7 minute read
Making sense of cryptocurrency: What you need to know
This year, we're seeing cryptocurrency become part of the mainstream conversation. “Crypto Bowl" anyone? That's what this year's Super Bowl was dubbed when not one, not two, but four cryptocurrency companies made their debut during coveted commercial slots. And in an increasingly digital world where concepts like NFTs and the metaverse are also making a name, we're going to experience more than just hype around cryptocurrency.
As predicted in our 2022 Commerce and Payment Trends Report, payment providers are enabling cryptocurrency for interesting use cases like loyalty, rewards and digital wallets. While market volatility still presents a big challenge for cryptocurrency, the question on everyone's mind is what role will cryptocurrency play in the future of commerce? For that answer, we'll need to evaluate where the cryptocurrency market stands today to predict where it's likely to go in the next few years. But first, a quick primer.
Cryptocurrencies at a glance
There are over 18,000 cryptocurrencies with a market capitalization of $1.7 trillion. Not only that, but an estimated 300 million consumers own cryptocurrencies. While blockchain-based cryptocurrency might still be considered niche today, the numbers show that it may not be a niche much longer.
Cryptocurrency and blockchain
Most cryptocurrencies are built using blockchain technology, which is essentially a public, distributed ledger. A single entity does not own the system of record, and multiple entities within a network can validate the legitimacy of a transaction (called a “block") or the ownership of an asset. The benefit of using blockchain technology is that it solves problems of record keeping and creates a public audit trail for all types of transactions, including cryptocurrency payments.
Cryptocurrencies have become a new store of value for many individuals, relying on security and encryption many don't understand. Often referred to as digital coins, cryptocurrencies are privately owned or created—and are currently largely unregulated. Moreover, cryptocurrency is inherently unstable since the value is determined by supply and demand.
The emergence of stablecoins
In 2021, the supply of stablecoins—cryptocurrencies that use physical commodities (like gold), assets (like stocks), or fiat currency (like the US dollar) as collateral—grew by almost 500% year over year, with a market capitalization over $127 billion. While still unregulated, stablecoins are potentially less volatile than other cryptocurrencies because of their collateral backing, making it easier for financial institutions to validate transactions and participate in blockchain networks.
The potential of central bank digital currencies
Don't expect governments and central banks to let themselves fall behind in the cryptocurrency conversation. To avoid undermining monetary control presented by asset-backed stablecoins, central banks are considering the introduction of digital currencies backed by fiat currency, known as central bank digital currencies or CBDCs. Around the world:
- Nine countries have fully launched a central bank digital currency (CBDC), including Nigeria and The Bahamas.
- 14 countries are piloting CBDCs, including China and South Korea.
- 87 countries are researching or developing a CBDC, including the US, Canada, the UK, and several EU countries.
Other countries are considering how to regulate digital currencies. In March, US President Biden signed an executive order calling on the government to examine the risks and benefits of cryptocurrencies—the first step to a federal approach to regulation and oversight. In addition, the International Monetary Fund is actively advocating for a unified regulatory approach to protect the stability of the global financial system. Expect more development as governments take a more active role in regulating cryptocurrencies.
Looking to the future of cryptocurrency
According to Andrew Mathieson, chief enterprise initiatives officer at Global Payments, cryptocurrencies—or any digital currency—are just new forms of money. Any way money can be used today, digital currencies could theoretically be used in the future. That includes the ability to purchase and hold cryptocurrencies in a digital wallet, earn rewards or redeem loyalty points, and yes, even the ability to use cryptocurrency as the agreed-upon tender between businesses and their customers.
Yet there are hurdles to overcome for crypto to become a pervasive form of money.
Because of the volatility of unregulated cryptocurrencies, it might be years before we see the majority of businesses accepting cryptocurrency for payment. Even though companies like Starbucks accept cryptocurrency payments today, the volatility presents a risk too high for most companies.
It's more likely in the near future that the list of companies offering cryptocurrency as rewards will expand. In fact, 44% of Americans would be interested in receiving cryptocurrency as a reward in place of traditional cash-back programs, setting the stage for new business opportunities. For example:
- Shake Shack now offers rewards in Bitcoin for its customers that pay through Cash App.
- Cryptocurrency exchanges BlockFi and Gemini plan to launch credit cards offering Bitcoin as reward points.
- Venmo card holders can trade their monthly cash-back rewards for crypto.
It all adds up to the fact that we're going to see more companies leverage crypto-as-rewards in 2022 and beyond.
"Offering cryptocurrency rewards can help brands attract and engage with younger audiences, driving richer consumer experiences and increased brand loyalty." —Dan O'Prey, Chief Product Officer at Bakkt
“Offering cryptocurrency rewards can help brands attract and engage with younger audiences, driving richer consumer experiences and increased brand loyalty," said Dan O'Prey, Chief Product Officer at Bakkt. “Our recent survey found that 72% of those who purchased crypto in the past six months are likely to redeem loyalty points for cryptocurrency and about half are interested in earning crypto instead of points. As a result, loyalty programs can be on the leading edge by providing customers with the option to earn rewards or redeem rewards for crypto."
According to Mathieson, cryptocurrency at present is primarily an investment vehicle. “Consumers may be buying and selling cryptocurrency, but they're either holding on to it or cashing it in rather than using it as a form of payment."
Ninety-one billion dollars in cryptocurrency are traded every 24 hours. That represents millions of people globally making investments in cryptocurrency—upwards of 300 million people.
In short, most people are still holding cryptocurrency to support their investment portfolios rather than using it as another form of money. However, research shows consumers are open to its future potential as a currency. Ninety-three percent of cryptocurrency owners say they would consider making a future purchase with digital currency.
CEO of Global Payments Jeff Sloan anticipates this trajectory as well: Currently, “crypto is mostly a person-to-person trading business." However, “there is a role for a digital fiat currency globally."
"Cryptocurrency is primarily an investment vehicle. Consumers may be buying and selling cryptocurrency, but right now they're either holding on to it or cashing it in."
Chief Enterprise Initiatives Officer, Global Payments
Digital wallets drive comfort for future crypto use
The growing use of digital wallets and person-to-person digital payment apps like Venmo and Cash App contribute to increased consumer comfort with digital currencies. And it may well turn the tide for cryptocurrency's use for consumer purchasing. If you can use a digital wallet to pay for goods and services with your credit or debit card, why not use the cryptocurrency you have stored there as well?
The largest consumer audience is leading the way
Not surprisingly, it's millennial and Gen Z consumers, in particular, driving the shift to cryptocurrency. Nineteen percent of millennials and 15% of Gen Z currently own cryptocurrency, and they're looking to spend it. In the same study, 51% of cryptocurrency owners reported they are more likely to buy from businesses that accept cryptocurrency.
Though millennials and Gen Z may be early crypto adopters, all generations are considering the role cryptocurrency plays in the economic system. In a study, 30% of respondents said cryptocurrency was the future of money.
What does all this mean for businesses?
Clear market drivers are lining up to widen the role of cryptocurrency in commerce. Consumer demand is already increasing, government interest is rising, and regulators are starting to create policy for this new type of digital currency.
Businesses should start conversations with their payment partner to help them monitor the cryptocurrency landscape and understand all of its varied use cases as we anticipate an uptick in demand from crypto-savvy consumers.
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