The debate around what Bitcoin is or what Bitcoin should be never seems to end. From 2010 when Satoshi Nakamoto begged Wikileaks to not use Bitcoin for donations to the debate over whether bitcoin use in darknet markets was good or not to the scaling debate that lasted from 2014–2017, debates about the utility of Bitcoin never seem to end.

Is Bitcoin Digital Gold? Is Bitcoin PayPal 2.0? Is Bitcoin the one money to rule them all? Who are you to talk about this stuff anyway? And who cares, isn’t the market going to reveal people’s preferences over time?

In this article, I seek to answer these questions and more by looking at how Bitcoin is currently used and project out a bit as to how Bitcoin will evolve in the future.

Why do people want Bitcoin?

Like anything in a market economy, the price of Bitcoin is entirely dependent on supply and demand. This may seem strange since money is used to price everything else, but there is a supply and demand for money.

A money that’s abundant will tend to have less demand and a money that’s scarce will tend to have larger demand. We call a money that’s abundant easy money because it’s easy to add to the supply. We call a money that’s scarce hard money because it’s hard to add to the supply.

The main reason why people value Bitcoin is because it is hard money. There’s an inborn instinct for humans to want scarce things and Bitcoin is limited in its supply by the 21 million cap. The 21 million cap has already lasted 9 years without changing and that makes Bitcoin’s scarcity easier to trust. The people that value Bitcoin’s scarcity are using Bitcoin as a store of value. That is, they are foregoing goods now for goods later. They are saving.

Furthermore, Bitcoin is also hard to confiscate and is unique among assets in this regard. There really aren’t that many options that are provably scarce and are resistant to confiscation. Real estate stores value pretty well (as they say, land is scarce: they’re not making any more), but is easily confiscatable. Stocks and bonds are also good stores of value, but are also easily seized by governments. Bitcoin is really the only asset that has both proven scarcity and confiscation-resistance.

That’s not to say that scarcity and the store of value uses are the only reasons that people want Bitcoin. There are people that want Bitcoin so they could buy something on the darknet markets or because they want to transfer some money to their relatives abroad. These are what I call method of payment use cases for Bitcoin.

Store of Value >> Method of Payment

The method of payment use cases have one thing in common. The people involved want the convenience that Bitcoin provides them, but don’t care to hold the Bitcoin itself. People that use Bitcoin as a method of payment are concerned not about price, but about slippage, fees and volatility during the short window when they hold Bitcoin.

For example, if someone wants to buy some LSD on the darknet markets, they first go and buy Bitcoin with their native currency (USD, say). Then they buy the product. The Bitcoin goes to the merchant, who then converts to their native currency (for simplicity, let’s say USD).

Neither party holds Bitcoin for very long and neither cares about the Bitcoin price as long as the total fees (USD →BTC, BTC transfer, BTC →USD) are reasonable. Bitcoin could be $100 or $100,000, for the method of payment use case, the price doesn’t matter. Convenience is what matters. Conversely, method-of-payment demand does not actually increase demand much for Bitcoin as the amount bought is sold soon after.

The only real benefits of having more method-of-payment utility are that Bitcoin can increase convenience in very special cases (foreign remittances, darknet) and Bitcoin’s liquidity can increase slightly as there are effectively more places to “sell” your Bitcoin, not for another currency, but for a good or service.

For people that use Bitcoin for its scarcity, that is, as a store of value, price matters quite a bit. Talk to anyone who owns Bitcoin and price is something they keep track of obsessively. This is prima facie evidence that most people don’t use Bitcoin as a method of payment, but as a store of value.

Competing on Method of Payment

Why is it that people value Bitcoin as a store of value so much more than as a method of payment?

Looking at the payment landscape, the answer should be clear. Consumers have many choices for method of payment already. Cash, Credit Cards, Debit Cards, Paypal, Venmo, Square Cash, Google Wallet, Apple Pay, Samsung Pay and even the good old bank check are among the many choices in the US for method of payment. WeChat in China, M-Pesa in Kenya and the Octapus Card in Hong Kong are even more convenient.

All these payment methods are much more convenient than Bitcoin for nearly every type of transaction (restaurants, brick and mortar stores, e-commerce, etc). For method of payment, convenience is paramount and that means merchant acceptance.

Merchants don’t want to keep Bitcoin (that is, use it as a store of value) which hinders its use as a method of payment. There are people that argue that a merchant can save on the 2–3% vs a credit card, but fail to realize the same merchant now has to convert these Bitcoins to USD and probably will have to pay in exchange fees and slippage in order to do so. At least the credit card fees are certain. The uncertainty around how much in fees that they’ll pay due to exchanging to USD is then passed onto the customer in the form of higher prices and/or worse rates for BTC/USD than spot. In other words, using Bitcoin as a method of payment is not a very good deal for the customer to use Bitcoin and so they don’t.