Bitcoin is now a spendable currency in plenty of niche markets and individuals will soon even be able to purchase a Tesla with it.
On February 8, Tesla announced that it had bought around US$1.5 billion in bitcoin and would begin accepting the cryptocurrency as payment for its products. The announcement caused the value of the virtual currency to shoot up more than 10% in value.
Elon Musk, Tesla’s chief executive officer, has long been a supporter of cryptocurrencies as an alternative form of payment and this move makes Tesla the first company of its size to allow real-world products to be purchased with bitcoin. Analysts believe the decision will incentivize other large companies to follow suit.
The decision indicates that the benefits of bitcoin are now starting to outweigh its risks, making it increasingly practical for companies to begin adopting cryptocurrencies as forms of payment.
The benefits of bitcoin
One of the biggest benefits of using cryptocurrencies over a traditional currency is related to security. Bitcoin is secured through the blockchain, meaning that encryption happens through every step that bitcoin takes, resulting in an almost airtight form of security regarding transactions.
This encryption can have some really important uses going forward, Sam Rockwell, a financial adviser with Raymond James, told TMS.
“As security breaches continue to give consumers and merchants alike headaches, both will certainly benefit from the secure and transparent network of cryptocurrency,” he said. “This is especially true for large purchases or transactions that involve highly sensitive client or patient data – think along the lines of buying a home or car, or paying for services in the medical or legal field.”
The other benefit of cryptocurrencies like bitcoin is that they are completely decentralized, meaning that no country or entity has control over the currency in the way they do with traditional currencies. Because of this, bitcoin is being seen in some circles as a way to move money out of the US dollar and into a more stable worldwide currency.
“The news about Tesla is huge,” blockchain user research specialist Georgia Rakusen told TMS. “It’s a strong positive signal for decentralized cryptocurrency payments when a lot of companies have been too hesitant to pull the trigger. This vote in confidence from Tesla is a hedge against the dollar, and given that Tesla’s average purchase price for bitcoin was in the mid-thirty thousands, it means they don’t expect bitcoin to drop to lows of previous years.”
The pitfalls of bitcoin
One of bitcoin’s biggest pitfalls in mainstream transactions lies in its transaction fees. These fees go to provide incentive for bitcoin miners, who use their own computing power to add transactions to the public ledger, or the blockchain.
Currently, these fees are at an all time high. The transaction fee for a single bitcoin transfer is around US$20 at the time of publication. This reinforces the fact that bitcoin will be great for large purchases or expensive payments, but it would be difficult to justify such a high payment when buying groceries or paying for a haircut.
Bitcoin has also been criticized for its environmental impact. Because of the computational power required to conduct a bitcoin transaction, the entire network of bitcoin miners is grossly inefficient when compared to other currencies such as Ether.
It’s been estimated that the energy used to support the bitcoin infrastructure is roughly equivalent to the energy used by the entire country of Argentina. This is coupled with the fact that the average transaction time is about 10 minutes.
The number of “bitcoins” is also limited, at 21 million. The last bitcoin is set to be mined in 2140, but with the extreme energy and hardware costs involved in mining the currency, it is doubtful that bitcoin mining will remain profitable until then. Without bitcoin mining, it will be impossible for transactions to process, effectively giving bitcoin an expiration date.
Going forward
Bitcoin’s previous problem, that it had no real-world value, is now gone. Today, bitcoin is a spendable currency in plenty of niche markets and individuals will soon even be able to purchase a Tesla with it. Tesla’s vote of confidence in the cryptocurrency is valuable from an economic perspective too, illustrating that it doesn’t just have value to fringe enthusiasts, but to business professionals as well.
Bitcoin will likely prove itself useful as a currency in the coming years, but there still remain a number of questions around its long-term usability. Whether bitcoins will still hold any value in a hundred years is still to be determined.
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