Bitcoin Looks to Gain Traction in Payments

Bitcoin

prices more than tripled in 2020 and are ending the year near $29,000, making millionaires out of hordes of investors who piled in to ride the popular momentum trade. Professional investors such as

Stanley Druckenmiller

and companies like Massachusetts Mutual Life Insurance Co. began investing. Companies like Robinhood Markets Inc. and

PayPal Holdings Inc.

allowed their customers to buy and sell bitcoin.

Despite those inroads, industry watchers say bitcoin must gain traction as a form of payment to become more ubiquitous. Spending it isn’t easy. Few merchants accept it, and many people are still unfamiliar with the cryptocurrency. Its use is generally limited to high-end purchases, like those at Mr. Dossa’s dealership.

Bitcoin, introduced in 2008, was designed to operate as a form of electronic cash, allowing users to exchange value as quickly and cheaply as sending an email. In practice, its adoption was hampered by several factors. In early years, it was difficult for average users to operate the digital wallets that stored their holdings. Many of the companies that tried accepting bitcoin in 2014 and 2015, including

Expedia Group Inc.

and Dell Inc., later quietly dropped it.

Bitcoin bulls say the tide could begin to turn soon. Two months ago, PayPal Holdings Inc. opened its platform up to bitcoin, allowing its 361 million users world-wide to buy or sell the asset. In early 2021, it will expand the options, allowing users to tap their bitcoin balances for payments to any of the 28 million merchants that use PayPal.

That venture has the potential to bring bitcoin into the mainstream. Still, there are several roadblocks on bitcoin’s path to widespread use as a form of payment.

The first is bitcoin is notoriously volatile—about a month after peaking above $19,000 in 2017, it had lost nearly half its value. For some sellers, that could mean charging a premium to customers who pay in bitcoin to cover the risk of a sharp U-turn in price before they can convert the payment to dollars.

In the case of Mr. Dossa’s dealership, its fee for bitcoin buyers is 1{a3b37e57a53f84d6443a5356ab02984f87900b4dee9193a01d6bf48d204ad87c} of the purchase price, equivalent to the transaction fee of BitPay, a payments-software startup that exchanged bitcoin for U.S. dollars and wired the money to Mr. Dossa.

The dealership doesn’t assume any added risk by accepting bitcoin because BitPay converts the bitcoin to dollars before the transaction is completed. Mr. Dossa says he received payment for the sports cars in less than a day after his customer sent the $6 million in bitcoin to BitPay. “It’s a very easy transaction,” he says.

Another problem though that historically has affected currencies with resource limits, like gold or gold-pegged currencies: hoarding. With a limited supply, rising demand pushes up the price of bitcoin. When that happens, investors tend to tighten their grip rather than spend the currency. For national currencies, this can lead to deflationary spirals.

Recent converts to bitcoin, focused on the price, may be reluctant to spend any of their holdings. For people who bought bitcoin when it was cheap, however, its rise has given their purchasing power a tremendous boost.

For this cohort, there is a logic to spending some of that money, said Société Générale forex strategist

Kit Juckes.

“If I bought into bitcoin at $5,000 and today it’s at $23,000, and PayPal let me buy something cool, I might think this is a neat way of diversifying,” he said. “The pathway has to start from people who made money on the way up.”

An obstacle specific to U.S. users is tied to how the Internal Revenue Service classifies bitcoin. In 2014, the agency declared it would treat bitcoin like property, not money—which means users selling bitcoin, no matter the reason, are subject to capital-gain taxes on that transaction. Firms like BitPay have services that help users navigate taxes.

Another stumbling block is fees. Right now, bitcoin doesn’t work well for small transactions because each transaction on the network includes a fee. The median transaction fee is currently around $5, according to the website BitInfoCharts, but the average is more than $9, and it varies wildly, depending on network traffic. (The fee rises when traffic is heavier). In 2020, the average fee was as low as 29 cents and as high as $13.

That makes bitcoin an unattractive payment option for users who might want to buy something small, say a $4 cup of coffee at

Starbucks.

The fee problem, though, becomes less pressing for larger transactions, and bitcoin has become a network where big transactions are the norm. The average transaction value, according to Bitinfocharts, is $127,000. At that size, a $9 fee to move money is negligible.

For all those reasons, bitcoin is a good option for the wealthy, Mr. Juckes said, as it is easier to use than trying to convert gold or sell stock. “This is a high-end form of money,” he said.

Write to Paul Vigna at [email protected]