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Marketing manager at Blockpit with a critical view on developments and changes in all areas of the crypto space.
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Let's take a look at the future of cryptocurrencies as a payment method. Cryptocurrencies are very versatile and have many different features, but the use case as payment and money transfer method continues to attract the public's attention in particular. Countless myths are circulating about crypto payments. Thanks to growing crypto-economic research efforts, light can be shed on many of them.

While cryptocurrency as a payment method isn't mainstream quite yet, businesses large and small now contemplate getting into crypto or implementing blockchain technology into their operations. A number of well-known companies already accept or have previously accepted cryptocurrencies, such as Microsoft, Virgin, Expedia, Subway, T-Mobile Poland, OKCupid and Newegg. According to CoinMap, over 13,000 stores across the world welcome crypto as a payment method.

Because of vague legislation, financial institutions remain hesitant towards the use of cryptocurrencies as a method of payment, a report by the US-American Office of the Director of National Intelligence states. This might also stem from Bitcoin's reputation as a means for money laundering. However, the trend might soon change as regulators and law enforcement gain access to new analytical tools to better trace illicit actors.

How do cryptocurrency (micro-)payments work?
E-commerce store owners want to provide users with as many payment options as possible, but not increase risk for fraudulent payment. For businesses, accepting cryptocurrency can actually help fight fraud. As customers pay upfront in a one-way transaction, merchants won't experience cancelled transactions while they've already sent the product. In addition, transaction fees are determined by the users, not by credit card companies or payment providers. With Bitcoin, for example, the amount of fees you pay determines the speed at which you will receive your money.

Admittedly, this doesn't make cryptocurrency the ideal mode if you want to buy a cup of coffee or a pair of socks. The main reason for this is that all bitcoin transactions compete against each other to be verified by miners. These tend to process bigger payments first as they offer bigger fees. Subsequently, the smaller a transaction, the longer it takes for it to be processed. Is there a solution to this problem? 

There are in fact a few ways to still use cryptocurrency in everyday transactions. Usually, you would go through a third-party platform such as Coinbase. What Coinbase does is hold the coins on behalf of all its users. People using the same platform can hence make payments to one another without any fees or delay so long as they trust a central third party. As many enthusiasts see cryptocurrency as an alternative to these kinds of centralized systems, they might abstain from using crypto for regular payments just yet.

Alternatives to wallets and exchanges
A lot of users are also wary of the looming security threat that wallets and exchanges are posing. The more people jump onto the crypto bandwagon, the more hackers are attracted to these targets. While this might seem as an insurmountable con to using crypto for payments, you can overcome some of this risk by using a well-known and proven provider. Also, alternatives to using wallets and exchanges are developed as crypto becomes more widely adopted.

One example would be the Lightning network, where Bitcoin transactions are settled without creating an on-blockchain transaction for individual payments. Only the net sum of all smaller transactions is registered by the blockchain. Security is enforced by blockchain smart-contracts. Essentially, this means that users can transfer funds directly between each other rather than broadcasting each transaction to the blockchain. To establish trust, both parties need to put down deposits that can be canceled if they fail to agree about their obligations.

The pros and cons of cryptocurrency as a payment method
While this might change once dedicated legislation is enacted, the technologies described above allow crypto users to remain mostly anonymous. People concerned with privacy consider the anonymity of cryptocurrency a pro. Bitcoin may be infamous for being used as payment for illegal services, but it is a perfectly legitimate way to take payments. Especially buyers with a high sense of cyber security often prefer anonymous transactions. Therefore, the anonymity may be considered both advantage and inconvenience at the same time.

The volatility of cryptocurrencies is another unique characteristic that has to be taken into account. Market values can go up and down in a matter of hours, so if you sold something for Bitcoin worth 500 Euros you might not have 500 Euros in Bitcoin the next day. Merchants can circumvent this issue by converting revenue into legal tender right after the transaction has taken place. On the other hand, if you take cryptocurrency and have your wallet loaded while prices skyrocket, you too make money as the value of your assets increases.

While crypto payments offer a lot of positive features, the high market volatility is a big con

Will cryptocurrency become a major payment method?
For cryptocurrency to become a viable replacement for mainstream payment methods, the market volatility would have to be drastically reduced. As long as the market is volatile, vendors won't want to primarily take crypto, because people don't spend money when the market goes up. Users lose money if they buy with crypto while its value increases. This means that businesses taking only crypto would lose revenue during market increases.

Clearly, cryptocurrencies hold an interesting potential as a means for cheap, quick and global payment transactions. Especially in areas with low adoption of traditional money systems - i. e. emerging markets - there is very low resistance to new financial technologies - but before mass adoption takes place, a number of technological and regulatory issues will have to be resolved.

Sources
Risks and Vulnerabilities of Virtual Currency
Will cryptocurrency become a major payment method?
How to accept crypto as a business
How Bitcoin Is Slowly Evolving as a Payment Method
Pros and Cons of Accepting Crypto as a Payment Method

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