Would Amazon accepting bitcoin lead to the breakthrough of cryptocurrency

Unverified rumors that Amazon (AMZN) will start accepting Bitcoin (COIN) (OTCQX:GBTC) have been shaking cryptocurrency communities lately. Though these rumors might prove to be untrue in the end, facts are that there seems to exist lots of demand for this new way of payment. There even was an online petition to convince Jeff Bezos to adopt Bitcoin as an accepted way of payment at Amazon.

Summary

Rumors about Amazon starting to accept Bitcoin payments are abundant.

Bitcoin isn’t really used as a payment system at the moment, relative to usual currency.

There are still multiple challenges to be overcome before it can reach widespread use.

Companies and regulators are just discovering how they should deal with Bitcoin and cryptocurrencies in general.

There are still multiple challenges to be overcome before it can reach widespread use.

Companies and regulators are just discovering how they should deal with Bitcoin and cryptocurrencies in general.

A bright future, but an uncertain present.

According to some who think the rumors are true, Amazon could make the announcement to accept Bitcoin as early as during their next investor call scheduled for October 26. According to Bitcoin bulls, this would be one step closer to major acceptance for the leading cryptocurrency. There already exist workarounds which make sure you can indirectly pay with Bitcoin at Amazon, but if Amazon would accept direct Bitcoin payments it would be huge news. Could it be the final breakthrough of Bitcoin? Will it finally be embraced by the masses?

Let us first take a peek at the price development of Bitcoin of the last couple of years, you can see it has been a crazy ride. Though the upswings are most obvious in the graph, there were many times when Bitcoin went through a downswing, sometimes losing more than 80% of its value (such as between December 2013 and the beginning of 2015).

These price swings show that Bitcoin has been anything but a stable investment. No wonder that cryptocurrency adepts are yearning for more retailers accepting the currency. It is likely that with a bigger user base, the price of Bitcoin would both rise and become more resilient.

When looking back five years on the price chart, Bitcoin has been a huge success. But under the radar there are some big problems plaguing Bitcoin and cryptocurrencies. These problems, or shall we call them challenges, still prevent widespread adoption and use. I will focus on Bitcoin, though most of these will be valid for other cryptocurrencies as well.

Challenge #1: It still seems complicated to use and dangerous if not stored well

Opening a Bitcoin wallet and buying a bit of this virtual currency by trading your ‘fiat’ currency isn’t too difficult. But it is still something which the large majority of the population has never done before. This explains why most of the population still thinks it is a complicated activity when you can also just pay by credit card or with cash.

In the past, the shift from physical currency to bank and credit cards has proven to be a long-term process as well. Most processes which require changes in human behavior are long-term, uneasy changes. As a personal example, in my home country the Netherlands a couple of years ago people were still regularly calculating the value of the Euro back to Dutch Guilders, while the Euro has been introduced in the Netherlands already in 2002. This indicates that changing the payment behavior of people will be a slow and a long-term process.

What could be a real problem though, is the safety of the Bitcoin platforms. Bitcoin already had more than its fair share of trouble with the platforms, most notably the MTGox system hack, where 463 million dollars worth of Bitcoin were stolen. Many people lost their Bitcoins. With increasing value of cryptocurrency, criminals now only have more incentives to try to hack Bitcoin exchanges. You could go for ‘cold storage’, where you take your Bitcoins offline and you can store the codes to your possessions yourself, for instance written on paper in a physical safe. Although there exist products to make this process easier, if you want to do it yourself it can be highly complicated.

Challenge #2: At the moment most people use Bitcoin as investment, not as payment system

With an exception of countries like Venezuela, where fiat currency is very unstable, most people hardly use Bitcoin as a payment system. Most web shops which started accepting Bitcoin do notice an increase in the Bitcoin payments over the last couple of years, but be honest: have you ever bought anything with Bitcoin? Speaking for myself, I have owned a very small amount since 2013 and have never even thought of paying for my online shopping with this currency.

Part of the problem is that the acceptance of cryptocurrency at webshops is limited. There is a growing list of websites which do accept Bitcoin. But most websites who accept it report only a relatively small number of Bitcoin transactions. If Bitcoin is so booming, why wouldn’t Bitcoin transactions at these websites skyrocket?

One of the problems is that most people who are buying Bitcoin at the moment are not shoppers, they are investors. They are buying the currency with the expectation that prices will rise in the future. There is nothing fundamentally wrong with price appreciation happening like this: gold has very little industrial use and its price has been driven by investors since ages.

But prices driven by investors might be obstructing the widespread use of Bitcoin as a payment infrastructure. Just think about the huge price appreciation of Bitcoin during the last year. Because of this rise, potential users might not want to use their Bitcoins to buy goods, hoping and anticipating for a further increase in price. They just hold their investments and only sell them for fiat currency again when they think prices have reached a top, or when they are willing to sell for different reasons. In this way, price increases in Bitcoin might counter-intuitively prevent widespread use of the currency as a payment system.

Challenge #3: The technology is not ready for widespread payment use.

Bitcoin isn’t actually designed to handle millions of micro transactions every hour. Currency the blockchain can handle 1MB of transactions every 10 minutes. The blockchain currently handles about 300k transactions every day, which is nothing compared to the number of transactions big banks are carrying out. This has to be improved before the masses are able to adopt this payment system.

Also, the fee per transaction used to be relatively small. That was, when the value of a Bitcoin was relatively small as well and when the capacity of the block size was not reaching its limits. Users pay a fee for Bitcoin transactions to miners because the computers of the miners process the transactions. Because the block size was limited to 1MB, this limitation in space has increased average fee costs. Recently there have been periods when the fee for sending a Bitcoin payment increased to about 2 dollars. This is unacceptable for micro payments. People are not going to pay for a cup of coffee by Bitcoin if they need to pay 2 dollars of transactions costs every time. Also, because of the 1MB limit, transactions can take longer to approve during times of heavy use of the blockchain.

The question of whether to change the blockchain has already led to heavy discussions in the Bitcoin community. I will not go into too much technical detail here, but I will try to explain just enough relevant facts to be able to understand the background. A new part of the software code, named SegWit2x, is currently released and in use by supporters. This code will increase the block size to 2MB by November 2017, doubling the amount of transactions which can be processed and also decreasing processing time. Also, the code changes the way in which some of the data are stored (the 2x part stands for 2MB and SegWit stands for Segregated Witness, which takes part of the way of storage). The Segwit part has already been implemented.

If Segwit2x will be implemented by the large majority of stakeholders, Bitcoin can prevent another hard fork like on the 1st of August. Bitcoin Cash split off Bitcoin on that date and was led by mostly miners which did not agree with the SegWit2x strategy. After implementing the SegWit part of the code on the 1st of August, some stakeholders are signalling they are could be backing out of the 2x part. When the agreement to implement the increase in block size by November is broken by enough miners or developers there would be another hard fork.

These disagreements stem from the fact that Bitcoin does not possess a central authority. For many people investing in Bitcoin, this used to be a big advantage: the currency cannot be manipulated by an actor like a central bank, and there is no middle man when doing a Bitcoin transaction. But this lack of a central authority might prove to be a bigger problem than anticipated when disagreements about future developments continue.

Challenge #4: Governments and institutions are cracking down on cryptocurrency.

The fourth problem has been widely reported about in the media the last months. For instance, the CEO of JPMorgan Chase (JPM), Jamie Dimon, called Bitcoin ‘worthless’ and ‘only used by criminals’. But real action came from China and South Korea, who recently banned Initial coin offerings (ICO’s).

Initial coin offerings are like IPO’s where a company wants to raise capital and in return gives away ‘coins’ to their shareholders. Ethereum is a cryptocoin which is designed for this. An ICO is comparable to an IPO, except that the shareholders will not receive shares, but coins. The big difference is that governments have very little control over ICO’s. There have already been some disturbing cases, varying from shaky businesses raising funds to outright fraud. As a result, China has banned ICO’s and South Korea recently decided to do the same. China has even shut down its largest Bitcoin exchanges, making it more difficult for the population to buy and trade Bitcoin.

Governments and other regulatory bodies are just starting to discover how to deal with rules and regulations regarding cryptocurrency. Most governments view cryptocurrency as a taxable asset but not a currency, and as a result in some countries you need to pay taxes on it. This is of course very difficult to enforce because the blockchain is (in theory) anonymous. On the bright side, many banks are already using the blockchain or experimenting with it, and Goldman Sachs (GS) recently started considering setting up Bitcoin and cryptocurrency trading operations.

To sum it up, governments and companies are still discovering how to deal with the relatively new phenomenon of cryptocurrency.

Conclusion

If Amazon would accept Bitcoin, it might create a short-term run for Bitcoin and other cryptocurrencies. It also would create major media attention for Bitcoin again. The real user adoption of such Bitcoin retail payments has been quite low until now, and Amazon embracing it would certainly spur its adoption. But if you would ask my opinion, I do not think it is very likely that Amazon will accept direct Bitcoin payments soon. Also, there are still too many problems for Bitcoin to become a widely used payment mechanism on short term.

Bitcoin, other cryptocurrencies and the blockchain are here to stay and they will almost certainly play an increasingly important role in the financial system of the future. At this moment however, widespread payment with Bitcoin is obstructed by a couple of important challenges which need to be solved. For most people, Bitcoin currently is an investment but not a serious way of payment.

Via Seeking Alpha