The first spark of the idea behind digital currencies happened when desktop printers were still an exciting new gadget. In 1993, Cynthia Dwork and Moni Naor used ‘proof of work’ to verify the legitimacy of a request for service in computing. Essentially one computer had to prove to the other that its request wasn’t part of a Denial-of-Service attack. The test is similar to CAPTCHA which asks humans to interpret scrambled letters in a visual puzzle when creating user accounts. This simple concept evolved into digital currencies, which have since been assigned value – enough to buy a Tesla but too complex to buy you a cup of coffee. Paul Vigna of The Wall Street Journal explores the reasons why Bitcoin can’t replace the cash in your bank account just yet.- Melani Nathan
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Why Bitcoin Hasnât Gained Traction as a Form of Payment
The cost of using the digital currency, and its volatility, make day-to-day transactions impractical
By Paul Vigna of The Wall Street Journal
Updated Feb. 9, 2021 12:44 pm ET
Elon Musk, a longtime advocate for bitcoin, will soon give Tesla Inc.âs TSLA -1.62% customers the chance to buy the companyâs electric vehicles using the digital currency. The newsâalong with Teslaâs move to acquire $1.5 billion of the cryptocurrency for its corporate treasuryâsent the price of bitcoin up 25% from Sunday to a new intraday record of $48,226 on Tuesday.
For bitcoin bulls, the announcement was the latest sign of validation for the burgeoning digital currency.
Despite making inroads with investors, bitcoin has been slow to take off as a form of payment. It was originally created in 2008 to operate like an electronic version of cash, allowing two people anywhere in the world to digitally exchange value as if they were physically exchanging cash.
In practice, it hasnât worked that way. The cost of using bitcoin, and its volatility, have made normal, day-to-day transactions impractical. That isnât likely to change with Teslaâs acceptance of the currency.
For users who might want to buy something small, say a $4 cup of coffee at Starbucks, bitcoin is an unattractive payment option because of the associated fees. The median transaction fee is currently around $5.40, according to the website BitInfoCharts, but the average is more than $11, and it varies wildly, depending on network traffic. (The fee rises when traffic is heavier.) Over the past three months, the daily average fee has varied between $2.18 and $17.20.
Luxury purchases, on the other hand, are where bitcoin has found its niche. Concerns about such fees are unlikely to be an issue for large-scale items, like an $80,000 Tesla Model S.
Bitcoin buyers tend to be loyal and spend more, said Jeff Klee, chief executive of CheapAir.com, which has been accepting bitcoin since 2013. âSince we started accepting bitcoin, we have consistently seen a âwealth effectâ where sales have increased as the valuation has gotten higher,â he said.
Among the other stumbling blocks bitcoin faces in becoming more ubiquitous is its inherent volatility. Despite its recent surge in valueâbitcoin has nearly quadrupled since Septemberâit still swings wildly. It can rise or fall 20% in a single day, sometimes for no apparent reason.
Tesla hasnât revealed any details about how its bitcoin payments system would work, and a representative for the company didnât respond to a request for comment. But industry watchers suggest Tesla would likely use a third-party processor to mitigate the risk of price volatility in the period between the parties agreeing to a deal and the funds clearing the bank.
Companies like BitPay automate the process, handling the back-end logistics for digital-currency payments. Unlike cash wirings, which can take days to process, bitcoin transactions close quickly, usually in a matter of minutes.
For example, if Tesla were to sell a Model S for $79,990âthe listed price on its websiteâthe customer would send $79,990 in bitcoin to a processor like BitPay, which would then direct $79,990 in cash to Tesla. BitPay tacks on a 1% processing fee.
Another big hurdle for bitcoin transactions: Taxes. Because the Internal Revenue Service classifies bitcoin as property rather than currency, users selling bitcoin, no matter the reason, are subject to capital-gains taxes on that transaction.
Of course, some longtime bitcoin holders have seen the value of their holdings rise so muchâbitcoinâs price has surged from $1,000 at the beginning of 2017âthey can afford to take a hit to cash out some of their gains.
Despite the hoopla surrounding Teslaâs announcement, it is unlikely to be a game changer for bitcoin or the company itself, at least in terms of transactions.
Among the few retailers that currently accept bitcoin, payments in the cryptocurrency tend to comprise about 5% of total sales. Applied to Tesla, bitcoin sales would have represented just 25,000 of the 500,000 cars it sold last year. Meanwhile, bitcoin transactions, which are mostly among traders, total in the hundreds of thousands a day.
Write to Paul Vigna at [email protected]
Corrections & Amplifications
Tesla Inc. sold 500,000 automobiles in 2020. An earlier version of this article incorrectly said it sold 200,000 vehicles last year. (Corrected on Feb. 9)
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Appeared in the February 10, 2021, print edition as ‘Bitcoin Faces Hurdles to Everyday Use.’