Bitcoin not used much to make payments

When it was created bitcoin was expected to be used as a medium of exchange just like fiat money. The first purchase was of two Papa John's pizzas in Florida for 10,000 bitcoins a rather high price given that one bitcoin is now worth over $10,000.

Bitcoin is not functioning much to make payments

A recent article in Fortune claims that bitcoin is turning from potentially replacing cash as a payments system to a commodity. One might add that it is a very speculative commodity.

The article notes that like gold, bitcoin is not used to buy goods usually as is fiat money. However, bitcoin is unlike gold in that its price is extremely volatile and it has no other uses as well such as in jewelry etc.

The volume of bitcoin transactions has risen for several years. Many of the transactions are traders buying and selling the coins. Often this is a result of the huge gains in price that cryptocurrencies had last year. It is mostly the result of speculation. It is not clear how many are buying the coins as an investment.

However, there are no doubt uses of the system to make payments for illegal activities and money laundering because the transactions are anonymous and do not involve a third party. North Korea appears to be trying to use bitcoin as a means of helping to finance itself and because it is banned from the mainstream financial system.

Bitcoin is still used by some for money transfers to some countries.

The problem of high user fees

As the volume of bitcoin transactions surged so did user transaction fees. From an average of $1.13 on October 1 last year, the fees rose to an astonishing $34.10 on average on December 23. This development caused a number of businesses to stop using bitcoin for payments. Steam the popular digital game distribution company was one among several to abandon the use of bitcoin for payments, as discussed in a recent Digital Journal article.

The problem has been solved, at least for now, with average costs on Thursday being just 20 cents. However, unless the price volatility eases perhaps there will not be a rise in companies accepting bitcoin as a means of payment. Bitcoin is also in competition with other coins such as Litecoin, and Bitcoin Cash for making payments. Both are faster and have very low transaction costs. Ripple and some others are developing payment systems that will help banks and other financial institutions make payments rather than replacing them.

Robinhood brokerage

Robinhood provides a platform for trading in securities free. The strategy seems to be that the free service will entice users into using Robinhood gold that allows trading after hours and other advantages but charges a monthly fee.

Next month Robinhood is said to be planning to allow trading in bitcoin and ethereum for free. Robin Hood already operates in five U.S. states trading securities. Robinhood says that it will allow users to track up to 16 different cryptocurrencies. We will just have to wait and see whether this is just hype or will become reality.

Robinhood has its own website. A review of the brokerage can be found here.

Previiously published in Digital Journal

Large game distributor Steam stops accepting bitcoin for payments

Steam, considered the largest digital distribution platform for PC gaming, has stopped accepting bitcoin as a payment system.

High volatility and fees make bitcoin unacceptable as money

Steam's owner Valve announced today that it would stop accepting bitcoin as a method of payment.

Valve said its decision was due to the "high fees and volatility" of bitcoin.

In a blog post Valve claimed that bitcoin transaction fees had gone up from $0.20 when they initially began to accept bitcoin to almost $20 dollars per transaction last week. The gamers paying in bitcoin have to make up for these fees.

One might think that since the value of bitcoin is often going up quickly Steam could make money on the transaction but Steam has to refund the difference which involves more transaction fees that the gamer must pay.

Steam points out the transaction fees are now so high that it makes no sense for the firm to refund money when the value paid is greater than the present value of bitcoin and the same is true of a situation where the customer paid too little in bitcoin. To add the additional amount in bitcoin involves large transaction fees that the customer must pay.

Steam says it may reconsider its decision in the future should the price of bitcoin become more stable. For now, it is still dealing with customers who have underpayed or still owe transaction fees.

Who are Steam and Valve?

Steam is considered the largest digital platform for PC gaming. It is estimated to have 75 percent of the market in 2013 by Screen Digest. By late 2017 Steam had over 150 million registered accounts. In 2015 Steam sold roughly $3.5 billion in games together with third party vendors.

Steam is owned by Valve corporation a U.S. video game developer and digital distribution company based in Bellevue Washington State. It was founded in 1996 by former Microsoft employees. Steam was launched in 20004. By 2011 after issuing many critically acclaimed games that were also commercial successes, it became the most profitable company per employee in the U.S.

No doubt other important firms that accept bitcoin will follow suit as transaction fees increase considerably and the volatility problem make it difficult to use bitcoin instead of fiat money in financial transactions.

Could competitive coins displace bitcoin as a form of money?

Dozens of companies accept bitcoin in payment. Many are listed at this site. However, as bitcoin's price continues to be highly volatile and transaction fees increase, some competing coins could become more widely used.

One possible competitor is litecoin, but bitcoin cash is another possible contender. Bitcoin cash uses blocks that are 8 times larger than those of bitcoin making its transactions much faster.

Litecoin

There are a few companies that accept litecoin in payment, but bitcoin has far more places that accept it and even has its own ATMs. Some of the advantages of litecoin for transactions are explained by its founder in the appended video. He sees litecoin being used for small transactions as it is faster than bitcoin while bitcoin although slower and with higher transaction fees is more secure and would be used for large transactions.

If you look at the recent trades section in the Canadian Quadrigacx exchange you will see many of the trades are in the low hundreds or even below a hundred in Canadian dollars, in a number of cases. There are very few trades in the thousands and I did not see one that even reached the price of a single bitcoin. As it is now, bitcoin is being traded often in rather small amounts in many instances. These could represent cases where bitcoin is being used for payments.

The processing time in litecoin exchanges is a block every two and a half minutes. In contrast bitcoin only processes a block every ten minutes. Litecoin's number of coins will total 84 million coins, whereas bitcoins' cap is just 21 million. It makes sense for more companies to accept litecoin in payment rather than bitcoin. However, in the cryptocurrency world common sense may not play much of a meaningful role.

The price of litecoin as I write this is $96.97 a bit down from a recent high. However, on Sept. 18 it was just around $52 dollars and this time last year it was a mere $3.69. Coin Market Cap gives a historical chart of the price of litecoin in U.S. dollars, as well as showing its price relative to that of bitcoin. In relation to bitcoin's price, litecoin's recent price is in decline.

Previously published in Digital Journal