Will I ever use bitcoins to buy groceries?

Laszlo Hanyecz bought two Papa John's pizzas with 10,000 bitcoins on May 22, 2010. This was the first time a crypto currency was used to buy something physical. This historical event has become rather unfortunate because of the rise in bitcoin's value . At the time of this writing, Bitcoin is valued at $20,857. That would make the purchase of those two pizzas worth $208,570,000 in today's terms.

This story illustrates cryptocurrencies aren't just virtual tokens to buy virtual goods, but are digital currencies that can be used to buy physical goods in the real world. It also highlights perhaps one of the biggest obstacles to adoption of cryptocurrencies - price volatility.

Among practical issues making adoption difficult, volatility tops the list. When the exchange price with other currencies in circulation is so volatile, it makes it hard to predict and keep up with what to charge for products and services. Without a hard shift to a universal new currency, the transition of operating with multiple currencies could be confusing, complicated, and painful for many individuals and small businesses who don't have enough cash reserves in a stable currency to absorb the volatility.

Let's consider what could happen with a fictional boutique clothing retailer. The shop owner sells a dress on Sunday afternoon for .0048 BTC (bitcoin) which would exchange for $100 USD that day. By Monday morning, the price of BTC drops 7% to .00004464 per USD. The retailer then needs to decide if they accept the roughly $7 loss by exchanging to USD avoiding further potential losses, or does she hold the BTC in hopes it returns in value. If her expenses like rent are paid in US Dollars and too many of her sales are in BTC, she may be forced to accept an unfavorable rate at a net loss just to pay operating costs for the month.

This type of scenario played out among retailers in El Salvador in the months following its declaration making Bitcoin legal tender in Sept 2021. By making it legal tender, it meant businesses would be required to accept it, despite only 10% of the population understanding what cryptocurrency is. To help citizens adopt this new currency, the government created a digital wallet for them to buy and sell with Bitcoin. Following this wallet rollout there were frequent technical glitches, fraudulent accounts, and usability issues that added to the challenges of adopting Bitcoin.

The issues Salvadorans experienced add to the list of adoption issues. The amount of time to resolve a transaction is a problem in particular for Bitcoin. It takes on average 10 minutes to verify a record (block) on Bitcoin's blockchain. Many services using Bitcoin's blockchain require additional confirmations meaning transactions may take 30 minutes or more to complete. Recognizing this practical limitation, the Ethereum platform's consensus model set out to reduce the amount of time it would take to verify new blocks.

The Ethereum platform has paved the way for other approaches to solving both the speed and volatility challenges. The creation of stable coins has served to create more predictable exchange currencies and allow real time payments. This is done by backing these stable coins with some collateral such as fiat currency reserves, commodities, or even other cryptocurrencies. While many of these stable coins rely on federally backed currencies, they remain decentralized and not the same as a government backed Central Bank Digital Currency (CBDC).

Overall consumer adoption of digital currencies is also fueled by changing sentiment about functioning in a cashless society, evidenced by an overall increase in the adoption of cashless transactions. In the span of 2 years, digital payments increased globally by 40% totaling $6.6 trillion in 2021. Retail banks continue working with more FinTechs to develop Banking As A Service (BaaS) solutions that bring money movement closer to the contextual touchpoint.

For the foreseeable future banks will be diversifying new revenue streams through BaaS while much more cautiously exploring crypto-based solutions such as mortgages and personal loans backed by Bitcoin. Amidst the extreme price discovery of cryptocurrencies this year, some analysts believe it is irresponsible for banks to not offer access to crypto assets. Perhaps more banks will wait to see how some high-profile crypto lending companies weather the slide in value for these assets and the consumer backlash of litigation. Celsius Network for example has filed Chapter 11 bankruptcy protection as it works to fill billions in liabilities held in crypto markets. Meanwhile, it has been over a month that Celsius Network has paused (frozen) all withdrawals, swaps, and transfers for all customer accounts.

Since the significant decline in value over the past year, Bitcoin is likely to only remain as an alternative currency rather than a replacement currency. Ether and Ethereum-based alt coins that work within the existing global financial system, rather than replacing it, stand a greater chance to be used in day-to-day transactions by consumers and businesses across the globe, including the local grocery store.