Do you want protection with a student's grant? by heidi mukhtar

 

Don McAlister is a technologist and has made several video tutorials on Bitcoin.

While primarily viewed as a store of value, and considered by many as a fantastic savings technology, bitcoin has yet to reach mass adoption. There are many reasons for this, but in this article, I want to explore one particular aspect that is potentially holding bitcoin back.

People are reluctant to spend bitcoin.

Why is this a bad thing?

One of the barriers to adoption is that people new to bitcoin struggle with some of the concepts behind it. They can’t immediately see the use case of the technology and fail to recognize that bitcoin is sound money. After all, what use is money if you can’t spend it? Historically, bitcoin has been difficult to spend due to the nature of the technology, but also due to the lack of support for people or businesses accepting bitcoin. If people can’t see bitcoin being used as real money, in a frictionless way and with tangible benefits, widespread adoption will be more difficult to achieve. In other words, bitcoin is not yet being commonly used as a medium of exchange.

For bitcoin to be considered a medium of exchange, we need to be able to freely exchange bitcoin for goods and services; in other words, to use bitcoin to buy stuff. The Bitcoin white paper defines Bitcoin as “A Peer-to-Peer Electronic Cash System,” and bitcoin was originally promoted as digital cash.

However, because it is such a great store of value, people who own bitcoin are looking forward to the days when the price has multiplied by 10, or even 100, as bitcoin becomes more widely adopted. So why on Earth would you spend something that has the potential to increase so significantly in value over time?

In this article, we explore the barriers that keep people from spending bitcoin, and review the rapidly changing landscape of bitcoin spending.

SAVING VERSUS SPENDING

You may have heard of the meme “stacking sats.” This is a common term among Bitcoiners who want to accumulate bitcoin for future gains. “Sat” is an abbreviation of “satoshi,” which is the smallest denomination of bitcoin. Each bitcoin can be divided into 100,000,000 sats. My personal preference is to use “bits" i.e., another way of subdividing a single bitcoin. There are 1,000,000 bits in a single bitcoin.

The fact of the matter is that we can’t “stack sats” forever. We can’t convert every cent of the fiat currency we make into sats (or bits) and HODL (hold) it forever. Everyone needs to spend money on their day-to-day existence — to pay bills, to buy food, for leisure, etc.

The approach I am advocating for is, as bitcoin becomes easier to spend, we should convert a percentage of our fiat (currently allocated for daily spending) on a monthly, weekly or even daily basis, and use that to cover our expenses.

With the basic premise established, let’s take a look at some of the reasons why bitcoin hasn’t taken off as a payment system to date and why that might be about to change dramatically.

COSTS OF ACQUIRING BITCOIN

We are still in the early days of bitcoin adoption, and there are fees and other costs associated with purchasing bitcoin from an exchange.

However, these costs are starting to diminish. One great example of this is the U.S.-based company, Strike. They have announced that fees will be set at the minimum possible rate for buying bitcoin through their app. Other companies, such as Swan, also boast very low fees and are working to reduce them even further.

But you don’t always need to buy bitcoin, you can also earn bitcoin with zero fees.

At the recent Bitcoin 2022 conference, Cash App announced that it will be possible to auto-convert your paycheck into bitcoin for free. By regularly converting your fiat income into bitcoin, you could easily build a stash of bitcoin to HODL for long-term savings, while also having some available for near-term purchases.

In addition, it’s really easy to be paid in bitcoin for goods or services you provide. With the expansion of the Lightning Network and Lightning Network Addresses (see below), you can receive bitcoin instantaneously and in some cases with zero fees.

TRANSACTION SPEED AND COSTS

Bitcoin transactions are recorded on a distributed, decentralized blockchain. The underlying decentralized, permissionless nature of Bitcoin is one of its main advantages over traditional fiat money. A typical bitcoin transaction that gets posted to the blockchain is commonly referred to as “on-chain.”

On-chain bitcoin transactions are often perceived as being slow. The Bitcoin blockchain was not developed for rapid transaction-processing, and by design, is extremely limited in terms of throughput. Transactions are batched into blocks which are processed approximately every 10 minutes, resulting in delays to seeing the transaction on the blockchain. Because of the potential for block reorganizations, it is prudent to wait for several blocks before considering a transaction as final. This could be a single confirmation for a low value amount, but for larger transactions, four to six confirmations are typically recommended.

Depending on conditions at the time, on-chain bitcoin transactions can also be expensive. While transaction fees are relatively inexpensive for high value transactions, on-chain fees for smaller transactions can be a significant proportion of the amount transferred, but this does vary. When bitcoin was first introduced and had an extremely low price, transaction fees were negligible (in fiat terms). However, as the value of bitcoin has since increased, the fees have increased accordingly. It just doesn’t make sense to use on-chain bitcoin transactions for minor purchases as it is much too slow, and the relatively high fees make it impractical.

With the introduction of the Lightning Network, the issues of speed and cost have largely been addressed. The Lightning Network is a Layer 2 protocol that sits on top of the Bitcoin network and allows for near-instantaneous settlement at virtually no cost. It also scales significantly, allowing for transactional throughput exceeding current payment systems such as Visa and Mastercard.

Support for the Lightning Network is now built into almost all bitcoin wallets and even some exchanges, such as CoinCorner, Bitfinex and Kraken. In addition, we are seeing support for Lightning built into some of the premier digital currency apps, such as Cash App.

BITCOIN PRICE VOLATILITY

The bitcoin price is notorious for its volatility, and this has historically caused concern for merchants and vendors (as well as consumers).

There now exist many solutions for merchants that allow for the receipt of bitcoin payments over the Lightning Network, which can then either be kept in bitcoin or, if volatility is a concern, exchanged immediately for fiat currency. As this exchange can be done nearly instantly, the impact of bitcoin price volatility is removed.

Solutions can be built using BTCPay Server — an open-source project that allows merchants to accept Lightning payments directly — or third-party services such as BitPay or CoinCorner, allowing merchants to accept both Lightning and on-chain payments, with the option of near-instant conversion to fiat.

Of course, some merchants might want to keep the accrued bitcoin or perhaps convert just some of it to fiat currency. The current systems are extremely flexible and can accommodate all of these scenarios.

Price volatility is also a concern for the consumer. The last thing a consumer wants is to convert an amount of fiat for a mortgage payment three weeks in advance and have the relative value of the payment decrease due to price volatility. This will eventually be solved by bitcoin becoming more stable, but until then, the solution is to only convert to bitcoin immediately before you spend the funds to mitigate the effects of price volatility.

BENEFITS TO THE RETAILER

While payment in bitcoin is relatively easy to set up for online merchants, there needs to be a physical solution in place to allow brick and mortar stores to accept payment in bitcoin.

Recently, Strike announced some ground-breaking partnerships with Shopify and point-of-sale (POS) device manufacturers, such as NCR, that will bring Lightning integration directly into many retailers in the U.S. and eventually around the globe. With direct integration with in-store POS terminals, paying in bitcoin using the Lightning Network will be as easy as scanning a QR code.

These developments will have significant benefits for both the consumer and the retailer.

The retailer will be able to process transactions rapidly at very low cost. Traditionally, the current payments technology does not allow for instant settlement and attracts a multitude of fees from the incumbent financial institutions. This can be as much as 3% or more for each transaction. Using the Lightning Network, the retailer will be in a position to take bitcoin payments instantly and potentially save 3% or more in the process.

As well as the eradication or significant reduction in fees, the retailer will also have final and near-instant settlement. The funds transferred during the transaction will be immediately available to them and the issue of reversal of credit card payments is removed. However, this does remove some elements of consumer protection in that refunds and chargebacks cannot be processed by external third parties. However, there is nothing stopping a merchant refunding a payment if requested by a customer.

BENEFITS TO THE CONSUMER

The consumer could benefit in a similar fashion. A portion of the savings accrued by the reduced transaction fees could be passed along to the consumer in the form of a discount to entice the customer to use this new payment technology. It would be a win-win situation.

In addition, the frictionless transaction process is extremely rapid and is usually as simple as scanning a QR code. Further developments are underway to create bitcoin cards using RFID chips to allow a simple tap to pay for goods and services.

This is pure speculation, but the day can’t be far away when Apple will start to build a bitcoin/Lightning wallet into every iPhone and Apple Watch.

One additional benefit for the consumer is the ability to be completely self-sovereign and self-banked. Although probably not a feature for mass adoption, it is possible to run your own Bitcoin node at home and connect your Lightning wallet to your home node, thereby removing all reliance on trusted third parties.

PERSON-TO-PERSON TRANSFERS

There is still some work to do on improving the user experience of paying using bitcoin. Even though it’s simple enough to scan a QR code, sending bitcoin between individuals remotely can be difficult, usually requiring the creation of Lightning invoices, long multi-digit addresses, and clumsy screenshotting and emails.

One recent development is the introduction of the Lightning Address or LNURL. This mechanism is as simple to use as email. In fact, it looks just like an email address: name@service.io

Once you have an account on an exchange that supports Lightning Addresses (e.g., CoinCorner) or a wallet that supports them (e.g., Wallet of Satoshi), you’ll be issued with a personalized Lightning Address.

Using this address is as simple as sending someone an email, but instead you send bitcoin over the Lightning Network.

THE BOLT CARD

Just as I had submitted this article for publication, a brand new innovative way to spend your bitcoin has been launched in the U.K.: The Bolt Card by CoinCorner.

The Bolt Card image options (source)

In the U.K., contactless payments are pretty much the norm using either the Visa or MasterCard networks. No need for apps, just a near field communication (NFC) card allowing you to tap on a point-of-sale device to make a payment. Using Visa or MasterCard for payments comes with some downsides for the vendor in the form of high fees and delayed settlement.

Payment by bitcoin virtually removes the fees and allows for instant cash settlement, but invariably, it requires the use of a bitcoin wallet, usually on your mobile device. So you need a decent phone, then to open your wallet app, scan the QR code and then tap a button to confirm the transaction. This also relies on a stable and fast internet connection to allow the transaction to complete.

Not very user friendly.

The Bolt Card fixes this. Basically, once you have set up your Bolt Card by pairing it with your CoinCorner account (noncustodial solutions are in development) to buy something using bitcoin you simply tap the Bolt Card on the POS device, the same as you would a Visa or MasterCard card. The Bolt Card uses NFC to communicate with the POS device (or even websites on NFC-enabled mobile devices) to initiate the transaction and complete the transaction without an internet connection. This is all built using industry standard LNURL mechanisms making the Bolt Card compatible with industry standards without using propriety mechanisms.

You can configure the Bolt Card to use your CoinCorner GBP (British pound sterling) or euro account and it will convert the amount into bitcoin and transfer the payment using the Lightning Network, instantly resulting in no capital gains tax implications. Of course, you can also configure the card to spend bitcoin instead.

The Bolt Card is completely reusable and can also be configured as a gift card allowing you to load it with bitcoin to give to friends and family. Once loaded with a set amount of bitcoin, the sats can be transferred into virtually any mobile wallet or used for payments.

The simple act of tapping a physical card against a POS terminal exactly mimics the current contactless technology that most people are familiar with. It also removes the complexity of using a mobile app to make a Lightning payment, and in doing so, dramatically reduces the overall transaction time allowing for a higher vendor throughput, in addition to making the payment experience so much easier for the customer.

As well as being perfect for all bitcoin payments, the Bolt Card could have a major impact in underdeveloped countries where internet access or mobile phone ownership is problematic. Preloaded Bolt cards could be purchased and used simply and effectively, giving access to financial tools for the unbanked. With the ability to reload the Bolt Card, this payment technology can be dropped into areas where the current financial infrastructure for traditional banking would never be considered.

Currently, the Bolt Card is only available in the Isle of Man and the U.K., but it is anticipated this payment solution will be rolled out globally over the next 12 months.

MICROPAYMENTS

Bitcoin is programmable money. With the addition of the Lightning Network, you can use micropayments to pay for low-value services. How many times have you found an interesting article on the web and discovered it’s behind a paywall? Sometimes a free trial is available, but invariably you need to sign up for a digital subscription. I’ve found that even if the article is supremely interesting, I can’t be bothered to go through the free trial signup and cancellation process to access a single article, and I certainly wouldn’t sign up for a full subscription for a single article.

But what if you could frictionlessly pay a token amount to access a single article?

That’s exactly what you can do with the Lightning Network.

In this live example, the article can be accessed for the equivalent of $0.25 (635 sats, or 6.35 bits, when I paid). The transaction is seamless and frictionless. Upon clicking the button to pay, your Lightning wallet is opened, and the amount made ready to pay. With a single tap, the payment is made and the article is available to read.

CAPITAL GAINS TAX

In some countries, the selling or transfer of bitcoin can trigger a capital gains tax event. Eventually, it is hoped that bitcoin will be reclassified as a currency, removing this burden, but until then, you need to be mindful of capital gains tax. However, this is more likely to be an issue for bitcoin that you’re holding for an extended period.

In the situation where you are using bitcoin to pay bills or buy stuff, the scenario would be that you would acquire the bitcoin you need for the week and spend that. It is likely that over the course of a week, there would be minimal capital gains (or potentially a loss) if the bitcoin price corrects. If you replenish the amount of bitcoin you need to use on a weekly basis, capital gains theoretically become inconsequential. At the end of the period, any surplus bitcoin can be swept away to cold storage for long-term HODLing, and then you can replenish your day-to-day bitcoin stash with a fresh purchase.

BILL PAYMENTS

A new service (initially available only in the U.S.) which was recently introduced is the new Pay Bill service by Bitrefill. This allows you to search the service for your provider (such as a utility company or mortgage provider, etc.), complete your information and pay using bitcoin. This service is still invite-only for now, but provides a good look into what the future might hold — until major corporations start accepting bitcoin as payment directly.

SUMMARY

There are now many ways to start spending your bitcoin, and many more places will start to accept it soon. There is an element of inconvenience in converting fiat to bitcoin, but Bitcoiners should make the effort to start spending in bitcoin as soon as they can.

Until bitcoin is seen as a useful, frictionless method of payment, pre-coiners will struggle to understand Bitcoin and the benefits it brings. As more people come into bitcoin and start using and saving it, the more it will be demystified and its true value will be appreciated.

As the Lightning Network is more widely adopted, it will pave the way for bitcoin to be used also as a unit of account and we should start to see things being priced in bitcoin, bits or satoshis. As the Bitcoin network and the Lightning Network are global in their reach, bitcoin is well-placed to become a global unit of account. Imagine being able to move around the world with a single Lightning wallet and pay for goods and services based on a global monetary standard. No currency conversions, no local pricing, just a single global currency.

So, download a Lightning wallet (or if you’re in the U.K., get a Bolt Card), load up some sats and get spending.