Why Bitcoin Hasn't Gained Traction as a Form of Payment
February 09 2021 - 11:39AM
Dow Jones News
By Paul Vigna
Want to buy your next car with bitcoin? What about your next cup
of coffee?
Elon Musk, a longtime advocate for bitcoin, will soon give Tesla
Inc.'s customers the chance to buy the company's electric vehicles
using the digital currency. The news -- along with Tesla's move to
acquire $1.5 billion of the cryptocurrency for its corporate
treasury -- sent the price of bitcoin up more than 20% to a new
intraday record of $46,724 on Monday.
For bitcoin bulls, the announcement was the latest sign of
validation for the burgeoning digital currency.
Despite making inroads with investors, bitcoin has been slow to
take off as a form of payment. It was originally created in 2008 to
operate like an electronic version of cash, allowing two people
anywhere in the world to digitally exchange value as if they were
physically exchanging cash.
In practice, it hasn't worked that way. The cost of using
bitcoin, and its volatility, have made normal, day-to-day
transactions impractical. That isn't likely to change with Tesla's
acceptance of the currency.
For users who might want to buy something small, say a $4 cup of
coffee at Starbucks, bitcoin is an unattractive payment option
because of the associated fees. The median transaction fee is
currently around $5.40, according to the website BitInfoCharts, but
the average is more than $11, and it varies wildly, depending on
network traffic. (The fee rises when traffic is heavier.) Over the
past three months, the daily average fee has varied between $2.18
and $17.20.
Luxury purchases, on the other hand, are where bitcoin has found
its niche. Concerns about such fees are unlikely to be an issue for
large-scale items, like an $80,000 Tesla Model S.
Bitcoin buyers tend to be loyal and spend more, said Jeff Klee,
chief executive of CheapAir.com, which has been accepting bitcoin
since 2013. "Since we started accepting bitcoin, we have
consistently seen a 'wealth effect' where sales have increased as
the valuation has gotten higher," he said.
Among the other stumbling blocks bitcoin faces in becoming more
ubiquitous is its inherent volatility. Despite its recent surge in
value -- bitcoin has nearly quadrupled since September -- it still
swings wildly. It can rise or fall 20% in a single day, sometimes
for no apparent reason.
Tesla hasn't revealed any details about how its bitcoin payments
system would work, and a representative for the company didn't
respond to a request for comment. But industry watchers suggest
Tesla would likely use a third-party processor to mitigate the risk
of price volatility in the period between the parties agreeing to a
deal and the funds clearing the bank.
Companies like BitPay automate the process, handling the
back-end logistics for digital-currency payments. Unlike cash
wirings, which can take days to process, bitcoin transactions close
quickly, usually in a matter of minutes.
For example, if Tesla were to sell a Model S for $79,990 -- the
listed price on its website -- the customer would send $79,990 in
bitcoin to a processor like BitPay, which would then direct $79,990
in cash to Tesla. BitPay tacks on a 1% processing fee.
Another big hurdle for bitcoin transactions: Taxes. Because the
Internal Revenue Service classifies bitcoin as property rather than
currency, users selling bitcoin, no matter the reason, are subject
to capital-gains taxes on that transaction.
Of course, some longtime bitcoin holders have seen the value of
their holdings rise so much -- bitcoin's price has surged from
$1,000 at the beginning of 2017 -- they can afford to take a hit to
cash out some of their gains.
Despite the hoopla surrounding Tesla's announcement, it is
unlikely to be a game changer for bitcoin or the company itself, at
least in terms of transactions.
Among the few retailers that currently accept bitcoin, payments
in the cryptocurrency tend to comprise about 5% of total sales.
Applied to Tesla, bitcoin sales would have represented just 10,000
of the 200,000 cars it sold last year. Meanwhile, bitcoin
transactions, which are mostly among traders, total in the hundreds
of thousands a day.
Write to Paul Vigna at paul.vigna@wsj.com
(END) Dow Jones Newswires
February 09, 2021 11:24 ET (16:24 GMT)
Copyright (c) 2021 Dow Jones & Company, Inc.
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