Cryptocurrency explained: Bad for everyday purchases, okay for speculative investments

It’s an intriguing prospect, using cryptocurrency to buy everyday items, such as your daily coffee or a takeaway pizza, and doing away with the need for cash or traditional banking services.

However, your mobile wallet and/or debit card is not obsolete yet, and cryptocurrency – a form of anonymous and secure online money – is unlikely to be much of a challenger right now.

Instead, currencies like Bitcoin and Litecoin have gained more traction as a speculative investment than a credible alternative to the pound in your pocket.

A small number of companies in the US have recognised and incorporated Bitcoin, the best known cryptocurrency. has a Bitcoin tracker on its financial app, and Intuit, which develops tax calculation software, can process and file Bitcoin transactions.

For small purchases, cryptocurrency is simply uneconomic. The high cost of processing the transaction, and the fact that it may take 2 or 3 days for the transaction to be verified, mean that it is too costly and time consuming to be used like a traditional method of payment. 

That’s because the transactions need to be logged on a ledger and processed by a host of independent computers, who take their cut in fees.

On top of this, no major UK high street shop currently accepts payment via cryptocurrencies.

Transaction costs are too high for everyday purchases

When you buy these currencies, there is the cost of buying the coins themselves, and then each crypto currency exchange will add a fee for trading when you buy or sell them. This can be a flat fee for each trade or a percentage of trades made within a month.  

Joe Pindar, Director of Product Strategy at Gemalto, says the transaction fee is based on the demand for space in the Bitcoin ‘blocks’, a form of online ledger.

“Bitcoin charges more for transactions to be prioritised and put in the bitcoin ‘ledger’ first,” he says. “Unlike stock exchanges where the settlement time is in fractions of a second, Bitcoin has a slow settlement time (called a “confirmation time” in Bitcoin language) taking several hours.”

This inefficiency means that the price and transaction fees can vary significantly before the sale transaction is confirmed, he says.

“As a result, some transactions may get cancelled hours after they were placed as they remain unconfirmed within the network.”

So, in practical terms, your payment may not go through, or the value of your cryptocurrency may have changed even while the transaction was being processed. For both the customer and the merchant, this is a scenario that doesn’t work because it could mean over or underpaying for goods due to the volatility of the value.

There aren’t many online retailers accepting these currencies. However, this is changing and you can now, for example, donate money to some charities including the RNLI through Bitcoin.   

Crypto is a speculative investment

So while there aren’t many opportunities for using cryptocurrencies for buying and selling goods, could they be a good investment instead?

Regulators and market experts have all warned that for most people, cryptocurrencies are too uncertain and risky to be a sensible place to put your money. While it might be easy to buy coins, it is much more difficult to sell them. They are also unregulated, although governments in the US and UK are looking at introducing regulation soon.

However, a fair few of us have dipped our toes into this market. In fact around 2.6million UK consumers have bought cryptoassets at some point, according to research from the Financial Conduct authority (FCA).  That’s a 1.1 million annual increase, and of the 1.9 million that still hold their cryptoassets – such as Bitcoin, Ripple or Ether – half have more than £260.

Joe Pindar says in 2017 Bitcoin was a purely speculative asset being driven by momentum.

“It wasn’t operating like a currency nor was it pegged to a different asset that had downward pressure, like a company is when the share price is related to revenues earned,” he says. “One thing that has come to light in the last two or three months as the price of Bitcoin reduced is that it was easy to buy cryptocurrencies on exchanges but incredibly hard to sell them.”

Bitcoin is around $11,642 currently, after reaching a high of close to $20,000 in December 2017.   

Since the UK’s coronavirus lockdown in March, the price has been rising steadily but last month the price lost $1,000 in a few hours, falling under $11,000. 

“There are a lot of investors in the cryptocurrency space,” says Drew Bell, chief developer at Ethercoin, a cryptocurrency backed by an asset-based real estate. 

“A lot of people want to participate in the market and invest for the long term and want to be active traders, but to be a successful trader you need knowledge, experience, and to be able to control your emotions. Human beings get greedy and fearful and in a volatile market often do the opposite of what they should.”

He said there had been scepticism from institutional investors such as pension funds and investment managers, partly because the sector is, as yet, largely unregulated.

“There are some smart people on both sides of the argument right now,” he says. “Some love it and see it as transformational, that it is a new asset class and after regulation there will be huge amounts of money going into it.”

His company is also planning to educate people on how to trade cryptocurrencies, but he acknowledged that there were still some issues around cost and speed for cryptocurrencies as a means of payment.

“Visa can administer 56,000 transactions a second, but blockchain (the system by which coins are recorded) only 7,000 a second. It is still early days and will take time to maximise the potential of the system.”

The thorny issue of cryptocurrency regulation

The FCA’s research published this year gives an overview of the UK market. 

The FCA’s Interim Executive Director of Strategy and Competition, Sheldon Mills, said: “This FCA report reveals the increasing popularity of cryptoassets among the UK consumer population and underlines the importance of our work to gain a deeper understanding of this market and how people interact with these assets.  

“Cryptoassets present risks and opportunities for consumers and we hope these insights will help inform the policy debate in the UK and internationally as the use of these assets continue to grow.”

It is concerned that consumers may not fully recognise the risk involved in some of these products.

There have previously been warnings from the FCA around cryptocurrencies being highly volatile and riskly, especially as many are not currently regulated in the UK.

This means if customers do have issues, they aren’t able to make complaints via the Financial Ombudsman Service or seek compensation from the Financial Services Compensation Scheme (FSCS) if they were to lose money, for example.  

The FCA is working with the Government and Bank of England, as part of a UK Cryptoassets Taskforce, to understand and address the harms from cryptoassets.  

In the March 2020 budget, the Government said it intends to consult on measures to bring certain cryptoassets into scope of financial promotions regulation. 

22 October 2020