What must happen before Bitcoin replaces Visa and other digital payment methods?


Accept payments in Bitcoin (CRYPTO: BTC) has notable advantages. The original cryptocurrency was designed for an online world and eliminates or reduces many weak spots for merchants by reducing bank fees, thereby reducing transaction costs compared to digital payment networks such as Visa (NYSE: V), and accelerate the speed at which transactions are settled.

Bitcoin is not perfect, however. Crypto and blockchain based assets are still a new technology, so many people are not familiar with or comfortable with how they work. The wild swings in the price of Bitcoin are also a major drag as a form of payment. As a result, most merchants don’t even consider replacing the traditional platforms run by Visa and the big banks just yet. At this point, the convenience and peace of mind of using the existing networks outweigh the benefits of moving to blockchain-based payments. But here are three ways Bitcoin could capture a greater share of the digital payments market.

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Bitcoin payment development in a nutshell: Time

All the different movements going on with Bitcoin and other cryptocurrencies can be summed up in one way: it will be time before Bitcoin becomes an accepted medium of digital exchange for valuables.

Although other younger blockchain networks like Ethereum (CRYPTO: ETH) have garnered more interest in recent times, it is worth noting that there are thousands of developers working hard on Bitcoin or on projects built on its platform. Some of them can be found on the existing payment networks themselves. For example, Visa’s network supports debit cards backed by cryptocurrency accounts, and the company has a small segment working on other methods of integrating Bitcoin into its system.

Nonetheless, Bitcoin still has a ways to go before it can overtake massive and powerful institutions like Visa and the banking partners that dominate the payments industry.

More Bitcoin Enablers, Not Just HODLers

As the cryptocurrency movement gathered momentum, a term emerged to describe some of its most ardent supporters: the HODLers. HODL is a now intentional misspelling of “hold”, an encouragement to hold on to cryptos even during some of the sharp drops and frenzied swings in value. It was also retroactively coined as an acronym for “Hold On for Dear Life”.

Individuals aren’t the only Bitcoin HODLers out there. Some notable companies have added Bitcoin to their balance sheets, including Square (NYSE: SQ), You’re here (NASDAQ: TSLA), Microstrategy (NASDAQ: MSTR), and leader in e-commerce in Latin America Free Mercado (NASDAQ: MELI). Some of these companies may just have Bitcoin as an alternative to cash in the hopes that the price of Bitcoin will rise over time. Others, like Square, are trying to make Bitcoin a standard of commercial exchange. Square CEO Jack Dorsey said last summer that Square is building a new ecosystem of developers to accelerate Bitcoin’s usefulness as a payment platform. Even the country of El Salvador has made Bitcoin an official currency, although its implementation has so far been questionable.

As a result of the work of some Bitcoin holders, a growing list of items and services can be purchased with Bitcoin, from low value items like socks to expensive goods like real estate or college education. Given the increased development, more and more businesses and consumers might agree to accept Bitcoin as a payment method. This could cause some to start spending their crypto assets rather than just HODLers.

Use of derivatives a stabilizing force over time

Financial products, such as futures and options built on or denominated in Bitcoin, could go a long way in advancing its use as a form of daily payment.

Leading derivatives market CME Group (NASDAQ: CME) launched Bitcoin futures at the end of 2017 and has steadily added other Bitcoin contracts in the years since. These financial instruments help institutions that own or use Bitcoin to manage their risk, as Bitcoin’s volatility is wild compared to national currencies like the US dollar, in which organizations have to pay their bills and taxes. A suitable analogy might be that of airlines, which use derivatives to handle large fluctuations in aircraft fuel. If more businesses are accepting Bitcoin payments and using the Bitcoin blockchain rather than a traditional payment network like Visa, a way to protect against declines in value is essential.

Bitcoin has acquired a significant beachhead as a legitimate investment asset, with a market value of over $ 1,000 billion. However, Bitcoin has the potential beyond that to simplify and lower the cost of traditional digital payment systems. But before Bitcoin is ready to take on the traditional digital payments industry dominated by Visa and the big banks, a lot of work needs to be done – and it could take many years before that happens.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.


About Matthew R. Dailey

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