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 Figures obtained by Reuters show that while "wallets" - cyberspeak
for accounts - are being created at a steady clip, many of them are
empty. Analysts also provided Reuters with data that shows liquidity
in the cryptocurrency remains limited.
Bitcoin, a virtual currency created through a "mining" process where
a computer's resources are used to perform millions of calculations,
has been hailed as revolutionary because of its lack of ties to a
central bank and its potential as an alternative to credit cards for
paying goods and services.
However, the currency's volatility has slowed broader acceptance.
The price of bitcoin has plummeted roughly 50 percent so far this
year. It most recently traded at $356.26, down from a peak of $1,163
in December 2013.
Two of its primary appeals -- the lower transaction fees compared to
credit cards and its use in cross-border transactions -- have not
been enough to offset its ups and downs.
Until a unique application emerges that separates it from credit
cards, online payments or other currencies, the expansion may remain
slow, many market insiders said.
"There has to be some motivation that would help this whole bitcoin
system explode, like really good applications for consumers," said
Jonathan Levin, a London-based digital currency consultant and
co-founder of the Oxford Virtual Currency Group. "At the moment,
there isn't."
Last week's second auction of bitcoins by the U.S. Marshals Service,
which showed a drastic drop in bidders from the first sale in June,
demonstrated just how far bitcoin has fallen off the radar. The
first auction attracted 45 unique bidders, with 63 bids, while the
December sale showed just 11 buyers and 27 bids.
Despite declining demand, billionaire venture capitalist Tim Draper,
one of the most ardent supporters of the digital currency, believes
bitcoin is still one of the "greatest technological breakthroughs
since the Internet."
He is betting that bitcoin will be widely accepted by consumers who
want to make secure purchases without costly bank or credit card
fees.
Many applications are still being developed by start-up companies
that will affect the way consumers operate, said Draper, who was the
sole winner of the first U.S. Marshals' bitcoin auction and also
took a portion of last week's sale.
MORE RETAILERS ACCEPTING BITCOINS, BUT...
The number of online merchants, including Overstock.com and Dell
which accept bitcoin as payment jumped to 76,000 at the end of
September from just 10,000 a year ago, according to digital currency
news website Coindesk.
Still, actual retail sales using bitcoin remain paltry.
The only figures on retail sales in bitcoin are estimates and Tim
Swanson, head of business development at Melotic, a Hong Kong-based
exchange for digital assets, told Reuters global retail sales in
bitcoin come to about $2.3 million daily (5,000-6,000 bitcoins). By
comparison, consumers spend about $15 billion daily in the United
States.
The vast majority of bitcoins are also immediately converted into
traditional currencies like dollars and euros when handled in retail
transactions. Fees for this typically run at about 1 percent or
less.
Bitpay, one of the two biggest bitcoin payment processors, is doing
about $1 million in transactions per day, Stephanie Wargo, BitPay's
vice president of marketing said. Coinbase, the other big payment
processor, declined to disclose retail transaction volumes.
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One development many bitcoin supporters hope could change this is
the Atlas bitcoin card, the first bitcoin U.S. debit card for buying
goods and services and a business backed by venture capitalist
Draper.
But Atlas still has to run the gauntlet of regulatory approvals
before the card hits the market, the company's co-founder, Mickey
Costa said. He declined to elaborate.
Draper said Atlas could eventually save retailers the 2-1/2 to 4
percent fee they pay credit card companies.
WHAT'S IN YOUR WALLET
Just like retailer acceptance of bitcoin, the creation of wallets -
which store secure digital keys used to access bitcoin addresses and
sign transactions - has also surged.
At the end of the third quarter, the latest figures available,
wallets grew to 6.5 million from 1.3 million a year earlier,
according to Coindesk.
However, opening a wallet is cost-free, and of the 6.5 million
wallets, only about 250,000 to 500,000 have actual bitcoins in them
while the rest are empty, Melotic's Swanson said.
For Brian Armstrong, chief executive officer at Coinbase in San
Francisco, a better measure of consumer adoption is daily
transaction volume, which crossed 100,000 in December for the first
time, according to Blockchain.info, a wallet company.
But the bulk of that transaction volume has nothing to do with the
actual buying of goods and services: activities such as miners
moving bitcoins between wallets, said Jeffrey Robinson, who has
written a book on bitcoin.
Bitcoin liquidity has also remained constrained.
John Ratcliff, a software engineer at Nvidia who has done extensive
analysis on bitcoin transactions, estimated that monthly liquidity
is about 10-20 percent of the entire 13.6 million bitcoin in
circulation. The rest are either being hoarded or don't trade
because they're fractional in size.
Where bitcoin could be valuable though is remittances across
borders, especially in emerging markets, where transaction costs can
be very expensive, said Steven Englander, global head of G10 FX
strategy at CitiFX in New York.
"But in the end, you want to ask yourself, does bitcoin hold promise
of making certain transactions efficient? The answer is yes," said
Englander. "Does it cater to any market niche that is not already
being taken care of? I am more skeptical."
(Reporting by Gertrude Chavez-Dreyfuss and Michael Connor in New
York; Additional reporting by Sarah McBride in San Francisco;
Editing by David Gaffen)
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