Will Bitcoin overtake Visa and MasterCard as a payment system?
22 April, 2019
A recent report generated by a well-known cryptocurrency analytical tool suggests that Bitcoin could surpass both Visa and MasterCard as a global payment system within the next 10 years. If the report's conclusions are correct, more people will be using Bitcoin to transact business than the world's two most famous credit cards.
What do you think? The report from DataLight is certainly compelling, but there are some definite holes in the logic it presents. Raw data suggests that the Bitcoin network certainly has the potential to beat both Visa and MasterCard, but the report does not take into account how Bitcoin is being used.
Cryptocurrency critics and proponents alike would do well to look at the data without reading too much into it. Even if everything the report says is accurate today, we all know that cryptocurrency's volatility could change everything overnight. The Bitcoin of 2029 could look drastically different from what it is today.
What the report says
DataLight's prognostications are based on a number of key factors: network growth rate, speed, active nodes, and number of users. When you account for all of these factors and mix them up into an analytical stew, it would appear as though the Bitcoin network is already close to outperforming both Visa and MasterCard. But looking at them individually paints a different picture.
1. Network growth rate
The report offers some key statistics involving the total number of transactions taken place on the three networks. Bitcoin processed some 81 million transactions in 2018 as compared to Visa's 124 billion and MasterCard's 74 billion. Bitcoin is obviously nowhere close to the other two in this regard.
Having said that, DataLight accounts for the disparity by recognizing that Bitcoin's 10-year history is also eclipsed by the histories of both Visa and MasterCard. Visa debuted in the 1950s while MasterCard didn't get started until the 1960s. Both networks have had a decades-long head start, making Bitcoin's rate of growth comparable year-on-year.
2. Transaction speed
Next up is the speed of network transactions. It is common knowledge that cryptocurrency transactions can go through in less than a minute when traffic is low. The longest it takes for Bitcoin transaction these days is about 10 minutes. Finalizing credit card transactions takes considerably longer.
Use your Visa or MasterCard to purchase fuel for your vehicle and you will notice that it takes a few days for the purchase to post. You might buy fuel on Friday only to find that the charge doesn't appear on your statement until Monday. In this regard, the speed award goes to Bitcoin.
However, things are different when you measure the number of transactions processed within a given time frame. Bitcoin is currently capable of processing a mere seven transactions per second. The Visa network can process 65,000. This proves that Visa's network is faster overall. The only reason credit card transactions take so long to post is that they have to go through the settlement process first. That is not a network speed issue. It is a bank issue.
3. Active nodes
Another measurement cited in the DataLight report is the number of computer nodes on each network. Bitcoin is the clear winner here. DataLight says that Bitcoin's network is powered by some 10,000 active nodes located around the world. Compare that to Visa's 119 and MasterCard's 98 and it becomes clear who is superior in this regard.
The logic here suggests that Bitcoin's larger volume of nodes makes the network more accessible. The more accessible it is, the more likely it is to be used as a payment system. If that were the case though, it would seem that Bitcoin would have already blown past Visa and MasterCard.
The one thing Visa and MasterCard have going for them is that their computer nodes are not competing to process information. As such, both networks can be scaled according to demand. In Bitcoin's case, anyone who wants to set up a new node in order to compete can do so. Every new node represents another computer competing to process blocks which, in the end, slows down processing speeds.
4. Number of users
Finally is the number of users DataLight cited in its report. According to their numbers, the Bitcoin network currently boasts only about 25 million unique wallets. That pales in comparison to the combined 5.3 billion credit and debit cards issued by Visa and MasterCard.
This particular statistic really shows the disparity between the three networks. If Bitcoin is going to surpass Visa and MasterCard as a global payment system within the next 10 years, it has to find a way to increase its number of users by 40 times the current number.
Payment system or store of value
Bitcoin has a lot of great things going for it. It is a secure and decentralized monetary system people can use to freely transact business among themselves. As you know, you can use bitcoins to play slots online. If you are an American living in the state of Ohio, you can pay some of your local and state taxes with bitcoins. If you live in London, you can take a taxi across town with bitcoins.
All of this is undoubtedly good. But the DataLight report seems to miss an important fact about Bitcoin: today's owners view it more as a store of value than a monetary system. If that trend continues, it doesn't seem likely it will ever overtake Visa and MasterCard as a global payment system.
The store of value concept
Bitcoin's original developer, an individual who goes by the pseudonym Satoshi, envisioned his creation as a monetary system that could complement fiat in the electronic payments arena. The idea was to encourage people to purchase and mine bitcoins for the purposes of using those coins to buy things.
Satoshi's goal was realized early on. However, it did not take long before investors realized that the laws of supply and demand could quickly push the price of Bitcoin up. So what did they do? Some began buying bitcoins at every opportunity. Others jumped into the mining game.
The net result of all this activity was a Bitcoin price that eventually peaked at around USD $20,000. At that price it was more valuable than the most sought-after commodities in the world. Suddenly Bitcoin was an investment rather than a monetary system.
This is what people mean when they talk about store of value. Investors are not purchasing bitcoins in order to spend them on the slots or a taxi ride. They are purchasing them solely for the purpose of making money from them. It is no different to buying stocks and shares. You store your fiat as crypto in the hopes that future price increases will allow you to sell at a substantial profit.
The difference between price and value
What we have seen in the meteoric rise and devastating fall of Bitcoin over the last three years underscores why it is unlikely Bitcoin will ever overtake Visa and MasterCard. It is encapsulated in the difference between price and value.
As a store of value, Bitcoin's price is determined by supply and demand. The more people want it, the higher the price goes. Bitcoin's price falls when demand drops. It is actually pretty simple. But beyond using Bitcoin as an investment, its only additional value is found in its utility. This is where MasterCard and Visa both have a powerful upper hand.
The value of both Bitcoin and credit cards is the utility they offer. In other words, they are valuable in the way they are used. The reason people are not applying for Visa and MasterCard charge cards as investments is because there is no value in that. The real value with both types of cards is the ability to pay for things without having to rely on cash.
Visa and MasterCard's utility is undeniable. Both cards are accepted around the world by virtually every merchant willing to accept electronic payments. If Bitcoin is ever to surpass them, it has to figure out a way to equal their utility. The Bitcoin community has to find a way to convince merchants to accept bitcoin payments as readily as they accept Visa and MasterCard.
That is not likely to happen until Bitcoin's price stabilizes. The reason merchants are reluctant to get on board with Bitcoin now is a reasonable fear of losing their shirts. Imagine being a merchant who accepted Bitcoin back when it peaked in 2017. A wallet containing $20,000 in Bitcoin back then would be worth just $5,000 today.
Bitcoin's rightful place
The point of this post is not to slam Bitcoin or discourage people from using it. Rather, the intent is to simply illustrate Bitcoin's rightful place in the world economy. It is a particularly good system for transacting business online in a secure and decentralized way. The world owes Satoshi and Bitcoin a great deal of respect for introducing the idea of a digital currency built on blockchain.
Having said that, Satoshi never intended Bitcoin to replace fiat. He never expected it to, either. And at the end of the day, both MasterCard and Visa are simply plastic representations of fiat. It is not reasonable to expect Bitcoin to overtake either one as a global payment system unless nations start abandoning their fiat in favor of decentralized crypto. If you expect that to happen, you have no idea how hard governments are working to protect their currencies.