Is Bitcoin really a “Currency” (originally published 11.20.2017)

The question often arises, is Bitcoin a “Currency”.

Well, it depends on both your definition of currency, and your intent of what to do with it.

To take a look forward, let’s first take a step backwards.

I recall an event in 2000 where both Peter Thiel and I were on a panel about the future of Money and Transaction processing.

I had taken my company VirtualSellers (VDOT) public in 1999, and we were the first Master Merchant in the world for credit card processing.

Peter (along with Max Levchin) had merged with an entity called X.com (the online bank owned by now famed Elon Musk) and renamed their company from Confinity to…PayPal (there’s a little history lesson).

On the Panel, Peter was claiming the PayPal was a new “global currency”. My response was NO- PayPal is simply emailing money, which will be no different than a bank transferring your own money from one account to another.

Why is this important? Because today, there is again, a lot of conversation and kerfuffle around Bitcoin being a new currency.

But is it really?

Again, it depends. Most people think of a true currency as something you can spend anywhere.

Let’s tackle that question first; If you can’t spend it, is it really a currency?

A currency has three simple components.

1- How is it created?

2- How is it spent?

3- Who will accept it?

For the first part, I’ve answered that before. Bitcoin is more like a Gift Card you purchase, than a currency that is created.

(**Note- If you’re not sure what Bitcoin is, here was my simple attempt to explain in. Read the explanation here.)

What about the second part? How is it spent?

Must the same, it’s transferred electronically. This is really no different than you doing a wire transfer from your bank account. You are simply sending digital money. Whether it is money you have deposited (in cash, from a paycheck, etc.), all your money in your back is now a digital currency.

Just like a Bitcoin (except that you buy the Bitcoin), your amounts are converted to a digital format for spending. When you use your debit card, that is a type of digital currency.

However, let’s look at the last part — who accepts the “currency”?

That is the concern of today, but most likely won’t be in the future.

As of now, there are very few Merchants that accept Bitcoin as a payment currency. You would be hard pressed (as of this moment) to walk up and down your local street and find someone who accepts any crypto at all, much less Bitcoin.

This is not a criticism, but an accurate observation of the state of the market.

With the rise of Bitcoin, or any other upcoming crypto currencies, it reminds me of the early days of the Credit Card industry.

When Credit Cards were first started, NO one accepted them. No one knew what it was.

No merchant was willing to take a piece of plastic for a promise that money would be deposited three days later in their account.

In those early days a Merchant would accept cash, as that was easy, tangible, and you could see it, touch it feel it. And for cash they understood it.

The Merchant would also accept checks with the promise money would be deposited in their accounts, and with no fee. This meant a Merchant could accept a check (a piece of paper) and just deposit it like cash. There was also no transaction fee to make that deposit.

With Credit Cards, well this was a new animal all together. First, the Merchant now had to PAY a fee for the privilege of accepting money. This was a foreign concept. These fees are called interchange fees, and even to this day are a bane for merchants. There is a constant desire to lower the transaction fees for accepting credit cards (more on this at a different time in how Blockchain can lower fees).

However, even once a Credit Card was accepted as a form of payment, unlike cash, the settlement of the money is not actually deposited in their account until 2–4 days later.

Between the new piece of plastic, new fees, delayed deposits, and other factors (such as chargebacks which are a different concerning issue all together) this made the early roll out of credit cards a tricky proposition.

Merchants were used to cash first, then eventually they became used to checks.

Then over time, more and more merchants accepted credit cards, until eventually in today’s time about 96% of all merchants accept credit cards.

You can think of Bitcoin in some of the same way. It is still early in the Crypto currency phase, so there are very few merchants who accept them.

As of now, Bitcoin is the market leader. However, in the early days of Credit Cards, the Discover Card was the leader. The Discover Card was created from the Sears Payment Systems- which was the first credit card created for people to buy washer and dryers.

As time went on, Discover Card faded whereas Master Card and Visa dominates now.

There is American Express as well, which has carved out a niche in the market, but not every merchant accepts the Amex Card.

American Express has added perks and status to their cards, which also come with much higher fees for the merchant to pay. This is why a consumer like Amex, but not all Merchants are fans.

The future of Crypto Currency will likely follow a similar path.

Bitcoin may be the market leader, but may not be the market winner. As other Crypto Currencies come out, there may be new features, perks, or fees structures that could create a few new winners.

Next time, I’ll address why Bitcoin especially, and other crypto currencies mostly, will never become a universally accepted digital currency. It has nothing to do the technology itself, but the structure of the Digital Space and the desire for Merchants to have stability.

Stay tuned.