Bitcoin could face fierce competition

Bitcoin’s success hasn’t gone unnoticed. Governments are now developing their own crypto-currencies.

Imagine walking into a coffee place to get a pick-me-up for the morning commute.

You ask for a large café latte and the barista smiles as she processes your order.

“That’ll be 60,000 satoshis, please,” she says without blinking.

You use your smartphone to make the transaction, take your coffee, and get on with your day.

Can you picture it yet?

I should probably clarify: I’m talking about the mainstream use of crypto-currencies here.

‘Satoshis’ are simply small units of bitcoin, just like there are 100 pennies in a pound.

Except bitcoin has taken it several steps further. A single bitcoin is made up of 100,000,000 satoshis!

Anyway, the whole point of bitcoin was arguably to make transactions cheaper, faster, and more reliable. So far, that’s not really the case.

In early June, it cost $5 to make a bitcoin payment. Though this transaction cost has come down a bit again, it’s still much higher than the few dollar cents it cost two years ago.

If these fees can’t come down to levels seen in 2015, or indeed, disappear altogether, it would clearly discourage the use of bitcoin for small purchases like a cup of coffee.

And if people will be charged even more for bitcoin transactions in the future, it would become more like the high fees often charged for sending money abroad.

“The whole reason behind bitcoin isn’t really there anymore,” says a British bitcoin user who was charged $6 recently for a transaction of $30 worth of bitcoin.

“Any currency where you have to pay a huge portion of the transaction just for the privilege of using that currency is no currency.”

You can understand the frustration. Despite being called a crypto-currency, bitcoin so far doesn’t really act like a proper payment method.

It may be why many investors appear to see bitcoin more like an asset class they can hold, hoping it’ll shoot up in value before they sell it again, rather than as a currency they can use to pay for things directly.

As long as there’s a cost to using bitcoin, people will be discouraged to use bitcoin for everyday purchases and this could negatively influence its appeal.

Governments are developing their own ‘bitcoins’

There’s another reason why bitcoin will want to eliminate transaction costs soon.

It could soon face fierce competition from national governments launching their own digital currencies.

“China’s central bank is testing a prototype digital currency with mock transactions between it and some of the country’s commercial banks,” reports the MIT’s Technology Review.

“A digital fiat currency – one backed by the central bank and with the same legal status as a banknote – would lower the cost of financial transactions, thereby helping to make financial services more widely available.

“This could be especially significant in China, where millions of people still lack access to conventional banks. A digital currency should also be cheaper to operate, and ought to reduce fraud and counterfeiting.”

And China’s not alone.

In September 2015, the Bank of England’s chief economist Andy Haldane floated the idea of the central bank issuing its own digital currency.

Though Haldane seemed to view it as a way to abolish cash and introduce negative interest rates, it still shows governments and central banks are actively working on this.

In fact, bitcoin’s success appears to have spurred the entire financial elite, governments and corporations included, into action.

“Financial services firms have taken an interest in cryptocurrency,” writes Ian Bogost in the Atlantic.

“Federal Reserve chair Janet Yellen has called for the Fed to leverage blockchain [the digital ledger originally created to validate bitcoin transactions].

“Canada has been experimenting with a blockchain-backed version of its national currency, called CAD-Coin.

“Future cryptocurrencies operated by banks or governments might enjoy more productive use than Bitcoin.”

Of course it’s by no means certain that a digital currency controlled by governments will be desirable.

Many bitcoin users may be holding the crypto-currency precisely to escape governmental scrutiny. This would explain why many libertarians view bitcoin favourably.

Still, once governments start bringing out a better crypto-currency that’s cheaper, faster and universally accepted, bitcoin could quickly lose ground.

When the powers that be start wielding their power and influence in the crypto-currency market, would you bet against them?

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