, cryptocurrency represents an extremely small portion of the total world’s wealth. In 2020, Bitcoin made up only 0.4% of the world’s entire money supply. While Coinbase Commerce, a popular cryptocurrency payment processor has reported an 600% increase in unique transactions, there is still a long way to go. Until cryptocurrency expands into more practical use and is not being held solely as an investment, merchants will be slow to adopt it.
That all being said, what we are seeing in the current crypto market is unprecedented. Billions of institutional dollars are coming into the space currently, with more pouring in every day. Visa, Fidelity, Paypal, CashApp, and many other traditional finance organizations are now adopting the usage of, or providing access to, crypto on their respective platforms. If these institutional dollars remain in the space and do not exit after a short flirtation, then the possibility that crypto-enabled bank cards will be the norm in the next year or two is very real. The large amount of new retail investors in the space will see this as the ideal practical use scenario for their digital assets, it will be the path of least resistance for the majority. Even if these traditional financial institutions are not allowing users to migrate crypto assets out of their infrastructure, the fact that they will enable users to seamlessly use their crypto as a payment method will make that point somewhat moot. This is the most obvious pathway to the normalization of using cryptocurrencies in everyday transactions, which will drive mass adoption in the long term.
Cryptocurrency is extremely volatile and unpredictable by traditional finance standards. Recently, the 5th most valuable (by market capitalization) cryptocurrency, Dogecoin dropped 28% after Tesla and SpaceX founder Elon Musk spoke about it on SNL. Since the start of 2021, Dogecoin has risen in value by nearly 10,000%. Dogecoin’s recent, very public, highs and lows are the perfect encapsulation of crypto’s extreme volatility, which will surely spook some from converting traditionally more stable and familiar fiat currencies into cryptocurrencies. James Ledbetter, a CNBC contributor, stated “If you look historically at the price of bitcoin, there have been a number of occasions where it’s really spiked and then comes crashing down really quickly.” In 2017, Bitcoin’s price collapsed and subsequently wiped away a third of its’ value in a single day. The unpredictability of cryptocurrency as an asset class is something that certainly has the ability to limit wide adoption. According to Investopedia, one of the main reasons Bitcoin is so volatile is because it is a perceived store of value as opposed to a true currency. Since true currencies are managed by governments, they can “respond” to various risks and events. Due to its finite quantity Bitcoin and other cryptocurrencies don’t have this ability, thus making them more volatile. Overall, if Bitcoin doesn’t become less volatile, it is likely that it will continue to scare off many people due to its extremely speculative nature.
Government Issuance of Cryptocurrency
According to FX Empire, some countries have already produced their own cryptocurrencies. These include Ecuador, China, Senegal, Singapore and Tunisia. This is just the beginning as more and more people leave cash behind. A recent poll from Travis Credit Union found that only 16% of Americans still carry cash while 58% plan to stop using it completely. A cashless world is just around the corner and cryptocurrencies are the perfect replacement, with HSBC, Barclays, UBS and Santander currently developing a Universal Settlement Coin in a bid to make trade more efficient. The one catch is that governments are likely to roll out cryptocurrencies with terms and conditions unlike, Bitcoin, Ethereum, Dogecoin, and other popular crypto assets. They will likely leverage the technology behind popular cryptocurrencies but keep them under strict government regulation. They also will more than likely be manageable to allow for economic intervention when needed. As more countries continue to officially implement digital payments, it will inevitably lead to the larger adoption of blockchain technologies as a whole.
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