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Home > Courses > Cryptocurrency Fundamentals > Cryptocurrency Basics > Bitcoin: Store of Value or Payment Method?

Bitcoin: Store of Value or Payment Method?

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Bitcoin: Store of Value or Payment Method?

Bitcoin continues to make headlines mainly due to its price increases, and many still see it as speculation while others see it as a store of value.

Regardless of how you see it, there is still a strong critique that Bitcoin cannot move away from the asset and store of the value function and take on fiat currencies as the medium of exchange.  

For Bitcoin to become widely accepted, it will need to start absorbing more offline and online commerce where people regularly trade goods and services and settle Bitcoin. 

Tackling the medium of exchange is a big ask for a 12-year-old technology and an asset held by less than 200 million people worldwide. So how will Bitcoin stand up to the most liquid trading mediums in the world?

To understand where Bitcoin lays in the medium of the exchange adoption curve, we need to look at its current shortcomings. There is an obvious case for Bitcoin not making a significant payment tool for a host of reasons, namely:


Bitcoin Volatility


Probably the most common attribute of Bitcoin that naysayers like to jump on is the asset's price. You cannot be a medium of exchange if the price of Bitcoin keeps moving around every hour. It would be brave of retailers to accept payment in a method that could be worth their current labor rates and, once accepted, could be worth a little less than the original fee agreed, in fiat terms.  

No one wants to lose money if they can help it, and we can see how this keeps retailers from adopting Bitcoin as a payment method.


Bitcoin Tax


Countries have yet to decide on how they will treat Bitcoin; while some like El Salvador have opted to make it a legal tender currency, making it easier for consumers to transact in Bitcoin, they are by far the exception. Many countries still treat Bitcoin as an asset and are liable for capital gains tax every time you purchase, which is a nightmare for any consumer to track and measure. 

Consumers would want to avoid such headaches, so they don't use Bitcoin to purchase goods and services in most cases.


Bitcoin Acceptance


As was the case before fiat money, humans had an issue with accepting payment during the battering phase. Fiat came along and provided a standard for trading in and out of goods and services, and now Bitcoin aims to replace this function. However, for Bitcoin to take on fiat, merchants will need to find easier ways to accept and transact with Bitcoin the same way they do with fiat. 

Suppose Bitcoin is not interoperable with their current practices and understanding of money. In that case, merchants are simply not going to want to accept payment, limiting the number of goods and services that Bitcoin can acquire directly.


How Bitcoin community solve these issues 


Now that you're aware of how Bitcoin functions and its limitations are in the medium of exchange field, you have to imagine that brilliant people are working on this problem. Bitcoin already has a solid market cap of 600 billion and being able to deploy that capital is the next step for owners of the cryptocurrency. 

So how do Bitcoiners plan to migrate to more enormous eCommerce incentives? Well, they have three options at the moment. 


Lightning Network


The lightning network is a second-layer solution built on top of Bitcoin that brings new services and functionality, one of them being smart contracts. Soon lightning will enable users to lock up Bitcoin into balanced channels; the amount of Bitcoin locked up can then be used to collateralize a fiat option of choice; let's say you have $1000 of Bitcoin, you could lock it up at 50% collateral and receive $500 backed by Bitcoin locked in the channel. 

You can then spend that USD as you would typically and pay off the channel in the future to rebalance and secure that Bitcoin once your loan to say has been paid.


Instant transactions


Using the Bitcoin lightning network or Liquid network, you can now achieve instant settlement of Bitcoin. Users who pay you via lightning or liquid instantly send funds via these second layers. Since clearance items are faster than the main chain, you have more time o convert them into an asset of your choice if you're not keen on holding Bitcoin or only want to hold a certain percentage of Bitcoin. 

Using the liquid network, for example, allows you to do atomic swaps, so once you receive your Bitcoin on Liquid, you can easily swap the amount you desire into a host of different stable coins, like USDT.


Apps supporting Lightning Network


Apps like Strike use Bitcoin in a pretty novel way allowing users to keep their fiat balances but transact via the Bitcoin lightning network. So users can pay you in cash or Bitcoin, and the app will auto convert it to the type of payment you would like instead. So if a merchant wants dollars, but I have Bitcoin, the app will handle the transfer on the fly.


Moving towards a Bitcoin standard 


These are by no means perfect solutions and will still need to be refined before consumers are willing to spend their Bitcoin, and merchants are eager to accept it. Still, it does provide us with a unique outlook towards the future for Bitcoin as it continues to push forward the growth of users and acquiring more of the world's savings over time. 

Eventually, savers will want to spend, and Bitcoin needs to be ready when that day finally comes.


Che Kohler



 

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