The recent drop in energy prices has dominated financial headlines in recent months, with the fallout having been wide ranging and somewhat conflicting. Consumers have received what amounts to a tax cut, and with more money to spend that’s good news for retailers. At the same time, stocks are experiencing a decent level of volatility, plagued by many of the same factors that are causing oil to plummet, including soft demand, a strong dollar and continued economic weakness across Europe, Japan and even China.
Receiving far less press attention is the ongoing collapse of Bitcoin prices. While this is not unexpected given the house of cards Bitcoin was built on, no one should forget that only a short time ago Bitcoin had reached manic levels. Investors worldwide – including high-powered venture capital firms and well-respected tech entrepreneurs – sang its praises, pouring millions into the virtual currency and confidently declaring that it was the next big thing.
That seems like a long time ago indeed. Since late 2013, when Bitcoin hit $1,200 its value has plunged more than 80%. If one of the purposes of a currency is to create stability across multiple marketplaces to empower smooth transactions between buyers and sellers, then Bitcoin has failed. At this point, it’s merely a speculative commodity, just like tulip bulbs centuries ago or even Beanie Babies more recently. And just like those fads, Bitcoin has peaked and is very unlikely to escalate significantly in value again.
The irony of Bitcoin’s fall is that some of the attributes that initially made it so attractive to its backers like no centralized banking control, lax regulation and no transaction fees, are the very same things that are actually causing its demise. These types of decentralized monetary systems never work, since valuations are allowed to fluctuate wildly and there is a lack of trust in the system. It’s simply not safe to hold Bitcoin. Look no further than the major exchanges, which have either gone bankrupt (Mt. Gox) or suffered major security lapses (Bitstamp). Both of which cost investors millions of dollars in unrecoverable losses.
Ultimately, one of Bitcoin’s biggest problems is the same retailers they are trying to convince to accept Bitcoin. The problem is that retailers that accept them, don’t hold them. Sure, in theory, some say they will take Bitcoin, but most immediately convert them into dollars – which means every time someone uses Bitcoin to pay for goods or services the currency loses value. It’s basically an elaborate Ponzi scheme. This is a major flaw in Bitcoin, if merchants don’t hold Bitcoin, every time they are used in a purchase they must be sold to someone else, forcing prices lower.
Bitcoin investors are missing the point. When it comes to paying for everyday items, the masses do not want a virtual currency that is difficult to understand, fluctuates wildly and operates in the shadows. What they want is convenience and safety and that means electronic mobile payments in dollars. Such a payment system is just scratching the surface in terms of its potential. To build on it, the major players will have to come together and merge existing technologies, not only to make the system more widely available but more efficient. As most Bitcoin pioneers say today. It’s not about Bitcoin, it’s about the technology. There is huge potential for mobile transactions in dollars.
As you might expect, Apple will play a major role. The company that transformed the music industry and basically changed the definition of the word ‘phone’ now needs to have a similar impact in the world of mobile and electronic payments. While Apple Pay was introduced last year, retailers have been slow to adopt the service, since it requires a significant investment in hardware. A recently announced partnership with Square could help solve this problem.
On the surface, Square, which is partly funded by Starbucks is a natural fit to help take mobile and electronic payments to the next level. But the company has hit a wall recently, having picked all the low hanging fruit in the marketplace. This is an opportunity to harness the energy it took to enable thousands of small businesses nationwide to process credit card transactions and apply it to making Apple Pay more universal. Many retailers like Starbucks are building their own mobile payment apps. This creates more of a problem than a solution. Meanwhile, the traditional credit card companies – Visa, Mastercard and American Express could also take part in this shift. Such companies make billions in swipe fees each year. Rather than see this revenue vanish, these firms should look to coalesce around this next wave in the industry – which is likely to take place with or without them. In other words, it would be wise to get on board and make the transition from debit and credit card purchases, just like everyone else. These companies have been big adaptors of the Apple Pay systems and are happy to participate as long as the fees are there. While one of the attractions of Bitcoin was that transactions are free, they have learned that to have security, regulation and efficiency costs money and those fees must be passed on to the consumer.
Another big winner could be PayPal, with millions of users already using it’s electronic payment system, PayPal just needs to take some steps to stay relevant. Spinning off the company this year from Ebay will help. We see Google or a credit card company jumping on PayPal as soon as they can. PayPal is a great asset that can be positioned for the future in mobile payments.
Google and Microsoft could also be a player in mobile transactions. Google was a first mover with Google Wallet but they ultimately lack focus and don’t seem to have a strategy for it. With all of the Android users lacking a good payment system PayPal looks like a natural fit. Microsoft certainly has the cash and firepower to get into this directly or through Xbox and the video game space. Microsoft already processes millions in digital payments through the xbox for games. Why not extend that into an app for the phone and computer. In the end, it’s a matter of focus and effort. Both Google and Microsoft could certainly be successful in mobile payments if they wanted.
Just because venture capitalists and tech investors embrace something, doesn’t mean that it has value or, for that matter, is legitimate or sustainable. Such investors back many failed ideas and enterprises all the time. While I don’t relish anyone losing money, Bitcoin basically went out of the way to make itself vulnerable. For this reason, it is destined to fail.
What’s more, most people don’t care about Bitcoin or some alternative currency. They just want to be able to buy things with their phones, in dollars. However, opportunities are abound in a field that people do care about – mobile and electronic payments. It’ll be interesting to see who takes advantage.
Ross Gerber is CEO and president of Santa Monica, Calif-based Gerber Kawasaki, an investment advisory with approximately $315 million in assets under advisement. Clients and employees may own positions in companies mentioned, but readers shouldn’t buy anything without doing their own research.
By Ross Gerber