Cryptocurrency as a means of payment

    Cryptocurrencies are widely known as a form of investment and an asset allocation tool, but can they be used for payment?
    This is not an easy question, but let’s try and find the answer. 

    First, let’s start with some context.

    Background: crypto hype and pizza orders

    In the early days, crypto was largely considered to be a viable payment option. It was not uncommon to see people buying basically everything with bitcoin: from coffee and snacks to jewellery and holiday vouchers. You might also remember the infamous Bitcoin Pizza Day (May 22), ironically celebrated by the crypto community all around the world: on that day in 2010, a crypto enthusiast paid 10,000 BTC for a couple of large pizzas. 

    Since then, bitcoin and cryptocurrency, in general, have become a much more significant part of our lives. Many people still see crypto as an investment tool and look at it solely through the lens of its exchange value. But that’s not all there is to it.

    Nowadays, pizza is not something you would buy with BTC, but cryptocurrencies are still being used as a payment mechanism. Any crypto holder is capable of making a payment to another individual to get what he wants: only this time it would probably be a big mansion or even a private island, not a pizza.

    The problem is, for crypto to be an actual payment tool just like any fiat currency, there need to be some effective mechanisms to ensure that every deal involving cryptocurrencies is completed fairly and equally transparently for every interested party. So, what could these helpful mechanisms be?

    What makes payments in fiat so convenient

    There are multiple ways to use fiat currencies for payments. Local currency payments, regional and international multi-currency payments — there are different systems designed for specific types of transactions. Some of them are used by millions of people on an everyday basis. Others are created for transferring large amounts of money. On top of that, there are messaging systems for financial institutions (SWIFT is the best-known example) that allow different banks from across the world to communicate and transmit payment instructions to each other.

    All these complex systems that help us make various transactions with a fair amount of confidence, were created as a result of a gradual evolution of financial technologies and procedures. While still having some room for improvement, these solutions are the best thing we have today for making payments with ease and a minimum amount of doubt.

    What about crypto?

    Cryptocurrency-based transactions have some inherent strengths and weaknesses compared to traditional fiat operations. 

    First of all, exchange rate risks are very influential in this case, because cryptocurrencies are not backed by physical commodities or government authorities. Therefore, crypto’s value is essentially determined exclusively by supply and demand. 

    There are effective crypto instruments that address this issue, though: stablecoins, for example.

    Stablecoins are much more stable than unbacked cryptocurrencies because they are usually tied to the value of a fiat currency. If an acquired product or service is priced in fiat, stablecoins tied to this particular currency are the easiest way to purchase that product or service with crypto.

    Another positive factor that makes cryptocurrency transactions viable is their speed. If a payment service is able to instantly convert crypto to fiat (and the other way around), the crypto payment can be completed with the minimal exchange rate risk.

    The number of transactions

    While the global payment networks that operate with fiat can process thousands of transactions in a matter of seconds, blockchain-based transactions are much more complex and therefore require much more time to be processed. 

    Limited transaction rates might appear a problem, but each new generation of cryptocurrencies makes the issue less and less apparent. For example, Bitcoin’s at 7 tps (transaction per second), Etherium’s capability is at 13 tps, and Dogecoin offers 30 tps. BSC sits at 63 tps, Cardano offers 257 tps, and Solana, one of the most popular new blockchains, offers a whopping 50,000 tps (some sources claim that Solana’s actual tps is about 30,000, but it still is quite a number). Meanwhile, Ethereum 2.0 is expected to hit 100,000 tps. 

    This trend indicates that blockchains are ready to offer some impressive transaction rates that will allow them to be used as an alternative to traditional payment systems.

    The speed of transactions

    Third-generation blockchains allow their users to make transactions practically instantly, which is a great advantage. Traditional systems can process payments really fast, too, especially if the local banks and currencies are involved. Still, large sum payments, direct debit payments, and international payments can take much more time: in some cases, transactions take days to be processed.

    Transaction costs

    Each cryptocurrency operates differently, and it’s really difficult to tell how much money on average one might lose on transaction fees. In the past, some cryptocurrencies had pretty high fees; on the other hand, some of the recently emerged cryptocurrencies have close to zero fees. All in all, the situation is almost identical to the tps trends we covered before: the future seems to be pretty bright here.

    In conclusion

    While the concept of blockchain is still hard to grasp for many people, which forces them to be sceptical and even defensive toward cryptocurrencies, it’s hard to deny the financial, social, and cultural impact that bitcoin and its successors had on our lives. For instance, crypto has already proved useful for international payments. 

    To make cryptocurrencies even more accessible and recognised, we should integrate solutions that would make them easier to use for an average person who is not a part of the crypto community, while simultaneously giving experienced users options and tools to fine-tune their crypto experience. We know for a fact that such solutions already exist: for example, CryptoPayments is one of them.