Bitcoin Payment Problem Statement

The original Bitcoin Whitepaper set out to make Bitcoin a digital currency capable of solving the double-spending problem without relying on a trusted 3rd party. Since its creation Bitcoin has achieved its goal of preventing double spending in a trustless network and now looks to establish itself as a broadly used currency. Crypto fans and investors hope someday that Bitcoin, and other cryptocurrencies, will rival fiat currencies like the Dollar, Euro, and Yen in terms of price stability and acceptance as a form of payment.

In order for Bitcoin to achieve this preeminence it has a number of hurdles to overcome. Some of these hurdles are technical, such as decreasing the block time and increasing the number of transactions per second. But other problems can’t be solved by any amount of code and will require a bit of luck to provide the right environment for the currency to flourish. Specifically I would like to talk about Gresham's Law.

Gresham’s Law Elaborated

Let’s do a thought experiment. Suppose everywhere that accepts credit cards also accepts Bitcoin as a form of payment (a scenario that will soon be reality if TenX is successful). If you were to fill your car with $30 of petrol what method would pay with? US dollars or Bitcoin? I would guess the vast majority of you would pay with fiat. Why?

Your answer to this question depends on two things: your ability to pay using either currency and the value you assign to either currency. If you do not have enough of one currency to pay for the petrol then you will be forced to pay with the currency you have more of. But in our thought experiment let’s say you have ample amounts of both currencies. Then your decision to pay with Bitcoin or pay with fiat will depend upon which currency you value more.

In this situation Gresham’s Law dictates you pay with the currency you value least. Now, given the recent hype regarding Blockchain and Cryptocurrencies you probably expect Bitcoin to rise in value compared to fiat. As such you probably value your Bitcoin more than you value your fiat. This is why you would pay with fiat in the current market condition and it also is a major hurdle for Bitcoin adoption in the short term.

Jumping Over the Hurdles

There are a few paths for Bitcoin adoption as a common global currency. The main path for such adoption is where people start using it regularly for transactions. As people become more comfortable transacting with it, demand for accepting it as a method of payment will grow and the currency will gradually be adopted.

Recently, though, Bitcoin and most cryptocurrencies in general have evolved from being a “store of value” to being more of an investment. This sentiment will slow adoption of it as a currency. And this is why cryptocurrency will need the right events happening in the right places for it to catapult as a major form of currency.

As a Feeless Currency for the Unbanked

One scenario that may give it traction as a global currency is pushing it as a payment method in areas where there are a large number of unbanked peoples. People who are poor in urban areas of the US are often kept poor by high banking fees and other tactics that prey on those without credit and low means. For example, Karen is 18 and just got kicked out of her house by her parents. She has no credit and no bank account. She gets a job at a convenience store and receives a check after working for a week. As she has no bank account she incurs a fee just to cash her payday check. Frustrated by this she opens a bank account but as she cannot meet the minimum balance requirement she must pay a monthly fee for her bank account. Before her next paycheck she decides to replace her shoes that are falling apart for new ones. In the process she accidentally overdrafts her bank account and incurs an overdraft fee. She now has negative money.

This is an area where cryptocurrency could be a game changer. In this scenario we sidestep Gresham’s law because Bitcoin is the only currency we have to use. Converting to or even getting paid in Bitcoin (which, yes, is a thing) would avoid or greatly reduce the many costs and fees poor people incur just to live.

As a Safe Haven in Uncertainty

Another scenario that could drive cryptocurrency adoption is one where the native payment method of a country or region is volatile, untrustworthy, or highly depreciated in value. Now this region would have to have the tech to support cryptocurrencies but this is becoming less and less of a problem as the world modernizes. A scenario like this is happening right now in Venezuela.

Essentially, the opposite of Gresham’s Law (Thier’s Law) can occur when one currency becomes so worthless that no one accepts it as payment. In Venezuela there is currently massive financial turmoil due to equally massive amounts of fraud that occurred over the previous decade. This has caused the Venezuelan Bolivar to massively decline in value. Similar currency collapses have been seen in with the German Weimar, the Great Depression, and around the fall of the Soviet Union.

Any currency collapse in a technologically modern society allows for Bitcoin and cryptocurrencies to take hold as a major player in daily transactions. This is because Thier’s Law roughly states that if one currency becomes sufficiently devalued it will no longer be accepted.

Cashless Society

The final scenario that could drive cryptocurrency adoption is one that is somewhat forced on users by the government. The list is long of countries that are already experimenting with a cashless society (India, Estonia, Korea, Sweden, Zimbabwe, Denmark, etc.) and some of these plans are already rolling out in India and Estonia. This is just one step into adoption of a digitized world that could just as easily be based on blockchain technology just as most of these mobile applications are tied to a payment processor or store of value identified by the government.

There are many pro's and con's to a cashless society but in general this system increases transparency, decreases fraud, decreases the effect of the hidden economy (i.e. black markets), and reduces frictional cost of daily business transfers and transactions. Essentially, it lowers the barrier to entry and ensures that everyone is comfortable with a digital currency instead of physical cash and in the long run a potential move away from fiat currency and to cryptocurrency (or possibly a government sponsored cryptocurrency).

Caveats.

Cryptocurrencies could more slowly gain adoption as they become more sought after, more widely held, and more valuable. There may soon come a tipping point where people either decide to treat it like a true currency, where they make daily transactions with it, or where they treat it more like an investment, holding and selling it like stocks or gold.

Also, there is a subset of cryptocurrencies that do not aim to be “stores of value” and they can gain value without adoption. Zcash, Monero, Bitcoin, and Litecoin are examples of currencies that generally try to be “stores of value.” Ethereum, SiaCoin, Iota, and others use specific coins are either designed to fund a specific business (e.g. SiaCoin), define ownership (NEO and Ethereum) or act as the gas that makes the larger machine run (e.g. Ethereum). The coins that aren't meant to be stores of value do not need the same type of adoption that Bitcoin needs to increase their value. As an example, Ethereum needs a few of its ERC20 tokens to flourish and Ether should gain value with it since it is the building blocks that most of the "Etereum Stacks" will be based around.

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