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Elon Musk, a longtime advocate for bitcoin, will soon give Tesla Inc.’s TSLA -1.62% customers the chance to buy the company’s electric vehicles using the digital currency. The news—along with Tesla’s move to acquire $1.5 billion of the cryptocurrency for its corporate treasury—sent 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 hasn’t worked that way. The cost of using bitcoin, and its volatility, have made normal, day-to-day transactions impractical. That isn’t likely to change with Tesla’s 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. “Since we started accepting bitcoin, we have consistently seen a ‘wealth effect’ where sales have increased as the valuation has gotten higher,” he said.
Among the other stumbling blocks bitcoin faces in becoming more ubiquitous is its inherent volatility. Despite its recent surge in value—bitcoin has nearly quadrupled since September—it still swings wildly. It can rise or fall 20% in a single day, sometimes for no apparent reason.
Tesla hasn’t revealed any details about how its bitcoin payments system would work, and a representative for the company didn’t 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 $79,990—the listed price on its website—the 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 much—bitcoin’s price has surged from $1,000 at the beginning of 2017—they can afford to take a hit to cash out some of their gains.
Despite the hoopla surrounding Tesla’s 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.’
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