From Boom to Whimper – Where are the Bitcoin merchants and can Ethereum revive cryptocurrency payments?

The promise of Bitcoin was to be a currency that would allow anyone to participate in digital payments without needing banks and other financial gatekeepers. But in order to achieve that Bitcoin would have to win over both consumers and merchants. Despite all of the hype it has so far failed to do either, instead being used mostly as a store of value and financial speculation. There have already been many discussions about why Bitcoin has not seen wide spread adoption with consumers. This post discusses some of the reasons that may have kept merchants from adopting Bitcoin and explores whether Ethereum can overcome these problems and convince merchants to finally adopt cryptocurrency payments.

The Bitcoin Merchant Bubble

A few small merchants accepted bitcoin before 2014, mostly Alpaca socks and vape shops, usually owners driven by Libertarian ideals. Then in early 2014, Overstock.com announced they would start accepting bitcoin. Through 2014 and 2015 there were more large companies jumping in with similar announcements. There was Dell, Dish, Microsoft, Expedia, Time Inc., and Newegg. Wikipedia, Ubuntu, and even the American Red Cross started accepting bitcoin for donations. It seemed like in no time most of the world would be using bitcoin.

And then it all just stopped. The announcements stopped rolling in, and soon some organizations either quit accepting bitcoin or hid it away. Ubuntu (Canonical) closely monitors their donation pages for any impact to donor behavior. They noticed that adding an extra payment option decreased the amount of money they received – the bitcoin option had to go. WordPress removed theirs, then reassured the Bitcoin community it would be back. Microsoft did something similar. Mozilla and Wikipedia both hide their bitcoin donation option, choosing not to display it anywhere on their donation pages. So what happened? Wasn’t this the miracle payment merchants desperately wanted?

It’s difficult to determine how many merchants actually accept bitcoin. Coinbase says that over 45,000 merchants use them to integrate bitcoin payments, but for some reason they don’t list them all, they only list a few. A search feature where you could find companies that sell what you are looking for and accept bitcoin would be fantastic, but it is strangely absent, especially given all that Coinbase has done to promote and support Bitcoin. There are a myriad of sites that supposedly list companies that accept bitcoin, but most of these lists are filled with companies that have never accepted bitcoin or that have stopped accepting it.

Regarding Online Lists of Bitcoin Merchants

http://spendbitcoins.com claims that over 100,000 merchants accept bitcoin, but most of who they list appear to be companies that don't and never have accepted bitcoin (e.g. amazon, hostmonster, bandcamp). Interestingly while Coinbase doesn't list their 45,000 merchants, they do link to this site from their support pages under the where can I spend bitcoin? topic. This support topic is also out of date as it points to some shutdown services such as ChangeTip.

https://coinmap.org coinmap lists over 8,000 merchants worldwide that supposedly accept bitcoin. However I contacted all of the merchants listed in my area and none of them accept bitcoin.

Another clear sign for the lack of merchant interest is the recent pivot of Circle away from bitcoin. Circle started as a bitcoin peer-to-peer payment app but have since added fiat options and more recently removed users ability to buy and sell bitcoin entirely (sending them to Coinbase). There just isn’t enough demand for them to keep it as an option. It’s time to face the fact that most merchants simply aren’t interested in, or don’t want to accept, bitcoin.

But Wait, Bitcoin is Better for Merchants… Right?

We’ve all been hearing and saying how Bitcoin is great for merchants, so first let’s look at the benefits that accepting bitcoin is supposed to bring over existing payment systems.

Bitcoin is supposed to be cheaper for merchants

Charges for accepting credit card payments vary but it is common for the payment processor to take a 2-3% fee per transaction plus a base fee which can be as high as 30 cents. Bitcoin is technically free for merchants to accept it. However it requires some tech skills to setup, maintain, and secure so there are payment services such as BitPay and Coinbase which make it simpler to accept bitcoin payments, usually for a 1% per transaction fee and an added small fee for exchanging bitcoin to a local currency. So accepting bitcoin can save merchants around 1% per transaction, which could be a big deal in low margin industries.

Bitcoin is supposed to be safer for merchants since payments can’t be reversed by an intermediary

Credit card processors can reverse payments months after they have cleared. Once a bitcoin transaction is included in a block, that’s it (excepting an extremely rare chain reorg). This means accepting bitcoin is supposed to free merchants from having to worry about fraud.

Bitcoin is supposed to be easy to use and never go down since it is peer-to-peer

Credit card networks very rarely suffer down time, but when they do the loss of revenue to companies can be significant. Bitcoin can be sent simply by scanning a QR code, a little simpler and less error prone than having to deal with credit card transactions.

Reality Sets In

The supposed benefits of bitcoin for merchants turn out not to be what they claim. Despite all the infrastructure that has grown around Bitcoin it is still more difficult to use than existing payment systems. While the network might not go down, there is no guarantee that payments will actually go through, even with users paying high fees. Even though payments can’t be reversed once confirmed, since there is no guarantee of transaction confirmation and it can take hours to occur, that benefit is moot. We’re left with bitcoin being nominally cheaper to accept than existing systems, which is not enough for anyone to make a big change. So there actually aren’t any real benefits for merchants to accept bitcoin, and merchants have known this.

There are also some fundamental problems with Bitcoin that make it unfavorable for merchant adoption, and they probably aren’t what you think. Many in the cryptocurrency space would have listed price volatility and a negative image tarnished by darknet markets such as Silk Road as reasons that merchants stayed away, but they are not. Most who accept bitcoin use a company like BitPay or Coinbase and they immediately exchange bitcoin to fiat, shielding them from price volatility. If the negative image of bitcoin was still a problem we wouldn’t have banks talking so openly about Bitcoin and blockchain and we wouldn’t have had companies like Microsoft or organizations like the American Red Cross accepting bitcoin. Despite being known and talked about for years, scaling has become an issue, but not always for the reasons people think.

What are the Real Issues Keeping Merchants from Adopting Bitcoin?

The current digital payment systems offer merchants more benefits than most bitcoiners realize. Bitcoin was not built to suit the needs of merchants, and that is the basis for most of the reasons that merchants haven’t adopted bitcoin.

Merchants exist in a legal and regulatory framework

When merchants accept bitcoin, one of the reasons they use BitPay or Coinbase is that they don’t have to handle bitcoin directly but instead just accept fiat. This is not just to protect themselves from bitcoin price fluctuations. Merchants have no idea how to legally handle bitcoin payments. How do they handle accounting and taxes? What regulations do they need to follow when accepting bitcoin? How do they follow the existing regulations when bitcoin payments can be anonymous? These are big problems for merchants as breaking the law, even unknowingly, can end their business. For the most part, the Bitcoin community hasn’t done much to assist in this area. Not only are most bitcoiners ignorant of these things, but they are often ideologically opposed to them.

Credit card payments connect historical purchases to an entity, whereas bitcoin is used to thwart that

Merchants and payment processors use credit card purchases to build up a historical picture of our buying habits. They can use this massive amount of data to discover better ways of convincing us to buy more stuff, as well as optimize their prices. We get targeted discounts and coupons emailed to us and extra cash back at certain stores. The data can even lead to more subtle ways of controlling consumer behavior such as optimizing the placement of items in stores to maximize purchases. These things might not be available or worthwhile to mom and pop shops, but they are immensely profitable to big retailers.

We tend to think of the monetization of user data as a new thing that companies like Facebook and Google do, but they are just copying what big retailers have done ever since they first started offering loyalty cards in the 90’s. The extra revenue generated from using this data more than makes up for the exorbitant fees the credit card processors charge. Merchants would be out of their minds to give this up in order to save a measly 1% on payment fees. Bitcoin was designed to allow users to be anonymous (or at least pseudonymous) which removes this benefit. While users could use the same Bitcoin address for all purchases, they almost never do. Most Bitcoin software is built to generate a new address for every transaction, making it extremely cumbersome to try and track consumer identities through bitcoin payments.

Repeat payments through autopay is a big feature that bitcoin doesn’t have

Autopay is not something every consumer uses or desires, but many enjoy the convenience of not having to remember to pay a multitude of bills manually. Autopay works really well for many services, and merchants don’t have to chase down late or forgotten payments while fronting bills until consumers catch up. Some industries live off of subscription services paid with repeat credit card charges. Bitcoin has no such option and no way to natively allow someone to pull payments from you (while there are a few ways to set this up, the process would be extremely convoluted and require constant updating and monitoring).

There is little to no consumer demand for accepting bitcoin

Despite the rising interest in Bitcoin, very few people want to spend bitcoin at stores, so there is no reason for merchants to accept it. But if interest keeps rising, how can that be? It turns out very few bitcoin transactions are for payments. BitPay is one of the largest bitcoin payment processors and in November and December of 2015 they celebrated record volumes (Christmas shopping perhaps) which equated to only 1.5% of the 200,000 transactions a day during that period. On top of low volume these transactions average around only $100 each. Merchants who start accepting bitcoin discover this lack of consumer use all too quickly. During the Bitcoin merchant boom, a new merchant announcing they were accepting bitcoin would get a small “bitcoin bump” for the first day or so, and then crickets after that. Accepting bitcoin didn’t increase any sales for merchants, it just shifted a small amount of purchases from credit cards to bitcoin while increasing the e-commerce costs and complexities.

While few merchants have published numbers, the few that have confirm the lack of adoption. One example is Fetlife (a “kinky” social network), who claimed that when they accepted bitcoin it accounted for less than 0.1% of their payments.

So if almost none of the bitcoin transactions are for purchases, what is bitcoin being used for? Years ago most bitcoin transactions were for blockchain based gambling, but today it turns out most people use bitcoin as either a store of value or for financial speculation. Virtually all bitcoin transactions are from and to exchanges, transactions for payments are barely a blip. Bitcoin is used as digital gold, not digital cash.

Another thing that could be keeping people from being bitcoin spenders (rather than just bitcoin speculators) is that despite Bitcoin being a great technology for sending money over the Internet the user experience is still so horrid that no one other than diehard fans want to use it. Volatility may not be a problem for merchants, but it is for their payment processors. To combat this, some give 15 minute windows for payments to be made. If there is a surge in transactions that bumps your transaction in priority due to a lower fee, you are faced with a truly nasty refund process (and a forfeited transaction fee). While credit card payments can be reversed far after they are made, they effectively take seconds to complete. It often takes over an hour or more for a bitcoin payment to confirm which is unacceptable for most purchases. Even worse, in the current state of the network some transactions never confirm, instead staying in the mempool until nodes decide to dump them, which could take days. No one is going to use a payment system with those properties.

Bitcoin turns out to be a costly method of accepting donations

One kind of transaction where slow confirmations could have been acceptable is donations, except accepting bitcoin donations turns out to be extremely costly. Donations are usually for small amounts and due to the way Bitcoin was designed (the UTXO model) if you want to collect all those donations and use them, you effectively have to pay a transaction fee for each donated amount. This leaves nonprofits paying astronomical fees just to use their bitcoin donations while credit cards will often give nonprofits discounted transactions and in some cases completely waive them.

Bitcoin is at full capacity and that has had known and unknown consequences

The Bitcoin community has been talking about scaling issues for years now, with many prominent individuals pointing out problems with a network at full capacity. Projects that could have been never materialize because they look elsewhere and fees rise to where ordinary users can’t justify using the system anymore. For the merchants that do accept bitcoin it has meant increased support calls to handle customers who don’t know about fees or other technical details of how bitcoin works but just know their payments aren’t going through. Extra support costs when the merchants can’t do anything to solve the problem will cause any remaining bitcoin merchant holdouts to drop bitcoin as a payment option.

Bitcoin community and development are not healthy

The Bitcoin community is strongly divided on the future direction of the technology and the state of Bitcoin development is convoluted to say the least. The problems are well known to those in the Bitcoin space and I won’t belabor them here. When merchants are looking into using new technologies of any kind (let alone payments) they want to see something that is stable, healthy, reliable, and low risk. What merchants would see today while investigating Bitcoin would send them running for the hills and they’d never look back.

From Whence Came the Original Boom?

With all these problems why did companies like Overstock, Expedia, and Dell initially jump on the bitcoin bandwagon? Rather than being organic demand and growth it was the outcome of an aggressive marketing campaign by Coinbase to try and kickstart the adoption of a technology they truly believe in. The campaign started to work as we saw some smaller companies try out bitcoin but the problems inherent in Bitcoin were just far too great.

So where do cryptocurrency payments go from here? Are they dead?

Altcoins to the Rescue?

Some in the cryptocurrency space have been arguing that some of the newer cryptocurrencies such as Dash, Monero, and Zcash that include privacy enhancing features could replace Bitcoin for payments. The problem is that these coins have the same problems and drawbacks that Bitcoin has when it comes to merchant acceptance. All the technological enhancements are user focused and the privacy features actually make the currencies less likely to be accepted by merchants. If we really want to see merchant adoption of cryptocurrencies then we need to stop and take a look at the real needs and payment pain points that merchants face and see what it would take for merchants to adopt a new payment solution. In reality a new system needs to be 10x better for people to make the switch, it can’t be marginally better. Bitcoin and most altcoins fail to be any better than existing payment networks, let alone an order of magnitude better.

What Would it take for Massive Merchant Adoption of Cryptocurrencies?

I don’t know exactly what features and properties a new payment system would need in order to reach a 10x improvement over the existing system for merchants, but I can make a few educated guesses. For starters the new system would have to include all the benefits of the existing system. Merchants would need to be able to tie historical payments to entities, be able to offer autopay and repeat payments natively, and the system couldn’t be antagonistic to government or banks. But what other features might be useful for merchants that tie into payments?

One possibility is the issuance and transfer of gift cards within the system in a way that lowers costs and combats fraud. Gift card fraud turns out to be big business and any advancement in gift card security would be welcomed. A system which allowed payments in existing fiat currencies would at least encourage adoption of a single unified platform. For some merchants the inclusion of novel features around purchase orders, loan payments, supply chain tracking and licensing records would go a long way. I don’t know if these features would be enough to gain adoption but I do know that only one cryptocurrency can offer them; Ethereum.

Ethereum is not only faster than Bitcoin and can handle more transactions, but there is a clear and ambitious scaling plan in place. Ethereum uses accounts rather than the UTXO model of Bitcoin which can tie historical purchases to an entity much like the existing system. The smart contract functionality of Ethereum means contracts could be written to offer up a fully decentralized financial and payment network for anyone to use which could include all the features I listed above and countless more. Simple repeat payment like functionality already exists in an Ethereum Wallet contract (where you can authorize an entity to withdraw up to a certain amount of your funds per day) and it wouldn’t be hard to generalize that feature further. This would be better than the existing system as it both gives users complete control over their finances but also gives them the convenience of things like autopay. On top of that, Ethereum could easily be used by existing banks to allow payments in fiat (Santander is already working on it).

Who could work with merchants and have the resources to build such a system of interoperating Ethereum smart contracts and offer a friendly way for merchants to use it? Coinbase is one company that comes to mind. Not only do they have the resources but building this aligns directly with their mission statement: to create an open financial system for the world. They could offer a customized wallet or interface through their website that allows merchants to access the features, release and redeem gift cards, open purchase orders and track payments, and so on. They’d have to work on how to monetize it but there are at least a few obvious options. ConsenSys is another organization that could build such a system as they work with large enterprises frequently and are on the forefront of building some awesome things with Ethereum.

Ethereum is Already Being Adopted Inside Big Companies

Ethereum is already being looked at by many major companies for their internal blockchain investigations (Enterprise Ethereum is one example of visible progress in this area) which means that these companies will not only be familiar with the technology, but if they use it internally then plugging in to the public Ethereum network would bring immediate interoperability rather than adding complexity (which payment systems usually do).

Even those in the community who really wanted Bitcoin to do it all, such as Preston Byrne of Overstock.com, have ended up using Ethereum for their blockchain projects. His project, t0, is built on an Ethereum chain but they store hashes on the Bitcoin blockchain so they can claim some connection to Bitcoin.

Bitcoin will never become widely adopted by merchants, and neither will the hundreds of other existing cryptocurrencies. I don’t know if merchants will end up adopting cryptocurrency payments, but if they do, Ethereum is really the only game in town. Ethereum solves many of the problems that Bitcoin has and opens up the possibility for a system that is useful for merchants to be built. Whether or not this will happen is yet to be seen.


Some References and Further Reading

Forbes – New ways for turning data into dollars
Wikipedia – pseudonymity
BitPay Blog – Understanding bitcoin’s growth in 2015
BitPay Blog – Business to business bitcoin billing
Blockchain.info transaction chart
Ethereum Mist release with wallet contract
2016 – SWIFT Institute – Virtual currencies: media of exchange or speculative asset?
Forbes – Bitcoin’s blue chip
Circle Blog – Moving away from bitcoin
Circle Blog – early post introducing Circle
Circle Blog – early post on Circle as a Bitcoin company
Coindesk – Santander putting digital cash on Ethereum
Time – Wikipedia accepting bitcoin donations
Vox – Bitcoin was supposed to change the world – what happened?
ChangeTip reddit post on shutting down
1997 – Dowling, Uncles – Do customer loyalty programs really work?
1997 – Sharp, Sharp – Loyalty programs and their impact on repeat-purchase loyalty patterns: a replication and extension
Forbes – Six myths about customer loyalty programs
New York Times – How China took center stage in Bitcoin’s civil war
Lightspeed Venture Partners – At least half of all bitcoin transactions are for online gambling (2013)