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What Needs to Happen Before Bitcoin Replaces Visa and Other Digital Payment Methods?

Accepting payments in Bitcoin (CRYPTO: BTC) has some notable advantages. The original cryptocurrency was built for an online world, and eliminates or reduces many pain points for merchants by lowering banking fees, reducing transaction costs compared with digital payment networks like Visa (NYSE: V), and expediting the speed at which transactions are settled.

Bitcoin isn't perfect, though. Crypto and blockchain-based assets are still new technology, so many people aren't familiar or comfortable with how they work. Wild swings in Bitcoin's price is also a major detractor as a form of payment. As a result, most merchants aren't even thinking about replacing traditional platforms run by Visa and big banks just yet. At this point, convenience and peace-of-mind using incumbent networks outweighs any of the benefits of switching to blockchain-based payments. But here are three ways Bitcoin could capture a larger share of the digital payments market.

Image source: Getty Images.

Bitcoin payment development in a word: Time

All the various movements going on with Bitcoin and other cryptocurrencies can be summed up in one way: It is going to take time before Bitcoin becomes an accepted medium of digital exchange for things of value.

Though other, younger blockchain networks like Ethereum (CRYPTO: ETH) have received greater interest of late, it's noteworthy that there are thousands of developers hard at work on Bitcoin or on projects built on its platform. Some of them can be found at legacy payment networks themselves. For instance, Visa's network supports debit cards backed by cryptocurrency accounts, and the company has a small segment working on other methods to integrate Bitcoin into its system.

Nevertheless, Bitcoin still has a ways to go before it can overtake massive and powerful institutions like Visa and the banking partners that dominate the payments business.

More Bitcoin facilitators, not just HODLers

As the cryptocurrency movement has gained momentum, a term has arisen to describe some of its most avid proponents: HODLers. HODL is a now-intentional misspelling of "hold," an encouragement to hold onto cryptos even during some of the sharp downturns and frenzied swings in value. It has also retroactively been coined as an acronym for "Hold On for Dear Life."

Individuals aren't the only Bitcoin HODLers out there. Some notable companies have added Bitcoin to their balance sheets, including Square (NYSE: SQ), Tesla (NASDAQ: TSLA), Microstrategy (NASDAQ: MSTR), and Latin American e-commerce leader MercadoLibre (NASDAQ: MELI). Some of these firms may simply have Bitcoin as an alternative to cash with the expectation that Bitcoin's price will rise over time. Others, like Square, are trying to make Bitcoin a standard of business exchange. Square Chief Executive Officer Jack Dorsey said this past summer that Square was building a new developer ecosystem to accelerate Bitcoin's usefulness as a payments platform. Even the country of El Salvador has made Bitcoin an official currency, though implementation has been dubious so far.

As a result of some Bitcoin holders' work, a growing list of items and services can be purchased with Bitcoin -- everything from low-value items like socks to expensive goods like real estate or a college education. Given more development, more businesses and consumers might warm to accepting Bitcoin as payment. This could lead some to start spending their crypto assets rather than just HODLing them.

Use of derivatives a stabilizing force over time

Financial products, such as futures and options built atop or denominated in Bitcoin, could go a long way toward advancing its use as an everyday form of payment.

Leading derivatives marketplace CME Group (NASDAQ: CME) launched Bitcoin futures back in late 2017 and has steadily added other Bitcoin contracts in the years since. These financial instruments help institutions that own or utilize Bitcoin to manage their risk -- since Bitcoin volatility is wild compared to national currencies like the U.S. dollar, in which organizations have to pay their bills and taxes. An apt analogy might be airlines, which use derivatives to manage big swings in aircraft fuel. If more businesses are to accept Bitcoin payments and utilize the Bitcoin blockchain rather than a traditional payments network like Visa, a way to protect against downturns in value is critical.

Bitcoin has gained an important beachhead as a legitimate investment asset, with a market value that exceeds $1 trillion. However, Bitcoin has potential beyond that to simplify and reduce the cost of traditional digital payment systems. But before Bitcoin is ready to take on the legacy digital payments industry dominated by the likes of Visa and big banks, a lot of work needs to be done -- and it could take many years before that happens.

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Nicholas Rossolillo owns Bitcoin, Ethereum, Square, Tesla, and Visa. His clients may own shares of the companies or cryptocurrencies mentioned. The Motley Fool owns shares of and recommends Bitcoin, Ethereum, MercadoLibre, Square, Tesla, and Visa. The Motley Fool recommends CME Group and MicroStrategy. The Motley Fool has a disclosure policy.


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