Bitcoin Enjoys Steady Growth, But Experts Ask Where the Case Is for Consumer Use

Since 2012, investors have poured $407 million into Bitcoin startups, with three-quarters of that sum flowing into the cryptocurrency just this year, according to figures compiled by CoinDesk, a Bitcoin newsletter.

But now at least one expert is expressing doubts that these investors will see much of a return—if any—on their capital. The reason? While more merchants are accepting Bitcoin, consumers have little or no reason to hold it or spend it. Without a mainstream consumer base to support the currency, startups may struggle for survival.

“Mainstream consumers have no intention of converting to Bitcoin,” Nathalie Reinelt, an analyst at the Boston-based payments consultancy Aite Group, tells Digital Transactions News. Indeed, in a report on Bitcoin released this week, Reinelt argues Bitcoin is “solving a commerce problem that the vast majority of consumers simply don’t have.”

The implication, she says, is that “if I were running a Bitcoin company, I’d be very concerned.”

While Bitcoin is easy to use once consumers have bought the currency and funded a wallet, it’s no easier than credit cards and enjoys none of plastic’s consumer protections, Reinelt maintains. Plus, processors, merchants, and card networks have introduced wallet and card-on-file services such as Visa Checkout and Amazon 1-Click that enable single-click transactions, she points out.

Other experts are equally skeptical that Bitcoin will gain wide acceptance among consumers. Bitcoin’s speed of settlement—generally, a process that takes place in a matter of minutes—could have wide appeal for applications such as person-to-person payments, but this is not likely to be a durable advantage, George Warfel, a director at Edgar, Dunn, a San Francisco-based consultancy, says.

“The advantage of the block chain is that it’s instantaneous,” Warfel says, referring to the underlying Bitcoin architecture that tallies the currency and ties holdings to their owners. “But that’s an advantage only until the ACH becomes instantaneous, and that day isn’t far off.”

NACHA, the rules-setting body for the automated clearing house network, has released a plan calling for same-day ACH in a process not expected to be complete until March 2018. More or less real-time ACH could follow at some point, but that isn’t part of the current NACHA proposal.

Most ACH transactions settle next day, an interval that has spawned pressure on the network to speed up settlement. “You are going to have real-time ACH coming into the market,” argues Peter Ehmke, also a director at Edgar, Dunn and a colleague of Warfel. “It’s going to take time, but it will happen.”

Nor, argues Warfel, is there much advantage to consumers to hold Bitcoin as an investment. The currency’s notorious volatility aside, he says, buying and holding Bitcoin makes it seem more like a precious metal than a currency. “A payment medium only confuses its business model if its use case is as an investment medium,” Warfel notes. “Most people don’t pay in gold.”

On top of these issues, Reinelt adds that Bitcoin comes with considerable risks for consumers. Holdings aren’t insured, exposing users to risk of loss from hacking, she says. Also, since the currency exists as computer code, it can be lost if computers crash or hard drives are corrupted. Already, Ehmke points out, there have been cases of people losing their holdings through the unwitting disposal of older hard drives.

Still, Reinelt concedes that Bitcoin has a strong case as a payment method for cross-border remittances, mainly because of the drastically lower fees compared to conventional money transfers. “That’s the only value proposition I see for mainstream consumers, and it doesn’t even apply to the majority of mainstream consumers,” she says.

Time will tell if most consumers agree with Reinelt, Warfel, and Ehmke. For now, the Bitcoin user base continues to grow. For example, the user count for My Wallet, a Bitcoin product offered by Blockchain.info, an online Bitcoin service, is nearing 2.7 million, nearly triple the number a year ago. It took this number three years to reach 1 million, but then only nine months to hit 2 million in October.

While the number of active Bitcoin wallets isn’t available, transaction volume is also building rapidly. Daily transactions are starting to exceed 100,000, up around 40% from a year ago.