I have said quite a lot in the past couple of months about how Bitcoin is not the best cryptocurrency for actual purchases, mainly because of its volatility. Instead, I recommended using an asset-backed stablecoin, such as Circle’s USDCoin, to avoid market risk. I have also criticized the most popular stablecoin, Tether, for failing to provide a reliable method to validate its assets, leaving the stablecoin open to disturbing articles like this one.
However, it occurred to me that I hadn’t actually tried to execute a purchase with USDCoin, and that this would be important as a reality check. So I did, and the results were surprising to me. I am reluctantly forced to conclude that you really do need to use Bitcoin at this point for the actual purchase, and that stablecoins are better thought of as a way to avoid market risk in between purchases. To see why this is, I will walk you through my process.
How Buying Something with Crypto Actually Works
- In keeping with my view that Bitcoin is not a realistic means of tender for actual purchases, due to its extreme volatility, I chose to purchase $15.00 of USDCoin through Coinbase, a trusted exchange and wallet provider that I used for my ill-fated BitPay prepaid card experiment (it was not ill-fated due to Coinbase).
- Buying $15.00 of USDCoin via a bank transfer was easy and painless since I had already set up my bank account with Coinbase. There was no charge, and Coinbase kindly makes up to $500.00 worth of cryptocurrency available for immediate use while it processes the ACH. So far, so good. I downloaded the Coinbase app on my iPhone so I could use the camera to capture a QR code instead of entering a long and complex alphanumeric wallet address.
- After checking out, I found myself using an exchange called CoinPayments.
- Here, I encountered my first payments-related problem. CoinPayments wanted over $16 worth of USDCoin for my $9.99 purchase. That’s a $6 markup, or 60% of the purchase price!
- The issue turned out to be exchange rates. Looking at the CoinPayments fee table, we see that there is a 0.5% fee for incoming payments, plus a coin TX (conversion) fee. That is where they get you. USDCoin is not actually supported, even though it was listed on the checkout page, so I am not sure how they would have done it, but the fee for Bitcoin is far less, at 0.0004. In fact, here is a table of the conversion fees for a few prominent coins:
Table 1. CoinPayments Cryptocurrency Conversion Fees
Source: CoinPayments, retrieved January 2021
- In the event, I used the Coinbase app to convert the required amount of USDCoin into Bitcoin. I then redid the whole transaction and used the Coinbase app to send $10.88 to CoinPayments. Recalculating the fees, it appears that there was an additional 78 cents tucked in there somewhere, perhaps from an intermediary of some sort.Note the extremely wide spread between the various options: from a 12X multiplier for Dogecoin, to a rate of 0.04% for Bitcoin. Ether, the #2 cryptocurrency, is more than ten times as expensive as Bitcoin, at 0.4%, while Ripple, perhaps due to the SEC lawsuit, has a 3X multiplier. In fact, Coinbase has halted purchases of Ripple for the moment. Note that CoinPayments is subsidizing the Bitcoin fee; my guess is that it would be closer to Ether without the subsidy
- After a delay of about a minute, the Bitcoin arrived, and about 10 minutes later the provider emailed me to say my purchase was complete.
In conclusion, the experiment revealed the following key findings:
- Stablecoins are not at this point usable for the kind of purchases you would need to use them for (that is, from providers who cannot accept cards), due to a lack of support from merchant acquirers and exchanges. This lack of direct support incurs a prohibitive fee, which forces the consumer to revert to a more widely accepted currency.
- The direct cost to the consumer is in any event higher than with cards; this may come to an unpleasant surprise to anyone thinking that cryptocurrency is cheaper. It surely is overall; the middle-of-the-road fee for Litecoin of 0.6% is much less than the average credit card rate of 2.75%, but all this cost is shifted to the consumer. Furthermore, there is no fraud guarantee or chargeback mechanism. If the provider had been dishonest or merely incompetent, I would have been stuck.
- Bitcoin, for all its many faults, is de facto the only cryptocurrency that is universally supported, which means that despite its volatility, most people will continue to use it. I recommend holding your wallet balances in USDCoin or another stablecoin and converting only what you need to Bitcoin at the time you make a purchase. Coinbase will even pay you interest on your holdings.
- Stablecoins are best thought of as exchange currencies, useful for converting fiat currency into whatever cryptocurrency has the best rate at the merchant you are doing business with. Facebook’s Diem has enough corporate backing that it may change the situation when it launches some time this year. Failing that, we are likely going to need a central bank digital currency (CBDC) or a regulatory intervention of some sort.
What do you think? Did I miss something obvious? Let me know in the comments!