Bitcoin Accepted Here?

For all the hype lately, the digital currency remains a niche opportunity for independent sales organizations and other third-party acquirers.

On the eve of the 76th anniversary of Pearl Harbor, Valve Corp. dropped a little bomb of its own. The Bellevue, Wash.-based parent of Steam, a marketer of popular online games, issued a statement to say it would no longer accept Bitcoin, effective immediately. The reason? “High fees and volatility in the value of Bitcoin,” the game company said.

High fees? Volatility? That wasn’t supposed to be part of the package with Bitcoin, which promised solid value to merchants when it debuted eight years ago. That value included low acceptance costs, lightning-fast transactions, and, perhaps best of all, no chargebacks. Yes, the price fluctuated, but for the most part within a manageable range.

The result is that roughly 100,000 merchants worldwide accept Bitcoin, businesses ranging from single-unit coffee shops to automobile dealers to big-time online sellers like Overstock.com.

But these days, the experience of sellers like Valve, coupled with head-scratching events in the Bitcoin community, leaves merchants, independent sales organizations, and merchant processors wondering what kind of opportunity lies latent in this newfangled form of money.

“Some people can’t wrap their heads around it,” says Eric Brown, founder and chief executive of Aliant Payment Systems Inc., a 14-year-old, Fort Lauderdale, Fla.-based ISO that’s getting set to offer Bitcoin acceptance to its 7,000 merchants.

Others are taking a more cautious approach. North American Bancard LLC, a Troy, Mich.-based company and one of the biggest ISOs in the country, is considering “a potential pilot in 2018 for a small portion of our [merchant] base,” says Justin Muntean, senior vice president of sales.

But NAB is far from sold on Bitcoin. “We’ve had some inquiries,” Muntean says, “but we haven’t seen a huge surge of interest from our merchant base.”

‘Extreme’ Volatility

Little wonder payments executives and merchants are having a hard time “wrapping their heads” around Bitcoin. It seems there is a negative for every positive these days. Take the cryptocurrency’s most notable feature, its wild runup in value. From roughly $1,000 at the start of 2017, its price had surged to just shy of $18,000 by the middle of December.

That has made Bitcoin more notable as an investment vehicle than as a payment device. Some observers fear it may also encourage users to hold on to the currency, hoping it will appreciate even more, rather than spend it.

Yet that may not be entirely true. BitPay Inc., a major Bitcoin exchange based in Atlanta that processes for 4,400 merchants, has found that people spend more when the price rises because they feel richer, according to a spokesman. And, he says, “the product still has inherent advantages regardless what the price is.”

The numbers may prove him out. BitPay’s merchant volume in 2017 exceeded $1 billion, up 300% over the previous year. Still, the company is hedging its bets. It plans to add five more cryptocurrencies this year, some as early as this month or February. It won’t say which ones. One popular site, Cryptomarketcap.com, tracks more than 1,300.

Another negative for Bitcoin stems from yet another positive. The currency has become popular enough that its blockchain, the distributed ledger that tracks its transactions across a global network of computers, is struggling to keep up with the traffic. That results in the two big problems that plagued Valve, the game seller: slower transfers and higher fees.

Bitcoin network fees are paid by Bitcoin users when they spend the currency. Early in 2016, when Valve added Bitcoin as a payment option, the fee to its customers was around 20 cents. By December, it was getting close to $20.

That was bad enough. What made matters worse, Valve said, is that network congestion had slowed down settlement so much that any downward swing in Bitcoin’s value made it necessary to charge the customer again to make up the difference. And that second transaction, of course, triggered a second fee.

While Bitcoin’s price has generally surged upward in recent months, that climb has occurred on the back of a jagged arrow featuring some dramatic dips. “Historically, the value of Bitcoin has been volatile, but the degree of volatility has become extreme in the last few months, losing as much as 25% in value over a period of days,” Valve noted in its December statement.

Keeping the Lights on

Bitcoin network fees are charged by organizations that harness roomfuls of computers to crack complex mathematical problems. Since the solutions yield new Bitcoin, these organizations are called miners.

With the buildup in volume, miners have been able to charge more to give transactions priority on the blockchain. That supply-and-demand dynamic isn’t likely to change until the developers who manage the network figure out how to boost capacity. One solution, which involves increasing block size, hasn’t proved popular enough to be enacted.

Another project, by a group of developers calling themselves the Lightning Network, would take transactions entirely off-chain until the last stage of settlement. That undertaking is nearing the finish line.

But not fast enough for some. Qondado LLC., a 2-year-old developer of encryption software in San Juan, Puerto Rico, last month launched Digital Debit, a mobile wallet that lets users pay merchants—or each other—with Bitcoin. The twist: It gets around network congestion with its own blockchain bypass. “What we’ve done is make that experience available right now,” says chief executive Edward Robles.

Developed within an application developer network run by San Francisco-based Coinbase, another big U.S. Bitcoin exchange, the Digital Debit wallet interacts with the point of sale by scanning a quick-response code displayed at the merchant terminal.

Once the connection is confirmed, the user can send the required sum through the app, which instantly translates the dollar amount of the sale into Bitcoin. Users must have a Coinbase account, but signing up for Digital Debit automatically creates one, Robles says.

The cost to the user is nothing for transactions under $10. Over that, it’s 50 cents. Qondado keeps the cost down by keeping transactions off the blockchain until the merchant cashes in the newly received Bitcoin, says Robles. “We saw this as a way to be the Apple Pay or Alipay of cryptocurrency,” he adds.

But that doesn’t mean the system hasn’t imposed considerable development and operating costs on Qondado. Its fee policy just “keeps the lights on,” says Robles. He won’t give specifics about number of users so far, but adds “response has initially been very strong” to the company’s Facebook campaign.

‘There Is a Need’

But what kind of merchants are likely to accept Bitcoin? That’s what ISOs like Aliant are finding out. Brown says he’s targeting his base of high-risk merchants first, as these account for more than 60% of his base. He also expects card-not-present merchants to be among the first to sign on, since this is Aliant’s business focus.

But others, he hopes, will adopt Bitcoin. The first to sign up, indeed, was a plumbing contractor. As for takers overall so far, “We’re kicking out contracts,” Brown says.

To handle the back end of Bitcoin, Aliant has signed up NetCents Systems Ltd., a 5-year-old Vancouver, British Columbia-based exchange. For POS transactions, it’s relying on terminals from a Palo Alto, Calif.-based startup, Poynt Corp.

The Poynt device features an app library with business functions that go well beyond payment. The devices deployed by Aliant will work with a specialized connection to NetCents.

Pricing Bitcoin transactions could be tricky for Aliant, since there’s no interchange on which to base rates. Also, Brown says he wants to keep the service economical without attracting merchants that aren’t “serious” about accepting the digital currency.

Right now, Aliant’s Bitcoin transaction pricing ranges from 0.5% to just over 3%, with a fixed fee from a nickel up to 30 cents. The fixed fee depends on volume, which brings it down, and risk, which does the opposite. There is also a monthly ($9.95 to $19.95) and annual ($99) fee.

Other digital currencies could follow at Aliant. Brown says he is convinced “there is a need in the marketplace.”

A Means of Exchange

That may well be the case. On the face of it, there’s no reason merchants shouldn’t trade in Bitcoin every bit as much as they do in dollars, and no reason ISOs and processors shouldn’t enable this business. After all, as Qondado’s Robles says, “Bitcoin was designed to be a means of exchange.”

That’s on the face of it. Dig deeper, and you find volatility, cost, and network-scaling issues that raise big concerns. Chances are, these will be worked out. The question is how soon.

 

Bitcoin’s New Solution for Network Growth

Bitcoin’s heady rise last year has pleased investors and drawn the attention of derivatives exchanges and other institutional players, but it may also have obscured a development going on behind the scenes to solve one of the digital currency’s biggest drawbacks: its weakness as a payment method.

Bitcoin, which started out 2017 at a price just shy of $1,000, was dancing above and below the $18,000 mark in the first half of December. By mid-December, Bitcoin’s $17,800 price placed the total value of all Bitcoin in circulation at close to $300 billion.

Investor interest has been stoked not only by the currency’s meteoric rise but also by the implied endorsement coming from big-league futures exchanges. Chicago-based CME Group Inc. was set to start trading Bitcoin futures Dec. 18, but its crosstown rival, Cboe Global Markets Inc., beat it to the punch on Dec. 10. Both exchanges earlier received a green light for the contracts from the Commodity Futures Trading Commission.

But another event took place early last month that promises to clear up two key Bitcoin problems: network congestion and fast-rising transaction fees. Developers working on a project called the Lightning Network announced they had conducted a pair of successful live transactions using specifications they’ve been working on for more than a year.

While much work needs to be done, the transactions reportedly worked as expected across software prepared by different developers, according to Coindesk, a cryptocurrency news site.

For the past couple of years, the Bitcoin network has been plagued by slow transaction times and rising fees for users. Both problems are brought on by volume growth on an underlying blockchain limited by 1-megabyte blocks.

While some solutions attack the problem by increasing block capacity, Lightning proposes a bypass. It manages the transaction’s details via off-chain channels, broadcasting to the blockchain only when the transaction is culminated.

If Lightning is widely adopted, it could solve Bitcoin’s scaling problem, allowing for much faster growth and more reasonable transaction costs.

Fees are controlled by so-called miners, the organizations that create new Bitcoin by working out complex mathematical problems. As volume rises, miners can charge more to give a transaction a higher priority on the blockchain.

Bitcoin has already become a hot commodity for investors. Next up could be a solution that finally unlocks its potential as a payment instrument.