Will Bitcoin kill credit cards?

After DeFi, “institutional investors” has probably been the buzzword for the crypto-market, especially following the likes of MicroStrategy and Square jumping in. Looking at institutions going on a Bitcoin buying spree, many analysts have had their say on what this means. Popular American computer scientist Paul Graham is the latest one after he tweeted, 

“Possible future scenario: Credit card companies become increasingly picky about who they’ll process transactions for, and this becomes the thing that tips the general public into using cryptocurrency in transactions, ultimately killing credit cards.”

Is this possible? Well, let’s investigate. Despite Bitcoin being priced at over two times its fair value, institutions are buying. The surge in interest in cryptocurrencies, the sheer suddenness of it, from the likes of PayPal and VISA, has led to this speculation. In fact, the co-founder of BlockSpring @pavtalk also commented on credit cards, stating,  

“My bet –

Step 1: Backwards compatible crypto cards w/ existing networks to build consumer volume. Differentiate on rewards

Step 2: Onboard merchants for direct, instant P2P payments off-chain, similar to FBO Venmo / Cash, but with crypto

Step 3: Direct P2P payments on-chain”

However, the top challenge, in this case, is “the chargeback guarantee,” when there is loss or theft, something that is highly unlikely in Bitcoin debit cards. Additionally, due to Bitcoin‘s rapidly increasing popularity and the growth of alternate payments, it is entirely possible that decentralization or open banking will entirely replace the traditional banking system and payment providers, including credit card companies.

There are several projects in the DeFi ecosystem and tokens that offer credit services and several other features on top of it do so at attractive rates. To stay relevant and favored, credit card companies, together with open banking APIs commoditizing the transactional value, may create an ecosystem that paves the way for a CBDC. Another interesting outcome of the Bitcoinization of banks and payment providers could be the emergence of Lending Protocols. 

Just as Mastercard joined the blockchain digital identity alliance last year, more credit card companies may get into the digital identity business and lending protocol field in crypto, which may then leverage their identity services to reduce risk. This would pave the way for an entirely new array of lending products and protocols in this domain.

The long-term impact of institutional and banking participation and interest in Bitcoin would be bullish. However, in the short run, the price may correct further based on its on-chain analysis. The map of unspent Bitcoins highlighted the level at which Bitcoins were accumulated.

Map of unspent Bitcoins || Source: Whalemaps

Bitcoins that were accumulated at varied price levels from $4,000 to $19,000 remained unspent at press time. Further, there was additional buying above the $18,000-level, and the purchased Bitcoins were held on exchange wallets rather than being withdrawn. Bitcoin may be heading towards a long sustained price rally and this may possibly kill credit cards, unless credit card companies explore solutions that interact with cryptocurrencies.