Blog: bitcoin

A cryptocurrency primer for e-commerce.

Tesla announced today that it was buying $1.5 billion in Bitcoin and would soon accept the currency as payment for its vehicles. Both Bitcoin and Tesla seem to have realized some short-term financial benefit from this news (as Mr. Musk no doubt intended), but I’m sure it left a lot of folks scratching their heads. While Bitcoin has become a speculative financial instrument long unmoored from its original purpose, cryptocurrency in general is starting to tease around the margins of payment and commerce. If you’re selling things online, you might be wondering what all this means to you.

The short answer is not much, at least for now. You probably won’t accept cryptocurrency as a payment method anytime soon. Crypto has created enough of a stink that, for a time, there was a sense in the e-commerce world that it might muscle in as an entirely different way of paying for things, like PayPal or Venmo. But it’s worth remembering that those services, process innovations aside, are still moving dollars or Euros or pesos around. For better or worse, most of the world runs on fiat currency, which is a fancy way of saying money whose value is determined by governments (and no, I’m not going to talk about gold, so don’t even start with me).

So, what the heck is cryptocurrency, anyway? Put simply, cryptocurrency is both a currency and an anonymous ledger (the anonymous part is important, but hang on for a sec). A dollar bill is currency, and it’s often anonymous, in the sense that you don’t sign your name to it in order to pay someone else (like a check or a credit card receipt, which is really just an IOU for some amount of dollar bills). Ultimately, though, it’s cumbersome to conduct big business with hard currency. There just aren’t enough wheelbarrows around.

Also, unless you’re selling weed and don’t want the government to know what you’re up to, you need to keep track of all those dollars, whether in real or IOU form. That’s a ledger – just a list of transactions, one after the other. Hard cash businesses (at least aboveboard ones) have ledgers too, but most businesses operate astride a vast and complex set of IOUs and assurances that, somewhere, somehow, if they had to, they could walk into the bank and withdraw a wheelbarrow full of hard cash.

There are some persistently thorny issues with this arrangement, as you’ve probably seen. Middlemen of every stripe want to skim a penny here, a half penny there, for the privilege of moving your money around. Exchange rates fluctuate, so tomorrow your scratch might get you a few less potatoes from the fellow across the river than it did today. And you might indeed have some perfectly valid reasons to not want every prying eye ogling your ledger, yet still want to conduct business without paper or coin (this is one reason why cryptocurrency is starting to see adoption in the third world – many people have phones, but carrying cash can be risky).

Cryptocurrency attempts to remedy all this by establishing itself as an alternate currency (we won’t talk about value yet, which is, yeah, a thing) with some form of a ledger built in. In other words, the currency itself contains the ledger. This is often built on the foundational concept of the blockchain, a very fancy ledger where each transaction more or less verifies the previous one and the entire ledger is unalterable and encrypted. I’m simplifying a bit, but the concept is fairly straightforward, and once you grok its core purpose — the elimination of a central authority to validate transactions — it starts to make sense. When someone hands you a dollar bill (unlike a check, or a credit card), you don’t even need to think about calling someone to see if it’s real. Now, if that dollar bill could move through the internet and through any number of people and countries and still be what it started out as – an anonymous transmitter of value that no one in all the intervening steps could get their grubby hands on – you’d have what a lot of nerds consider to be an ideal currency.

(As an aside, some cryptocurrencies can be “mined”; that is, created out of thin air by computers. This was designed as a way of sharing the computing load of all the encryption the blockchain requires. The theory was that if you paid folks a tiny morsel of said currency to handle the distributed nature of validation and encryption, you could cover the computing costs of decentralization. Instead, because Bitcoin is so valuable, Bitcoin mining is now an absurd industry that uses roughly nine nuclear plants worth of energy every day to create currency. You might as well call it KiloWattCoin, since it’s turning electricity into money.)

But is crypto an ideal replacement for fiat currency? Not yet. It might be, eventually, in some form. A lot of insanely smart people are working to make this happen. It won’t be with Bitcoin itself, which, despite what Elon Musk may claim to the contrary, is no longer really a currency but a purely speculative financial instrument. This is where that pesky value problem comes in. If you don’t peg crypto to anything at all, its value is whatever everyone who holds it (or wants it) thinks it is. There’s nothing inherently wrong with that; currency is always no more than what everyone agrees it is (it’s just that in certain cases the chorus is anchored by some very deep voices, namely governments and their banks). Bitcoin isn’t pegged to anything and is about as predictable as a broken roulette wheel. It also has a pressing technical quandary: The transaction volume over time has created a near-unmanageable computational load. Turns out that hardening your ever-growing ledger with world-beating encryption has some undesirable side effects once you’re hundreds of millions of transactions down the chain.

Bitcoin is thankfully off the table as far as a normal transactional currency you need to think about. Stripe, one of the biggest payment technology companies, dropped support for Bitcoin a few years ago; their explanation as to why is a model of economical economic prose, and well worth reading if you want to understand a little bit more about why Bitcoin is viewed primarily as an asset rather than a means of exchange.

The cryptocurrencies I vote Most Likely to Succeed will likely matriculate from the school of “stablecoin”, which I suppose is what happens when you fix what ain’t broke then have to break it again. Stablecoins are cryptocurrencies that are pegged to some real-world value, like dollars or Euros or gold or silver or even, in a delightfully recursive loop, other cryptocurrencies. Stablecoins take the “good” part of crypto – anonymized, electronic, borderless cash – and remove the crappy parts, like crazy volatility and onerous ledger maintenance. Stablecoins are making inroads in third-world cash economies where the adoption of inexpensive mobile phones has outpaced all the payment infrastructure and credit issuance that we take for granted. It’s possible at some point in the next ten years we’ll see one or more stablecoins make their way into global commerce.

Of course, the final hurdle for worldwide cryptocurrency adoption is the bogeyman it was partly created to avoid: The tax man. Anonymous, distributed transactions are anathema to regulation, taxation and half the other things that make most governments run. Government may not be able to stop the tide of cryptocurrency, but it’s absolutely going to be a giant pain in the ass about it. What else is new?

Categories: Articles

Tags: bitcoin crypto e-commerce