At this point, the benefits of accepting bitcoin are becoming obvious to many merchants (See "Five Ways Early Adopters Can Use Bitcoin, Part 2: Merchants). A wide range of new payment services from companies like BitPay and Coinbase have made it cheap and easy for companies to convert customer bitcoins to dollars, allowing them to attract new customers, drastically reduce the fees they pay to process online payments, and eliminate chargebacks, fraudulent purchases and price volatility.

Why would a consumer elect to spend a currency that may prove to be worth significantly more next week? In early 2013, bitcoin investors might have been able to buy a single album on iTunes. Yet if they had held onto that same bitcoin, they would be able to buy an iPad today. Given the clear incentives most investors have to save their bitcoin, who is most likely to use the currency for actual transactions? Let's talk about five use cases for today's consumers.

Diversification: Early purchases will be made by investors who have hit the jackpot as early adopters and can afford to be conspicuous consumers. (How about a joyride to outer space?) Rather than diversifying away from bitcoin by cashing out through an exchange, why not instead buy things from merchants that you already want, save the trading fees, and help demonstrate the utility of the currency to the broader market? Besides, that decision could in turn attract more speculators to pile into bitcoin and drive up the value of your remaining balance! (See "Are People Really Receiving Their Salary Through Bitcoin?")

International Travel: Anyone who has traveled internationally knows how high the fees can be to exchange money for a foreign currency - as much as 5-10%! (Not to mention, that you'll pay twice if you have anything left at the end of your trip.) With the emergence of bitcoin payment options and the massive international roll-out of Bitcoin ATMs, it is becoming easier and cheaper than ever to travel without incurring the exorbitant currency exchange fees you typically see at airports, and even banks, overseas. The travelers' bitcoin experience is perhaps the best microcosm for bitcoin's future potential as a true international reserve currency.

Remittance: Think international travel can be a pain? The fees associated with foreign exchange for travel have nothing on the costs services like Western Union charge migrant workers who send money home to their native countries via the $500 billion remittance industry. According to the World Bank, remittance prices average about 9% of the total value transferred, and often exceed 12% in sub-Saharan Africa. Instead of paying $20 to send $200 to a family member abroad, bitcoin offers the opportunity to make the same transfer at a fraction of the cost. While the infrastructure is still developing, there are already some services that facilitate this process, such as Kenya's BitPesa, which offer users the opportunity to transfer money for just 3%. In addition, the rise of "mobile money" in many developing nations suggests that many of their citizens may bypass their banking systems altogether once they services become more widespread.

Peer-to-Peer Payments: Whether you are settling up a dinner tab, buying concert tickets with friends, or even collecting money to pay for groceries or rent, bitcoin is easier, faster and cheaper than alternatives like PayPal, bank transfers or cash. Bitcoin's public wallets and QR code technology also make real-time gifts and/or donations much simpler. Want to send some spending money to a child who is away at college? (Especially MIT, which is giving each incoming freshman $100 worth of bitcoin in fall 2014?) With bitcoin, it's possible to send money that can be spent immediately, regardless of whether it's at the middle of the night or on a weekend. How about send a tip to a friend working on a new blog? Bitcoin's near-zero fees make micro-transactions such as gifts economically viable.

Online Transactions: Some people prefer to keep their online spending habits private. For better of for worse, there are large markets for "grey market" goods such as adult content, gambling, and pharmaceuticals with millions of customers. The bitcoin community also includes a large base of self-identified libertarians and crypto-anarchists who balk at the prospect of authorities having any ability to track their personal economic activity without cause. The pseudonymous nature of Bitcoin’s blockchain guarantees that consumers who put an emphasis on anonymity will be able to conduct their business privately.

Even consumers making more mundane online purchases may benefit from the stronger identity security inherent in bitcoin. In an era in which nearly 7% of online consumers face the prospect of identity theft, it simply doesn't make sense to share one's credit card information with dozens of different companies. Especially when even the largest and seemingly safest retailers have proven to be susceptible to data breaches (read: Target). Using bitcoin obviates the need to share any sensitive personal information with third-parties that are vulnerable to theft.

The Bottom Line

Make no mistake: the vast majority of demand for bitcoin in the near-future will continue to stem from its value as a speculative investment rather than a usable currency. But with the rapid rise in the currency’s public profile, growth in services geared towards simplifying the bitcoin consumer’s experience, and the major pain points that bitcoin can solve for travelers, migrant workers, online shoppers and other users, rapid consumer adoption seems to be right around the corner.

Related Articles
  1. Investing Basics

    The Easy Way To Measure Bitcoin's Fair Market Value: A Do-It-Yourself Guide

    How do you determine the fair market value of a currency that has appreciated faster than the shares of even the hottest technology stocks?
  2. Investing News

    Will Bitcoin And Walmart Force Western Union To Change Its Business Model?

    Western Union is recognized across the globe for providing a fast, efficient way to move money. Just walk into a Western Union office and you can transfer money to friends, relatives or business ...
  3. Investing Basics

    U.S. Marshals To Auction Off Seized Bitcoins

    The U.S. Marshals are auctioning off 29,656.51306529 bitcoins seized from drug site Silk Road. To be eligible, you'll need $200,000.
  4. Investing Basics

    Why Is Bitcoin's Value So Volatile?

    Bitcoin's value fluctuates due to a confluence of factors, including media hype and perceived value.
  5. Investing Basics

    Could One Bitcoin Come To Be Worth $1 Million? Q&A

    "If Bitcoin lives up to its potential and becomes the working capital of international trade, it could be used for cross border transactions."
  6. Investing Basics

    What is Bitcoin Mining?

    How does Bitcoin get released into circulation?
  7. Forex

    America Launches Its First Bitcoin ATMs : Q&A With Liberty Teller Co-Founder

    Investopedia interviewed one of the co-founders of Liberty Teller, a start-up company that launched the U.S.'s first Bitcoin ATMs.
  8. Personal Finance

    Blockchain Boom Could be the Next Big Thing for Tech Startups 

    Blockchain technology offers startups the ability to create flexible and secure businesses. It's a growing trend, but startups' success in deploying the technology to create products and services ...
  9. Economics

    How Bitcoin Helps People Bypass Government Currency Control

    Bitcoin has helped ordinary citizens in some countries bypass government controls over free exchange conversions.
  10. Economics

    What Bitcoin Regulations Look Like Around The World

    Bitcoin is still so new that countries are struggling to make legislation catch up with technology. Some nations are more open to virtual currency than others.
  1. How is a block chain network useful for trading goods and assets in virtual currencies?

    Perhaps the most famous quote associated with blockchain technology came from an anonymous virtual currency user, who described ... Read Full Answer >>
  2. What does a block chain record in a bitcoin exchange transaction?

    The bitcoin blockchain is essentially an enormous, shared, encrypted list of which addresses hold what bitcoin balances. ... Read Full Answer >>
  3. How does a block chain prevent double-spending of Bitcoins?

    Double-spending – the incidence of one individual successfully spending a Bitcoin balance more than once – is a major concern ... Read Full Answer >>
  4. Will M1 ever become obsolete?

    The form of M1 money in an economy may change over time, but M1 money will continue to exist for the foreseeable future; ... Read Full Answer >>
  5. How has the shift to e-commerce affected the profitability of companies in credit ...

    The shift to e-commerce has positively affected the profitability of companies in the credit services industry. However, ... Read Full Answer >>
  6. Why do Bitcoins have value?

    Bitcoin was launched in 2009 as the world's first decentralized, private digital currency. Because it has no physical denominations, ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  2. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
  3. Quick Ratio

    The quick ratio is an indicator of a company’s short-term liquidity. The quick ratio measures a company’s ability to meet ...
  4. Black Tuesday

    October 29, 1929, when the DJIA fell 12% - one of the largest one-day drops in stock market history. More than 16 million ...
  5. Black Monday

    October 19, 1987, when the Dow Jones Industrial Average (DJIA) lost almost 22% in a single day. That event marked the beginning ...
  6. Monetary Policy

    Monetary policy is the actions of a central bank, currency board or other regulatory committee that determine the size and ...
Trading Center