Medium of exchange is defined as an ‘intermediary instrument used to facilitate the sale, purchase or trade of goods between parties’. In essence, money needs to be used to facilitate transactions between people.
As a payment network that doesn’t require any intermediary, is censorship resistant, immutable, and exists across borders, Bitcoin is poised to be a great medium of exchange. However, as media pundits suggest daily, it doesn’t come without its concerns. For Bitcoin to have any measurable, meaningful utility as a medium of exchange, it needs to be faster and cheaper.
Bitcoin Transfer Speed
Currently Bitcoin can handle only 7 transactions per second. While that figure pales in comparison to the 24,000 transactions per second on the Visa network, there are several upgrades being developed to expand Bitcoin’s throughput much faster.
Lightning network – An off-chain network of payment channels that will enable instant and cheap micropayments for several million transactions per second.
Transaction Cost of Bitcoin
In December 2017, we saw Bitcoin’s transaction fee rocket to $55 USD near the peak of the bubble (see chart below). Since then, a number of scaling solutions have helped bring the costs associated with trading Bitcoin down significantly.
One such example is the implementation of a new technique called ‘batching’ by online exchanges – the grouping of multiple outgoing payments into a single transaction. This has been adopted widely and dramatically decreased the number of outgoing transactions required from exchanges, saving 80% in transaction fees.
The current cost of a bitcoin transaction is about $0.25. Though cross-border bank transfers to developed nations still cost around $30, this new method of transfer for bitcoin has shown a dramatic improvement. For merchants directly accepting bitcoin, there are also enormous savings when compared to Paypal for instance, with fees ranging from 2.6% to 3.6% plus a fixed cost of $0.30. If we take into account the additional 1.5% credit card fee, Bitcoin certainly appears to be a more attractive financial payment option going forward.
Sitting between almost every transaction in the economy, payment processors and banks absorb an enormous portion of revenue for merchants, especially those operating on low profit margins. A business with a 20% gross profit margin could benefit immensely from the eradication of payment processor fees of around 3%. With the invention of a peer-to-peer payment network, the traditional payment processing industry will undoubtedly see a significant disruption. At the moment, we see Bitcoin or a separate stablecoin based ecosystem to be the most likely disruptor.