Over the last decade we have seen the rise of Bitcoin and other cryptocurrencies. There are probably many reasons why this has happened, but one big reason seems to be a reaction to the 2008 financial crisis where the integrity of the existing financial system and the US dollar came into question.
In this article, we will make a comparison between using a standard credit card for making routine payments and using Bitcoin or other similar cryptocurrencies that hope to attract users away from the existing payment alternatives like credit cards. Below I have listed the features of two credit cards people use to make routine payments and further below I will compare some of those features to using Bitcoin or another similar cryptocurrency instead. After that are some added comments.
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For many people, credit cards are a very convenient way to make routine payments for purchases while at the same time taking advantage of incentives offered by the cards to use them. I'll list two examples below. After that we will compare some of the features offered by these two credit cards to using Bitcoin or a cryptocurrency instead.
- no annual fee
- 0% Intro APR for 15 months from account opening on purchases
- 3% cash back on all purchases in your first year up to $20,000 spent. After that, earn 1.5% cash back on all purchases
- Cash Back rewards do not expire as long as your account is open
- free unlimited access to your credit score
- Zero Liability Protection means you won't be held responsible for unauthorized charges made with your card
- Purchase Protection covers your new purchases for 120 days against damage or theft up to $500 per claim
- Extended Warranty extends the time period of the U.S. manufacturer’s warranty by an additional year ,on eligible warranties of three years or less.
- no annual fee
- 0% Intro APR for 15 months on purchases
- Earn unlimited 1.5% cash back on every purchase, every day
- Earn a one-time $150 cash bonus once you spend $500 on purchases within 3 months from account opening
This card also comes with limited liability protection and no foreign purchase transaction fees along with other features. My daughter used this card during her semester abroad in her senior year in college and the no foreign transaction fee was very helpful in that situation.
Please note the extensive incentives these card issuers offer to attract the use of their card for purchase payments. They charge no fee to maintain your account, they offer the flexibility to pay off purchases made over the first 15 months at 0% interest, and they actually pay the user cash back on purchases that can certainly add up to a substantial amount over time. (if the cards are used to pay normal monthly expenses as an example)
Users who continue to pay off the full balance of the card monthly after the initial 15 month 0% rate period can continue to accrue cash back while paying no interest and having the convenience of being able to pay everyday payments with the cards which are widely accepted where most people live and spend money on a daily basis.
What about using Bitcoin and Cryptos for routine payments?
In comparing the use of Bitcoin or similar cryptos for regular payments, the first thing to note is that they are not nearly as widely accepted for payments by merchants. While there are merchants (more often online merchants) who accept them for payments, they are a small fraction of the merchants who accept regular credit cards in most locations. In my local area as an example, every gas station, grocery store, restaurant, Walmart, Target, major retail outlet, etc. accepts credit cards for payment. As far as I know, not a single one of these accepts Bitcoin for payment in our local area. So that is one major hurdle for trying to use cryptos for routine payments.
Next, we need to ask: What happens if someone hacks into your wallet and steals your cryptos? As far as I know, you are probably out of luck. In comparison, if someone steals your credit card and uses it improperly, your liability is limited to either a very small amount or in many cases nothing at all. This issues was raised this past week in the Congressional hearings held about Project Libra from Facebook (see the unanswered questions segment of this TechCrunch article)
Extended Warranties and Purchase Protection? Many credit cards offer these features at no cost on all or most purchases. Cryptos don't offer anything like that as far as I know unless some individual merchants who accept them for payment offer it.
Finally, what incentives does Bitcoin or other cryptos offer to attract users? Here, we might say that the prospect of appreciation of the Bitcoin or crypto held in the wallet may attract some users. Using the US as an example, if you use a credit card you are simply using them as a method of payment to spend US dollars. So there is no balance on hand to appreciate in value and you will not see any gains from the currency itself (US dollars in this example). The cash back offer is what you can expect to receive from cards that offer that incentive (usually 1-3% of purchase amounts on various card offers).
But the prospect for appreciation of Bitcoin or a similar crypto is really more a reason why people buy and hold these cryptocurrencies rather than a compelling reason to use them make routine payments. Of course significant price volatility in anything involves downside risks as well as potential upside gains. Over its life span, Bitcoin holders have experienced significant volatility up and down in the price of the coins. For credit cards, there is little or no downside risk and limited gains for card that offer cash back or points incentives.
Summary
I believe the comparison above is one explanation for why Bitcoin and other cryptocurrencies have not achieved broad adoption by the general public for making routine payments. They don't compete well for most people in terms of offering incentives to use them for routine payments. That does not mean they have no role to play. Even though they have not achieved broad public adoption, the number of wallet holders continues to steadily increase over time as does the overall market cap of the cryptocurrency space. For people who want an alternative place to hold funds outside the normal banking system for any reason, they may help fill that demand in the marketplace. For those who see them as an investment vehicle for speculation, they may fill that demand in the marketplace. At the current level and pace of adoption they won't significantly impact the overall global monetary system, but they can find a healthy niche of users who feel they meet their personal needs. It will be interesting to see if the Facebook Project Libra gets off the ground and what incentives if any it may offer users to attract them to use the Libra.
Perhaps one way to look at this is that payment alternatives like credit cards offer some strong advantages for use in just making normal monthly purchases and payments. Things like cryptos and precious metals may offer some alternative long term store of value advantages for a portion of the funds people hold as savings. The same person might well use all three of these as part of their overall personal financial planning. So there is plenty of room in the marketplace for a variety of alternatives for different uses and demands.
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Added note: For full disclosure, the links I provided above (and below) for the two credit cards mentioned will take you to a page that explains the features offered by those cards. They also offer me an incentive referral fee for the first five people that decide they want to apply for the card and are accepted. So, if you have any interest in having either credit card, feel free to use the link provided above. I'll get a referral fee and you will get a card with a lot of nice features and incentives if you apply and are accepted. These kinds of credit cards work particularly well for people who simply use them to pay normal monthly expenses and then pay off the account balance each month. If you are inclined to build up debt on credit cards and do not pay off the balance, be advised these cards carry very high interest rates after the initial 0% incentive rate period expires. Personally, I prefer not to use credit cards that way.
