Bitcoin still has a big opportunity in payments despite 60% drop this year and choppy waters ahead

Published Fri, Dec 30 20221:24 PM EST

Investors are constantly reminded that despite the myriad coins, projects and innovations in crypto, bitcoin may be the only "safe" crypto asset to buy. That comes with a big asterisk, however. The price of bitcoin is down more than 60% for the year and volatility remains a key characteristic of the asset. Most of all, however, how to value it is still a mystery to many – lots of investors are looking at negative returns and the cryptocurrency certainly didn't convince people of its potential as an inflation hedge this year. While many have written off the original vision for bitcoin as digital cash – in large part because of the volatility – some investors and developers are still bullish on its potential to improve financial transactions. "In the same way the dot coms were the shape of the future in 1999," said Mike Brock, who leads Block's TBD business. "It was still filled with froth, vaporware and nonsense speculation. We're seeing the same thing here and a lot of people are getting hurt." To that point, investors sticking around the crypto market after the recent FTX blowup are shifting their attention to the utility crypto can provide rather than how they can ride the wave up in the hype cycles of speculative assets. Payments are one way to utilize bitcoin. "Trading and leveraging is not exactly a first order financial problem," said Lyn Alden, founder of macro-focused firm Lyn Alden Investment Strategy. "The bigger problem overall is that globally, a lot of people do not have access to savings, they do not have access to good payments. That's a much bigger total addressable market and essentially what bitcoin and stablecoins are going to solve." Brock added that the froth in the market is "still irrelevant to the long term success of these technologies. At a fundamental level, they do unlock value and they will provide more capital efficiencies in the markets in the future." Block has said little about TBD, which focuses on cryptocurrency and decentralized finance, since CEO Jack Dorsey announced the idea in summer 2021. Rather than putting energy into building yet another crypto exchange, TBD is focused on building a cross-border remittance product, according to Brock. Investors got a chuckle in 2021 after Tesla announced it would accept bitcoin from customers as payment for its electric vehicles and then reversed the decision shortly after, as crypto prices fell. And while Tesla didn't credit the volatility for its reversal, many observers saw it as evidence that the belief in bitcoin's payments capabilities were misguided. Bitcoin's price swings are irrelevant, however, according to Brock. "Bitcoin's price on any given day — as a remittance vehicle — has no effect on us," he said. "Whether the price is $500 or $100,000, the system works the same." "There's a huge premium that bitcoin enjoys today that is largely from speculation," he added. "I do think long-term value of bitcoin will go up because of increasing utility on the network, because it's being used increasingly to power things like international remittance [and] to secure other types of transactions like the digital identity work that we're doing." Bitcoin has a fixed supply cap of 21 million coins. Focused investors may not be buying the big dip in bitcoin yet. Instead, they may be holding on to their assets, with any concerns alleviated by its fixed supply, growing demand and anticipation of long-term returns. Global demand When Russia first waged war on Ukraine early this year, observers and crypto skeptics got a glimpse of bitcoin's potential to serve people where the formal financial system can't or doesn't. Many turned to crypto to safeguard their cash . Ukraine also received many payments and donations made in cryptocurrency amid reports of bank runs and empty ATMs. "It's not buying coffee at Starbucks, so that may not be relatable to your average American, but it's a real use case," Brock said. Block isn't alone in its confidence in bitcoin's payments potential. The group that runs the Lightning Network, a payment protocol built on the Bitcoin network, is committed to making Bitcoin network payments even faster, less costly and more readily confirmed than transactions made directly on the Bitcoin blockchain. Strike, which has a bitcoin buying and selling service, is also developing services around remittances, micropayments, tipping and paying merchants and peers in bitcoin. Earlier this month at the AfroBitcoin conference, Strike announced a partnership with a company called Bitnob that aims to use Bitcoin's Lightning Network to improve remittance payments into Africa . "It's really strange that people have dismissed this feature of Bitcoin," said Alex Gladstein, chief strategy officer at the Human Rights Foundation. "The ability to send value from one place to another is one of its most important features and it's something that's emerging all across the world in a really, really big way." "The existing international financial system is permissioned, gated, exclusionary and is often colonial," he added. "Users from country A can very rarely speak to users in country B very easily. There are a lot of fees involved in moving money around the world. Oftentimes in places like Africa, for example, 80% of all inter-African flows go through an American or a European company." Bitcoin has also been a lifeline for other groups marginalized or underserved by financial institions such as sex workers , Lebanese freelancers who grapple with hyperinflation and are unable to access their bank accounts, and Afghans suffering a nationwide cash shortage . And while different from consumer payments, a company called Stacks is so optimistic about Bitcoin's transaction capabilities, it's building a smart contracts layer for DeFi, NFTs and other decentralized apps on Bitcoin. Transacting in the U.S. Tyrone Ross Jr., president and founder of financial planning firm 401 Financial, said while investors certainly can think of bitcoin as a store of value, he's most bullish on crypto infrastructure plays like the TBD initiatives at Block. Paying for things with bitcoin is probably unwise in the U.S. because transactions are taxable, he said, but Bitcoin fulfills a need for people who have been turned away from the formal financial system. Ross called it "the one inarguable use case" and said it's so far been "clouded" by crypto's online casino culture. The Federal Reserve's Economic Well-Being of U.S. Households report issued this spring adds some strength to the argument. It showed lower-income adults (with less than $25,000 in annual income) are more likely to use cryptocurrencies for transaction purposes versus investing. Crypto investors, on the other hand, were "disproportionately high-income, almost always had a traditional banking relationship, and typically had other retirement savings." Some 46% had an income of $100,000 or more. Zooming out, 11% of adults in 2021 held cryptocurrency as an investment, while 2% said they used cryptocurrency to buy something or make a payment in the previous 12 months. Another 1% indicated they used crypto to send money to friends or family. This is a small pocket of the U.S. using bitcoin for payments, but Bitcoin doesn't need 100% of the global population on the network to succeed, according to Oppenheimer analyst Owen Lau. "If 5% of the whole population believe in the currency or that the price will go up, it's inevitably going to exist," he said. "The market price is determined by the marginal investment, not by the original investment. So if you still have a small sector of people who like this as a class, you still have people trading in and out of bitcoin." Brock said he believes bitcoin will come to be seen as a safe harbor "around the world," as it gains utility in remittances and as an inflation hedge ("not today, obviously"). That won't necessarily mean it will replace the dollar in people's everyday lives. In fact, debating the possibility is yet another way many investors miss the point, he said. "Will Bitcoin be a way that you're paying for your Starbucks coffee next year, in five years, in 10 years? Probably not," he said. "My belief in bitcoin's ability to make a better financial system is not contingent on the failure of the dollar."