For all the talk about merchant adoption and wallet creation, Bitcoin hasn’t found a consumer market—and probably won’t, says Nathalie Reinelt.
Bitcoin isn’t really disrupting anything until it starts pulling large volumes of assets away from traditional financial institutions. That’s not likely to happen any time soon.
Only days into the new year, Bitcoin was already taking its hits as its price slid downward and negative press made its way into the headlines.
In early January, Bitcoin exchange Bitstamp announced that its platform had been compromised and temporarily suspended all services. Although Bitstamp reassured its account holders that it has reserves stored offline to cover the loss of approximately 19,000 Bitcoins, valued at around $5.2 million, the incident does little more than remind mainstream consumers that there is still more risk than benefit to holding Bitcoin.
Bitcoin’s value has been on something of a roller coaster ride for over a year. It climbed as high as $1,242 in November 2013, but dropped below $270 early last month. Regulators have also created quite a bit of uncertainty and heartburn for Bitcoin stakeholders, likely contributing to the currency’s price fluctuations.
Amid all this activity, Bitcoin has seen successes (for example, mainstream merchant adoption) and failures (collapsed exchanges). Bitcoin has also attracted its fair share of advocates and detractors alike. But what it hasn’t really been able to do so far is something that is probably the most important element of any consumer-based company’s success: Attract mainstream consumers.
Holding the Bag
With over $430 million in venture-capital funds invested in Bitcoin startups, there is a lot at stake in bringing Bitcoin to the mass-consumer market. There are certainly use cases where Bitcoin stands a chance of solving a consumer problem. These include lowering expenses for cross-border money transfers, transactional privacy for consumers (or criminals) who do not want their purchasing activity tracked, and offering asset protection in struggling economies (e.g., Zimbabwe, Argentina) where the local currency is more volatile than even Bitcoin.
These use cases, however, do not make up a consumer population large enough to sustain the sheer volume of Bitcoin startups that continue to seek additional rounds of funding to stay in business.
Meanwhile, mainstream consumers remain unenthusiastic about converting their hard-earned cash into Bitcoin—and rightfully so. It’s not hard to see why. While the cryptocurrency may be an interesting technology, to the vast majority of mainstream consumers, Bitcoin is a solution in search of a problem.
How so? With the payments industry already focused so intensely on reducing friction in the consumer experience by way of contactless mobile payments for physical purchases and one-click checkout options for online transactions—with both approaches using existing banking relationships—Bitcoin isn’t really coming to the table with anything new for the average shopper.
Value proposition aside, there is also the risk of holding Bitcoin. Whether it’s the volatility of the currency or the startling fact that there are zero consumer-protection requirements in place in the event of a hack or total loss, it’s a lot to ask of consumers to abandon traditional payment methods that are working just fine, never mind payment methods that come with assurances that consumers won’t be left holding the bag in the event of a breach.
Nevertheless, Bitcoin-based businesses continue to sign up mainstream online merchants and report growth in wallet-account creation. Are these signs that the tide is shifting for mainstream consumer adoption? Not likely.
While Bitcoin wallet growth may show an increase in interest, that doesn’t necessarily mean that consumers are buying what Bitcoin companies are pitching. Whether those numbers reflect curious one-timers or fervent users remains to be seen. The true value doesn’t lie in wallet-creation numbers, but in how many of those wallets are active and how much fiat currency is actually being converted to Bitcoin.
Although the term “disruptor” is highly overused in the fintech world, Bitcoin isn’t really disrupting much of anything until it starts pulling large volumes of assets away from traditional financial institutions. And that’s something which, given all the downside risks for consumers, is not likely to happen any time soon.
Furthermore, merchant adoption can hardly be a signal that Bitcoin is garnering mainstream consumer support. Online merchants in particular have nothing to lose when it comes to Bitcoin. They actually benefit from the lack of chargeback liability and the ability to immediately convert to fiat currency and avoid all the volatility risk.
Add in lower transaction fees and easy integrations, and there is little wonder why so many name-brand online merchants have added the alternative-payment method to their checkout page.
This doesn’t mean that all is lost when it comes to cryptoplatforms, however. As regulators continue to weigh in on alternative currencies and their payment rails, perhaps there is an opportunity for the cryptocurrency industry to take a long hard look at where it can truly add value—and, moreover, succeed.
It is unlikely to attract the mainstream consumer, but the efficiency of Bitcoin’s underlying cryptorails actually has merit. The sooner Bitcoin startups accept that as a reality, the faster they can adapt their business model to focus on how the cryptography of the block chain can enable faster, less expensive payments, and the sooner they can partner with traditional financial-service organizations to build on the cryptotechnology, which holds so much promise.
This was not the intent behind Bitcoin’s creation, and it goes against everything Bitcoin loyalists embrace about the cryptocurrency. But Bitcoin-based businesses are unlikely to see large profits until they shift their priorities.
Nathalie Reinelt is an analyst at Aite Group LLC, Boston.