In the previous post, we claimed that Bitcoin is chosen as money when the benefits of using it outweigh the costs. In other words, when it's better to use Sats over Benjamins.
And that Bitcoin's benefits depend on the unique properties that are used. Bitcoin is most useful when more of its unique properties are used.
While Bitcoin's costs are all the hassle of using it instead of the alternative, good ol' Benjamins.
We also pointed out that nothing stays the same. Especially not in the world of Bitcoin where a hive of mega-smart developers are constantly working to improve it. As the hive hustles, we should expect Bitcoin's unique properties to improve and the hassle of using Bitcoin to go down.
Traditional Commerce
In this post we're going to break down how Bitcoin's benefits and costs have stacked up for buying everyday type things. And since those benefits and costs are constantly changing, we'll start from back in the day.
Bitcoin Pizza Guy
The first known example of Bitcoin commerce was the infamous pizza purchase. In May 2010, a guy named Laszlo had some spare bitcoin (10,000) lying around and got the munchies for pizza. To satisfy his craving, he went to a Bitcoin forum with this post:
Lucky for Laszlo (or notso), a forum viewer saw the post and offered to purchase the desired pies with Benjamins and deliver them to Laszlo in exchange for his bitcoins.
This transaction process has already achieved a high mark on the hassle spectrum, but to add insult to injury, those 10,000 bitcoins he exchanged for 2 large pizzas in 2010 are now worth $95 million in Benjamins.
The Cost of the Bitcoin Pizza
It's fair to say that Laszlo experienced all the costs Bitcoin has to offer. His capital was subject to major volatility while he went through a ton of effort to overcome Bitcoin's lack of merchant network and suffered a massive opportunity cost kick in the balls.
If you're feeling bad for our friend Laszlo, you can throw him some sats. Judging from his twitter profile, he'd be happy to take them.
The Benefits of the Bitcoin Pizza
I hope it was a tasty pizza. But even if it was the best tasting pizza of all time, what was the benefit of using Bitcoin to purchase it? To answer that, let's look at the unique Bitcoin properties Laszlo took advantage of in his pizza purchase:
That's a giant goose egg because nothing about Bitcoin benefited Laszlo's pizza purchase.
He did not save on international payment fees (Borderless). He did not benefit from Bitcoin's capped supply (Disinflationary). He did not transact tiny amounts of bitcoin (Divisible). No one involved was concerned with the transaction being reversed (Immutable). He did not need to circumvent the banking system (Permissionless). No one especially benefited from custoding the bitcoin (Portable). No special software was used in the transaction (Programmable). Laszlo exposed his identity in the transaction (Pseudonymous). And there was no particular need to audit the transaction (Transparent).
Bitcoin Pizza: Sats < Benjamins
There's no question. The Bitcoin pizza purchase would have been cheaper, easier, faster, and safer with Benjamins. While a monumental milestone in Bitcoin history, it's clear that Bitcoin is far from traditional commerce utility in 2010.
Merchant Costs Come Down
Despite Laszlo's pizza not taking advantage, Bitcoin's unique properties have always offered alluring appeal to merchants.
Permissionless: Bitcoin transactions avoid credit card companies which charge up to 3% per swipe.
Borderless: Bitcoin transactions avoid the extra cost and time associated with international fiat payments.
Immutable: Bitcoin transactions are permanent which saves merchants on potential chargeback costs made with credit and debit cards.
But these benefits alone were not enough to tip the Sats-Benjamin scale for traditional commerce.
It wasn't until 2013 that mainstream brands, like Wordpress, OkCupid, Baidu, and Overstock started accepting bitcoin. Why? The world and Bitcoin changed.
First, the Cyprus Financial Crisis happened. Like a bad hangover, Cyprus never recovered from the 2008 global financial crisis and had major debts to pay. Since they were on the Euro, they didn't have the liberty of making their money printer go brrrrrr and resorted to taking money out of people's bank accounts to help pay the debt.
This gave the people of Cyprus a real reason to keep money in Bitcoin, outside the reach of greasy government hands (shout out to Portability). It also gave the rest of the world reason to speculate on the future of Bitcoin.
The Bitcoin world was ready to embrace the speculation with open arms. Bitcoin exchanges like Coinbase started taking the pain out of buying bitcoin. By February 2013, Coinbase was selling $1 million in bitcoin per month.
There’s an incredible amount of demand for people who want to buy Bitcoins now.
-Brian Armstrong, CEO of Coinbase
The combo of greater demand and easier access to supply sent the bitcoin price on a wild ride that accelerated throughout the year.
Number go up only attracted more attention to Bitcoin and all of sudden there were more people in the world who had bitcoin to spend i.e., network effects.
Coinbase wasn't only focused on shilling bitcoin to speculators, they and Bitpay launched plug and play merchant services, and in a competitive race to win the future of Bitcoin commerce, spent sweet VC Benjamins to sell them aggressively.
As Danny Bradbury details in 2013: The Year Merchants Learned to Love Bitcoin, this gave merchants "no-lose" solutions to accept bitcoin and even allowed them to automatically convert bitcoin to their local currency. As a cherry on top, accepting bitcoin made for splashy publicity that gave often boring merchants an innovation glamour muscle to flex.
And merchants jumped on the bandwagon.
We have seen tremendous growth. We are averaging over 400 new merchant requests a day.
-Stephanie Wargo, VP of marketing at payment processing firm BitPay
The ecosystem upgrade brought down the cost of Bitcoin payments by making it easy to pay with and accept bitcoin (effort), creating new ways to spend bitcoin (more network effects), and lowering merchants' exposure to bitcoin volatility (capital risk).
The Sats-Benjamins Scale...Wobbles
Now that merchants accepted bitcoin and customers had bitcoin to spend, one question remains. Were they willing to spend it?
According to Bradbury's piece, late 2013 activity indicated they absolutely were.
BitDazzle, an e-commerce marketplace where merchants could (past tense foreshadow) sell their goods for Bitcoin experienced over 100% month over month growth through the end of 2013 peaking at 400% growth on Cyber Monday.
By 2015, more than 100,000 merchants accepted Bitcoin globally and data from Chainalysis indicates customers were all about spending their sats on regular, everyday type things.
(Y-axis edited to be in terms of Bitcoin volume)
Then, something happened.
(Y-axis edited to be in terms of Bitcoin volume)
Does that chart look familiar? If you were a bitcoin hodler through 2017-2018, I bet it does.
Here's bitcoin's price over the same time period:
You don't need a p-value to know the correlation is strong. The chance to cash in on sick gains acts like a thumb on the Sats side of the Sats-Benjamins scale. Recall the Bitcoin commerce enthusiasm of 2013 was also timed with a price runup.
How have our innovative bitcoin merchants responded since? Not well.
Headlines have been full of brands pulling back on Bitcoin payment channels:
Don't worry. Bitcoin is not dead yet.
Leigh Cuen from Coindesk recently dropped some upbeat stats on bitcoin merchant adoption:
According to BitPay Chief Marketing Officer Bill Zielke, the payment processor facilitated $1 billion worth of cryptocurrency transactions in 2019, with bitcoin leading the pack. Likewise, a Coinbase spokesperson said Coinbase Commerce processed $135 million worth of cryptocurrency payments for thousands of merchants in 2019, which represents a 600 percent increase in the number of unique transactions via Coinbase Commerce since 2018.
She goes on to note that these numbers are dwarfed by credit card volume which in 2018 amount to $3.7 trillion according to a 2019 report from the U.S. Bureau of Consumer Financial Protection.
The progress fits our narrative that time is on the side of Bitcoin adoption, but we're a long way from Bitcoin commerce hitting the mainstream.
Traditional Commerce: Sats < Benjamins
So, what's it going to take to get there? Sadly, my bet is coffee is the last thing we buy with bitcoin. But we're going to explore the potential path and the (more!) exciting stops along the way in our next piece.
Next Stop: Coffee? Where we're going we don't need...coffee.