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LONDON (Reuters) – The use of bitcoin for commercial payments has dropped dramatically this year, even as the original digital currency is beginning to satisfy one of the basic characteristics of any payment currency: stability.
The value of bitcoins handled by major payment processors fell by nearly 80% in the year to September, data from blockchain researcher Chainalysis shows. This suggests that the cryptocurrency is struggling to mature from a speculative asset to a serious alternative to state-issued money.
Months of relative calm in bitcoin prices after last winter’s wild swings had fueled hopes that it would become widely used for payments, its intended purpose.
But its slump in use as a payment currency has instead left big finance and crypto insiders looking at better technology infrastructure to help bitcoin take off as a way to pay.
“There should be a stability requirement if you want to become another form of money,” said Joni Teves, a strategist at UBS in London.
“But one thing that would bring bitcoin into the mainstream is scalability – can it process the value or volume of transactions that money tends to do?”
Blockchain technology, where all bitcoin activity is recorded and validated, can only process a fraction of the transactions per second that major credit card companies can. This makes its mass use impractical.
Bitcoin still endures torrid price swings, as shown by this week’s 30% drop. For a while last month, however, the cryptocurrency was more stable than US equities.
Despite growing stability, the value of bitcoin payments plummeted to $ 96 million in September from a December high of $ 427 million, data from Chainalysis shows.
The company surveyed 17 bitcoin payment processors, including Atlanta-based BitPay, one of the largest. Most merchants that accept bitcoins don’t do so directly, but use intermediaries like BitPay to convert bitcoin into fiat currencies.
Comprehensive data on bitcoins used for payments is patchy, as exchanges with other currencies tend to be included along with its use for commercial payments.
That said, separate figures for individual payment processors reflect the downward trend. At Vancouver-based Coinpayments, for example, inbound and outbound transactions plummeted by more than half between January and October, according to blockchain analytics site OXT.
Coinpayments did not respond to requests for comment.
“Bitcoin payment processing is seeing a slow but steady decline,” said Lex Sokolin, global director of fintech strategy at research firm Autonomous Next, of data on Coinpayments.
FIRST DECADE
During its first decade, Bitcoin attracted a mix of investors, some convinced they could reshape global finance by replacing traditional means of payment, and others attracted to quick earnings that took it close to $ 20,000 in December.
It has since lost three-quarters of its value, dipping below $ 4,500 on Tuesday, burning down companies along the way that hoped to profit from growing investor interest.
The chip designer Nvidia Corp NVDA.O, for example, saw its shares drop sharply last week after blaming the disappointing results of unsold chips that accumulated after the cryptocurrency mining boom evaporated.
However, Bitcoin’s relative stability this year has raised expectations that its use of payments by individuals and businesses will spread.
“The lack of volatility is a good step in the right direction starting to make it viable for some of the non-retail use cases,” said Zeeshan Feroz, UK CEO of Coinbase, one of the largest cryptocurrency exchanges.
But both major financial firms and cryptocurrency entrepreneurs say stability isn’t enough.
To gain traction, bitcoin needs to be faster and cheaper, they say. Clearer rules on an asset that has angered financial regulators around the world would also help give users a sense of legitimacy, UBS’s Teves said.
LAMPO NETWORK
While coordinated regulation remains a long way off, some developments are underway designed to address the so-called “scalability” problem – how many transactions per second the bitcoin network can handle.
Although in its infancy, the lightning-fast network – code that can be added to the bitcoin blockchain designed to make payments faster and cheaper – is growing in usage and capacity.
The network this week hit a record 4,101 “nodes” or computers running its software, according to the 1ML data aggregator, an increase of more than a quarter since August.
Lightning is popular, users say, because it allows users to exchange money instead of having to complete time-consuming transactions on the blockchain.
“Lightning solves some of bitcoin’s scaling problems,” said Ed Cooper, who oversees cryptocurrencies at fintech startup Revolut. “It is bringing payments into freedom, in the bitcoin network.
Reporting by Tom Wilson; Editing by Catherine Evans
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