Why Bitcoin has not gained strength as a form of payment

For bitcoin bowling, the announcement was the latest sign of validation of the growing digital currency.

Despite raiding investors, Bitcoin has taken a long time to deploy as a form of payment. It was originally created in 2008 to function as an electronic version of cash, allowing two people from anywhere in the world to digitally exchange value as if they were physically exchanging cash.

In practice, it has not worked that way. The cost of using Bitcoin and its volatility have made normal, day-to-day transactions impractical. That’s likely not to change with Tesla’s acceptance of the currency.

For users who want to buy something small, say a $ 4 cup of coffee at Starbucks, bitcoin is an unattractive payment option because of the associated rates. According to the BitInfoCharts website, the average transaction rate is currently around $ 5.40, but the average exceeds $ 11 and varies greatly, depending on network traffic. (The rate increases when traffic is heavier.) Over the past three months, the average daily fare has ranged from $ 2.18 to $ 17.20.

Luxury shopping, on the other hand, is where Bitcoin has found its place. Concerns about these rates are unlikely to be an issue for large-scale items, such as a $ 80,000 Tesla Model S.

Bitcoin buyers tend to be loyal and spend more, said Jeff Klee, CEO 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 the valuation has increased,” he said.

Among the other pitfalls facing bitcoin to become more ubiquitous is its inherent volatility. Despite its recent rise in value (bitcoin has quadrupled since September), it continues to fluctuate wildly. It can increase or decrease by 20% in a single day, sometimes for no apparent reason.

Tesla has not revealed any details on how its bitcoin payment system would work and a company representative did not respond to a request for comment. But industry observers suggest Tesla will likely use a third-party processor to mitigate the risk of price volatility in the period between the parties accepting a deal and the funds authorized by the bank.

Companies like BitPay automate the process, managing the background logistics for digital currency payments. Unlike cash wiring, which can take days to process, transactions with bitcoin close quickly, usually within minutes.

For example, if Tesla sold a Model S for $ 79,990, the price listed on its website, the customer would send $ 79,990 in bitcoins to a processor like BitPay, which would then direct $ 79,990 in cash to Tesla. BitPay charges a 1% processing fee.

Another major hurdle for bitcoin transactions: taxes. Because the Internal Revenue Service classifies bitcoin as property rather than currency, users who sell bitcoin, for whatever reason, are subject to capital gains tax on that transaction.

Of course, some long-time Bitcoin holders have seen both the value of their holdings rise — the price of Bitcoin has risen from $ 1,000 in early 2017 — they can afford to make some money from their earnings.

Despite the ad surrounding Tesla’s ad, it’s unlikely to change the bitcoin game or the company itself, at least in terms of transactions.

Among the few retailers that currently accept bitcoins, cryptocurrency payments typically account for about 5% of total sales. Applied to Tesla, bitcoin sales would have accounted for only 25,000 of the 500,000 cars it sold last year. Meanwhile, bitcoin transactions, which are mostly among traders, add up to hundreds of thousands a day.

Write to Paul Vignes to [email protected]

Corrections and amplifications
Tesla Inc. sold 500,000 cars in 2020. An earlier version of this article incorrectly said it sold 200,000 vehicles last year. (Corrected on February 9)