7 Problems Preventing Widespread Use of Cryptocurrency
Unless you’ve been completely unplugged from the internet and media for most of 2017, it’s likely you’ve read and heard much more about cryptocurrency than ever before, or like many people discovered cryptocurrency for the first time. Bitcoin’s skyrocketing price and concomitant breathless media coverage have rapidly increased awareness, curiosity, and chatter about cryptocurrency. Yet as of December 2017 cryptocurrencies remain exotic, incomprehensible, or simply unknown by much of the world’s population. While reliable numbers are elusive, it’s estimated that only 0.5% of the world’s population actually owns any type of cryptocurrency.
Despite the “currency” component of the cryptocurrency portmanteau, most (nearly all) existing tokens don’t actually function as currencies at this point in time, but instead as commodities like gold and silver. To truly function as a currency, cryptocurrencies must be widely used as a medium of exchange instead of merely a store (hopefully) of value. Just as gold is very rarely used as a medium of exchange — when’s the last time you purchased food, clothing, or anything at all with gold coins? — cryptocurrencies today don’t fully live up to their name as a true currency. What ingredients are necessary for cryptocurrency to transform from an object of curiosity and mystery to a widely used form of currency?
Following are seven key elements to mainstream adoption of cryptocurrencies:
1) Ease of use. Can you explain to your parents and grandparents how to buy, sell, and use cryptocurrency? If your parents and grandparents can understand it, will they be able to use it as easily as they use cash, checks, or credit cards? Until the answer to these questions is yes, cryptocurrencies will not be widely adopted by the great mass of general consumers.
2) Security. If you’ve been reading about cryptocurrencies, undoubtedly you’ve read stories about people losing tokens due to hacks or simply lost keys. Of course existing payment forms have security issues as well: your cash can be lost or stolen, people can forge checks, and credit card numbers are available on the internet. But there are loss protections in many of these cases: check fraud is insured, and credit card liability is limited. With cryptocurrencies, if your wallets are hacked or your keys are unrecoverable, you bear 100% of the loss. Consequently, many people perceive cryptocurrencies as substantially riskier than other forms or instruments of currency. Until the general population feels as comfortable with cryptocurrencies as with credit cards, widespread usage in everyday commerce will remain limited.
3) Acceptance. According to Internet Retailer, just three of the top 500 online retailers — 0.6% — accept Bitcoin as payment. Until acceptance is much more widespread, consumers will not think of cryptocurrencies as something to spend but rather as a speculative investment.
4) Stability. Acceptance won’t become widespread until volatility decreases. Major fiat currencies have a volatility of less than 1%, but Bitcoin’s volatility is 4.6%. Rapid price increases — or the hope thereof — encourage people to hold cryptocurrencies rather than trade them, tilting cryptocurrencies toward stores of value and not mediums of exchange, when both elements are required. Moreover, volatility discourages acceptance, as it increases complexity and risk for merchants.
5) Liquidity. A large volume of transactions from both currency trading (whether fiat or other cryptos) and the purchase and sale of goods and services will make others comfortable using and accepting cryptocurrencies.
6) Regulatory clarity. A survey from September 2017 found that 11% of Americans think owning Bitcoin is illegal, while 48% aren’t sure if it’s legal or not. Banks and other financial institutions remain uncertain how to treat cryptocurrencies. By reducing confusion and uncertainty, regulatory clarity can generate confidence among consumers, businesses, and financial institutions.
7) Infrastructure. Transactional infrastructure changes and improvements are necessary before the your local grocery store accepts cryptocurrency, including updated point-of-sale systems, lower transaction costs, quicker settlement time, and integration with accounting and banking systems. Until cryptocurrencies compare favorably against credit cards or mobile payments on these elements, there will be little incentive for consumers or businesses to use cryptocurrencies for everyday transactions.
None of these seven necessary elements are new observations; the crypto community has been discussing them for years. But with 2017’s dramatically increased awareness and interest in cryptocurrencies, the probability of achieving the necessary breakthroughs has never been greater.