Bitcoin May Hold Promise As Alternative Payment System

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Since Bitcoin surpassed the $1000 mark a few weeks ago, most investors are trying to figure out how much growth the cryptocurrency has left, whether this is just another bubble, and if they can trust an asset that even most supporters don’t fully understand. But Susquehanna Financial Group LLP analysts James Friedman and Meghna Ladha have another take on the matter.

Bitcoins as a payment system

“We have no opinion about the value of the tender itself,” they write. “But the structure of Bitcoin as a payments system appears to have some merit, about which investors in the traditional payments rails should take note.”

Its structure as a payment system that is converted into a fiat currency as soon as the transaction finishes eliminates some concerns about Bitcoin’s volatility, and the cost of executing a transaction is about a penny instead of 2-3% for credit cards. There’s still some exchange rate risk, but that’s hardly unique to Bitcoin. For now, Bitcoin miners are rewarded with 25 BTC every time they complete a block, but even when the block reward diminishes and transaction fees become necessary to keep the system working, the democratic nature of Bitcoin will make it hard for anyone to corner the market and impose high costs like Mastercard and Visa have done. Bitcoin transaction also have a double-edged finality to them. There are no charge-backs with Bitcoins, but there is also no fraud protection.

When Bitcoin is used as a way to reduce costs, companies don’t have to grapple with all the thorny issues that investors are worried about. If another digital currency usurps Bitcoin’s role  a few years from now it should be possible to adapt the processes that handle Bitcoin transactions to that new currency without much effort. If regulatory decisions or other pressures make Bitcoins unwieldy or unattractive, companies can always stop accepting them.

“We think the greatest appeal today for Bitcoins is from merchants who wish to manage down their payment transaction costs,” Friedman and Ladha write. “But the vast majority of Bitcoin consumer volume today is for speculation and merchants will likely need to create a rewards system to incentivize consumer interest over time.”

payment system volumes

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