Why you will never buy your coffee with Bitcoin
Well… your crypto-savvy nephew might do it a few times, but you will never buy your coffee with Bitcoin. And no, also not with Ether, or that other coin that your nephew keeps trying to persuade you into investing. Cryptocurrencies, and Bitcoin with it, are here to stay, but the narrative that Bitcoin will become a widespread unit of account is fading for good reason.
TL;DR: It does not make sense to have uneven distributed scarce currencies as a unit of account. Therefore your coffee won’t be accounted in Bitcoin, but your pension fund will hedge for inflation with Bitcoin
During the 2017–2018 crypto-craze, where prices where going up like the newest SpaceX rockets, and later came crashing down like the SN-8, there were new merchants accepting bitcoin every day. This hype fueled retail investors to tell friends to buy bitcoin, because soon they could be doing all their shopping with it. All in all bringing enormous interest into the coin. However, Bitcoin’s already full blockchain could only handle it with skyrocketing transaction costs. These costs were pushing the recently joined merchants to stop accepting Bitcoin as a payment method, thereby snowballing many retail investors out of the ‘bubble’.
In the above chart, the dotted line shows the average transaction fees in dollars paid for each transaction done on the bitcoin blockchain. The full line shows the price of 1 Bitcoin in dollars. Just after the first mayor peak, on the 22nd of December 2017, the price of bitcoin was just over 14 thousand dollars, but transactions averaged 55 dollars each. This made it impossible to profit from a hundred dollar investment in Bitcoin, as you would not have many dollars left when you would buy and sell.
What is also obvious from this chart, is that the current cryptocurrency ‘bull run’ we are in differs greatly from the previous one. This time, the interest does not come mainly from retail investors, and no there aren’t many new merchants accepting Bitcoin. I would even believe it if there are less shops using Bitcoin as a payment vehicle today, than three years ago. But, today, the average transaction fees haven’t skyrocketed as bad either, while the price of 1 bitcoin is now above double the previous all-time high.
The crypto enthusiasts of our time might have told you already, but if not I’ll do it again: This bull run is fueled by institutional investors, not by retail investors like you and me. While in the previous hype the average transaction costs (fees) were ten-folding, this hype-cycle the average transaction value has ten-folded. Meaning the average amount that 1 single transaction sends from Alice to Bob is, as of today, ~270.000 dollars. Yes. Let that sink in. There are now daily about 400.000 transactions. With an average value of 270.000 dollars per transaction. No, this is not coffee money any more.
For the insiders the narrative of bitcoin has changed. What once was magic internet money, and later thought to be the world’s payment network, is now mostly an institutional method for hedging for inflation. Does it matter that this narrative has changed? In my opinion it does not. The narrative of gold has changed over the thousands of years of its usage, just like the narrative of dollars, or euros.
Where Bitcoin’s narrative shifts away from a new form of payment, it opens up room for others to fill in this gap. Is it known already what it is, or will be? I don’t think so. Bitcoin might be used as a funding mechanism for payments accounted in dollars/other types of FIAT, but probably not by the masses. Bitcoin is a scarce and unequally divided asset. Two properties great for inflation hedging, but not for attracting whole countries, or the whole world for that matter, to use it for payments.
Promoting the story of Bitcoin, or other scarce unequally distributed currencies, as a payment method, seems to me like it would have an S-curve network effect like the image above. Up until the point that it would have 50% usage of the total population it would grow exponentially, and attract users. While after that point, every user entering the system, would only make the other users richer and richer. To me, this does not make sense for an asset that is used primarily as payment.
So, what does make sense as a new unit of account? Well, the contender should not be scarce, or if it is scarce it should not be unequally distributed. Any digital asset with these properties is in my opinion a contender for the future unit of account.
