The conventional wisdom around cryptocurrencies is that they are a revolutionary new payment platform that is censorship-resistant, fast, and trustlessly secure. However, I posit that cryptocurrencies are nowhere close to being great payment platforms and enabling payments is not what makes them valuable today. That being said, it's definitely possible for cryptocurrencies to be great at payments in the future, but the necessary pieces are not in place.


There are two key reasons why cryptocurrencies are not good for payments today. The first is that the medium of exchange is not stable. Most, if not all, cryptocurrencies have an inelastic supply which result in highly volatile prices. When demand for a coin changes, which it does often, the supply cannot change to stabilise its price. Take for example Bitcoin, which will have at most 21 million coins and the rate at which coins are created is fixed. Even Ethereum, which does not have a maximum supply cap, has a fixed rate at which new ether is created.


The problem with a volatile medium of exchange is that it can be very costly to use for transactions. Take for example, the merchant that just sold an Xbox for an ether. If the price of ether tanked in the next 5 minutes, s/he just sold the Xbox unintentionally at a discount. On the other hand, if the price of ether rose in the next 5 minutes, the Xbox purchaser would have unintentionally overpaid for the Xbox. Price volatility increases the risk to both parties engaging in a transaction resulting in both parties being discouraged from transacting at all. A centrally managed currency, like the US dollar, has a much stabler price which removes the volatility risk from transactions. So why would a law-abiding merchant and consumer not use the US dollar over cryptocurrencies for payments?


The second problem with payments on cryptocurrencies is that they are incredibly inaccessible for the average person. To pay with cryptocurrencies, one needs to own it in the first place. It's very difficult to own cryptocurrencies as opposed to fiat currencies (e.g. you get paid in fiat) today. To do so, one either needs to set up an account with a cryptocurrency exchange and wire money to the exchange, which is a long and arduous process, or go through the riskier option of over the counter purchases. Why would consumers put up with this overhead when they could just pay with their credit card or even with a payment app like Venmo? It's not like cryptocurrencies provide any benefits to pay with. Payments through credit cards or payment apps are just as fast if not faster and one often gets cashback with credit cards. To make matters worse, paying with cryptocurrencies introduces volatility risk, as I described above.


Absent the payments platform value proposition, what gives cryptocurrencies value today? I strongly believe in the store of value and the decentralized application use cases. I won't elaborate on this as a discussion on the value of cryptocurrencies is worthy of a separate blog post.


Even though I don't believe cryptocurrencies are good payment methods today, I believe that they will eventually be able to compete with traditional payment platforms. Two things need to be in place before this happens. First, we need a stablecoin, either centrally issued or homeostatically maintained like MakerDAO, to solve the price volatility problem I described above. Second, it must be much easier to obtain cryptocurrencies than it is today. Ideally, it should be as easy to purchase them as it is to connect a bank account to a Venmo or Square Cash app. Square Cash's new feature where users can purchase Bitcoin directly from the app is a step in the right direction. Nevertheless, as much as I am confident cryptocurrencies will be great for payments in the future, I am more excited about their store of value and decentralized applications use cases.

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Kevin Pan
Kevin has a background in CS with a Software Engineering major from the University of Waterloo. He programs websites, Ethereum dApps, and researches and writes about cryptocurrencies.