When the Music Stops

Bitcoin’s wild ride has enriched early investors but left payments geeks asking whether the cryptocurrency can ever be used to buy anything.

Let’s say you were an early Bitcoin enthusiast, but not too early. Bitcoin appeared on the scene in 2010, but you, ever cautious about unproven stuff like this, waited a few years. Then you bought 100 coins at the high for 2013’s third quarter, $129.46.

Where are you a scant four years later? Much richer, thank you very much. That $12,946 investment is worth about $400,000, give or take, at mid-September prices. Call your Bentley dealer.

Bitcoin has had a wild time over the past few years. This year alone, its value has skyrocketed from slightly less than $1,000 to, briefly, better than $5,000, before settling in the high $3,000s and low $4,000s as fall took hold. But, for all the excitement about the digital currency’s price, one question lingers: Can you spend it anywhere?

After all, Bitcoin’s investment value is really a side benefit. Its main function is supposed to be payment. But instead paying with Bitcoin has become the sideshow—and may well remain that way, say some observers.

“I look at it, and I’m not confident it’s going to hold out as a payment mechanism,” says Tim Sloane, who follows Bitcoin as vice president of payment innovation at Mercator Advisory Group, a Maynard, Mass.-based consultancy.

A Sandwich And a Coke

Just how many merchants take Bitcoin? No one knows for sure. The whole point with Bitcoin is that it relies on a decentralized structure. Lots of people maintain its blockchain—its transaction ledger—but there’s no central bank issuing and tracking it. So a merchant could start taking it, or stop, and no one would know unless an exchange chooses to release the data or some user alerts the community.

Enthusiast site Spendbitcoins.com counts up accepting merchants worldwide and estimates that there are now more than 100,000. That number includes plenty of obscure sites and corner shops but also early blockchain evangelists like Overstock.com.

Complicating things for merchants and customers alike is that the Bitcoin blockchain got pretty congested over recent years, which is slowing down transaction times and driving up user fees.

Fees are controlled by parties called miners. These were originally individuals but are increasingly companies that expend huge quantities of kilowatts on computational routines that allow transactions to be recorded on the blockchain. With limited capacity in a free market, miners can demand higher fees for quicker service.

That makes it tough if you just want to use Bitcoin to pay for a sandwich and a Coke. In some cases, the $2.41 average fee—up from a dime three years ago—could come to half or more of your purchase.

With that in mind, the Bitcoin community is attacking the capacity issue. In August, developers switched on a solution called Segregated Witness (SegWit, for short) that rearranges (“segregates”) certain signature (“witness”) data in a transaction, effectively increasing block capacity from 1 megabyte to 1.8 megabytes.

In November, a controversial proposal called SegWit2x could take effect. This would double block size but would also constitute what is known as a hard fork in the blockchain, effectively creating a new version of Bitcoin. This idea has split the community into opposing camps, so no one can say for sure if it will happen.

Meanwhile, yet another hard fork has already happened. Early in August, Bitcoin Cash split off from the Bitcoin chain with a block capacity of fully 8 megabytes. It was trading at better than $450 by mid-September and already had more coins in circulation than the original Bitcoin.

‘Nobody Can Tell’

These maneuvers may or may not solve the consumer problem. Critics have their doubts. “Right now, the infrastructure is insufficient to make broad acceptance of Bitcoin as cash unlikely because fees are too high,” says Sloane. “No one person can control [that]. That’s a good thing so long as you can align competing interests, but it’s not clear that’s happening.”

On the merchant side, some players are starting to adopt the same tactic the credit card industry turned to decades ago: Use third-party salespeople to sign up merchants. Last month, Bitpay, a major exchange based in Atlanta, paired with a Fort Lauderdale, Fla.-based independent sales organization called Aliant Payment Systems Inc. to recruit shops for acceptance.

Eric Brown, chief executive of the 13-year-old ISO, figures the e-commerce and high-risk merchants he caters to will respond to Bitcoin. Transactions are irrevocable, so no chargebacks, and, while fees aren’t worked out yet, they’ll likely be no higher than for credit card transactions, Brown says. “What’s nice is not having to deal with interchange,” he adds.

Bitpay charges a 1% merchant fee, which is standard for Bitcoin exchanges, and Aliant will pass this on to merchants with its own markup. “The fee will fluctuate for Bitcoin,” Brown says. Bitpay did not respond to queries from Digital Transactions.

Brown predicts Aliant will have signed up anywhere from 300 to 400 merchants for Bitcoin by the end of next year. Aliant’s total portfolio includes 6,700 merchants processing annually $435 million in card transactions and more than $4 million in automated clearing house volume.

Still, it’s really hard to tell right now how responsive merchants will be, as Brown admits. As far as he knows, Aliant is the first ISO to try this. “How it’s all going to play out, nobody can tell,” he says.

‘Like the Dotcom Crash’

But for now, at least, Bitcoin’s runup in price presents a big opportunity for high-end merchants. Some are signing up to accept the virtual currency, hoping to cash in on that wealth effect.

One example is Old Road Harley-Davidson, a motorcycle dealership in Santa Clarita, Calif. It’s preparing to accept its first Bitcoin transaction. It will take the currency for bikes valued in the tens of thousands of dollars, but also for specialized clothing it sells to Harley enthusiasts—everything from jackets to socks and underwear, says owner Mike Moffett.

Like Aliant, Old Road is using BitPay, though it has also applied with Coinbase, a rival exchange in San Francisco. Its fee for Bitcoin transactions is 1% of the value, which, as Moffett enthusiastically points out, “is less than most credit cards.”

The exchanges will convert the Bitcoin into dollars and deposit the funds into Old Road’s bank account, Moffett says. Bitcoin, he adds, is a supplement to credit cards at his shop, not a replacement.

Old Road has found customers ready to buy big-ticket goods like motorcycles. “People want to use the gains from investing in Bitcoin,” says Patrice O’Grady, general merchandise manager.

Old Road isn’t alone. It was inspired to take advantage of that market spike when it heard a car dealership was taking Bitcoin. And not just any car dealership, but Newport Beach Lamborghini down the road in Costa Mesa, which sells supercar models ranging well into the hundreds of thousands of dollars. That Bentley may be looking a little staid.

To be sure, Moffett is likely somewhat more schooled on cryptocurrency than the typical Harley dealer. He mines Ethereum in his spare time, for example. And, he points out that the total supply of Bitcoin is limited by its underlying code to 21 million coins. The supply currently is just shy of 16.6 million. As a result, he’s not fazed by the prospect of a rout in the market.

“When it spikes up, you’ll see people coming out of the woodwork [to spend it]. But we did it [accepting Bitcoin] more as a long-term play,” he says. “There’s a lot of room for growth, and there’s only so much Bitcoin out there.”

Likewise, Aliant’s Brown is optimistic the other big problem, the capacity crunch, will be worked out. This, he insists, is simply “growing pains.”

“It’s like the dotcom crash in the ‘90s,” he says. “The Internet came roaring back.”