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I've done research on bitcoin and I know what it is and how it works, kinda. I've even built a small block chain app.
What I don't understand, and I haven't been able to find the answer to, is if I own some bitcoin, how does that help me buy groceries at the market, or gas for my car? The market I go to doesn't accept bitcoin and neither do the gas stations. If I can't do that, how is bitcoin worth anything to me?
Also, how are people supposedly getting rich with bitcoin? I thought it was a currency, where we can buy things. Then I find that it's also a commodity where we can trade it.
The fact that a single bitcoin was approximately equal to a few cents when it first came out, but now is worth tens of thousands, is very troubling.
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Apologies for the brevity and avoidance of in-depth discussion in this answer, for simplicity's sake.
To understand Bitcoin and its failures, we must understand what a 'currency' is, and why it is important.
Prior to currency, people bartered for goods - I give you 4 chickens, you give me a goat. What if you don't want my chickens? How do I get my goat? Well I could trade my chickens for your neighbors calf, and trade you the calf for the goat, etc. But there are a few problems with this system:
(1) It takes time for me to 'shop' my chickens around to trade; [They are a poor 'medium of exchange']
(2) Chickens, goats, and calves only hold value while they are live / edible. [They are all poor 'stores of value']
(3) How much each person values a chicken, calf, or goat will differ based on even what they want to eat that week [it is a poor 'unit of account'].
Coincidentally, those bolded items there represent the 3 qualities of money. From a practical standpoint, you can see some of these having been met by a quasi-bartering currency, such as cocoa beans (South America) or pounds of salt (Rome), where the 'money' itself had a definable practical use. You can also see these principals with rare metals such as gold, which were the first minted coins. Now in any of these cases, the 'value' of the currency truly is in the eye of the beholder. If someone in prison is going to accept a pack of ramen noodles as money, it is because either they will use its inherent value, or simply they believe in the market's general valuation of that ramen, and have faith that they will be able to trade it to someone else down the road.
Metal coins technically had inherent value in their ability to be melted down for jewelry, but there are problems with this form of currency - metal content can be faked, new mine sites adjust inflation in non-controllable ways, and ultimately modern economies are unrelated to the handful of gold mines still in existence.
Modern economies have historically printed currency 'backed by' gold, to get around some of the physical problems of a metal-based currency [meaning for every dollar bill printed in the US, there was a speck of gold that was held by the US government, theoretically redeemable].
But what is that 'true' value of a dollar 'backed by' a speck of gold? For an inherently valuable money like salt, this 'market valuation' is not as much in question. Someone will always need salt, and therefore if salt is rare / hard to produce [which it no longer is], then owning salt will give you future market bargaining power. But what if your money is a minted coin, with a value above the raw ability for jewelry? Well you're in luck if that money is distributed by your government, because they will accept it for something tremendously important - to pay your taxes.
Proponents of gold [and, amusingly to me, bitcoin] dislike the fact that gold no longer backs the US reserve, but frankly, its true modern value is as settlement of your tax debt with the government. And that usage today is the same whether the government backs it with gold, or by proclamation (value by 'fiat').
Watch out, the below contains a lot of opinionated comments.
So why does almost no one accept bitcoin as a currency? Because it has no inherent value, and it cannot be used to settle a tax debt. And because it is insecure [no authority to assist with payment issues]. And because it does not 'play well' with a modern electronic economy [try explaining to a mom and pop shop how to set up a bitcoin wallet securely, and confirm their payment receipts on the blockchain, vs just paying Visa 3% and forgetting about it]. And because it is deflationary by nature [who wants to pay someone 10 BTC for a pizza worth $20 today, when it could be worth $200k in 5 years?]. And because it is volatile [who wants to accept 1 BTC today for $20k, when it could be worth $6k in 3 months?]
So why does BTC have a value at all? Because it avoids 'know your client' banking requirements allowing money laundering or black market activity. And because people love to gamble. And because it lends itself an air of superiority to its users. And because it makes some hopeful claims about the future (allowing the 'banking of the unbanked').
For the interest of the reader, note that today, BTC was valued at between $6500 and $7000 USD [difference due to various bitcoin markets with massive price spreads due to technical issues (look up 'Tether October 16 2018' for an example) not worth getting into here, but more than anything else, being a signal of the volatility and manipulation of the market].
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Here's the question, what I don't understand and I haven't been able to find the answer to, is if I own some bitcoin, how does that help me buy groceries at the market, or gas for my car? The market I go to doesn't accept bitcoin and neither do the gas stations. If I can't do that, how is bitcoin worth anything to me?
The market you go to probably doesn't accept Swiss francs either, but that doesn't mean Swiss francs aren't worth anything. It just means that it's not the preferred currency for those particular exchanges. Bitcoin is probably more comparable to gold than a national currency with potential uses involving storing value rather than transferring it.
Also how are people supposedly getting rich with bitcoin? I thought it was a currency, where we can buy things. Then I find that it's also a commodity where we can trade it.
Likely by acquiring bitcoin when the prices were lower than they are today or were in the past. It's much the same way people get rich with stocks -- they buy them when they are cheap and sell them when they are more expensive.
The value of bitcoin today comes largely from speculation. Regardless of what you could do with a commodity today, if you had good reason to think it would be more valuable in the future, you wouldn't sell it cheap today. Most of bitcoin's present value probably comes from this expectation of future value.
To give an analogy, imagine if silicon were a rare element rather than a common one. In the early days of digital electronics, even though you couldn't actually do much with digital electronics, it might make sense to invest in silicon. The idea would be that if digital electronics catches on and becomes a major industry, everyone in that industry will need lots of silicon. If you think you can sell silicon for lots of money in a few years, you won't sell it cheaply now.
So even though you couldn't yet do anything particularly exciting with silicon, its price would go up immediately. As digital electronics became more popular, the price of silicon would go up higher. Anything that suggested that maybe digital electronics were not going to be as big as expected would cause the price of silicon to drop drastically since its present value was based almost entirely on that expectation.
Much the same thing is happening with bitcoin. People expect that digital assets like bitcoin will become much more popular in the future and so they aren't going to be willing to sell them cheaply now. However, this makes the prices very volatile.
How is Bitcoin useful as a currency if so few services accept it?
That's the point.
It's not useful as a currency because so few services accept it.
So far, it has some other uses - international transfers, storage of value, speculation object. Just because it was intended to be a currency doesn't mean it's useful as one. Like gold. Gold is not useful as a currency today. Gold is a commodity and so is bitcoin. So far.
It actually works a lot like gold. You even mine it in a similar way to gold: spend some regular currency for the mining equipment and cost of running the equipment, and hope you mine enough to make it worth it. (Sidenote: These days it's quite difficult to mine bitcoin at a rate that doesn't cost more in electricity than you make from mining)
When it comes time to buy things, there might be some merchants that directly accept bitcoin (or gold, in our analogy) as a currency, but most will require that you use official local currency, so you sell some of your gold/bitcoin and use normal currency to buy things.
So to answer your main question, it's not useful as a currency in most cases. There's an increasing number of online merchants that accept bitcoin but very few brick-and-mortar stores.
There are currently two problems which prevent the widespread adoption of Bitcoins as a currency for everyday business.
The system doesn't scale. Due to the limited size of each block in the blockchain, there is a hard limit on the number of transactions which can be processed. The Bitcoin network can only handle up to 10 transactions per second. This is simply not enough for handling global commerce. For example, just McDonald's restaurants alone serve 68 million customers every day, which means 787 customers per second. That means if every McDonald's customer would pay in BitCoins, they alone would exceed the capacity of the Bitcoin network by factor 80.
If you want to pay at a supermarket checkout, you need a payment system which can confirm a payment within seconds, not hours like Bitcoin currently does. There are workarounds, like wallet services which handle bitcoin transactions for the participants and avoid the blockchain. But then you are back to one of the things Bitcoin wanted to avoid: a for-profit banking industry which controls financial transactions and can be subjected to government regulations.
There are many other cryptocurrencies which fix that design problem and allow much higher numbers of transactions. Unfortunately none of them has the momentum of Bitcoins.
The instability of the Bitcoin value. Many people perceive Bitcoins primarily as a speculation object and not as a currency. The result is that the Bitcoin value is rapidly fluctuating. This makes it unsuitable as a unit of wealth. You can't do long-term contracts denoted in Bitcoins, because you have no idea what Bitcoins are worth when payment is due. You can't put your savings in Bitcoins, because you don't know if the market will crash when you need to access your savings. Giving or taking a loan in Bitcoins becomes an incalculatable gamble for both sides.
Unless these two problems get fixed, we won't see Bitcoins being used in everyday commerce.
Let me actually answer the question asked, not rant:
How is Bitcoin useful as a currency if so few services accept it?
There are plenty of people actually living with Bitcoin. There are TONS of services that ULTIMATELY accept bitcoin.
The trick is not to look for bitcoin prices. You can use services like BitPay (https://bitpay.com/card/) to get a Bitcoin backed debit card - with which you can pay at any place that accepts VISA cards. That means basically all online stuff can be done with bitcoin.
I am not going into issue with volatility - those are outside of the question. The main question is usability in general, Bitpay and other similar services totally handle that part.
The market I go to doesn't accept bitcoin and neither do the gas stations. If I can't do that, how is bitcoin worth anything to me?
Without getting too deep into the particulars, folks aren't buying gas and groceries with it. One example of a common purchase is lightly controlled, gray market pharmaceuticals. Things like viagra.
Also, in countries like Venezuela, where the national currency is heavily manipulated, cryptocurrency can ironically provide a better store of value -- and method of getting money into and out of the country -- than paper money, at least for people who are not part of the privileged few.
Also how are people supposedly getting rich with bitcoin? I thought it was a currency, where we can buy things. Then I find that it's also a commodity where we can trade it.
The same way you'd get rich trading stocks: buy low and sell high. The price of one BTC swung from $900 to $20000 in 2017, so a lot of people who bought BTC early 2017 made out well. (The people who got in near the peak, not so much.)
I bought a small amount of bitcoin (and other cryptos) out of curiosity and a belief in the usefulness of cryptocurrency, back when it was worth about $400. But I'd first heard about it when the price was a few dollars, and I really wish I'd bought some then. In the end, I made a little rent money, but nothing life-changing. I don't think something similar will happen a second time, at least not to me.
The fact that a single bitcoin was approximately equal to a few cents when it first came out, but now is worth tens of thousands, is very troubling.
If by troubling you mean that it doesn't strike you as a good investment, that's because it isn't. Risk-wise, cryptocurrencies are like penny stocks, except in this case the business arguably doesn't have a product.
Here's the question, what I don't understand and I haven't been able to find the answer to, is if I own some bitcoin, how does that help me buy groceries at the market, or gas for my car? The market I go to doesn't accept bitcoin and neither do the gas stations. If I can't do that, how is bitcoin worth anything to me?
The idea is that with more adoption, then this will be able to be accomplished. The issue currently is that the mining fees and verification time are too high/long. Bitcoin will likely grow in use online and less so in the real world. Outside of the internet, it makes more sense to use Bitcoin for large purchases or to quickly and cheaply transfer large quantities of money (as opposed to wire transfers).
If you exclude the possibility of global financial collapse, then fiat currency will likely not go away. It's very likely that crypto and fiat will exist simultaneously (like the telephone and the internet).
Also how are people supposedly getting rich with bitcoin? I thought it was a currency, where we can buy things. Then I find that it's also a commodity where we can trade it.
There are markets that exist with all currencies. You can trade foreign exchange and take advantage of the exchange rates to make a profit. Bitcoin is a deflationary currency, which means that the supply is fixed. Since the supply is fixed, that makes it have an inverse relationship with dollar value. People are capitalizing on this characteristic of Bitcoin to make money. Similar to how gold was originally a currency, but now is a financial asset (because there is a fixed supply of gold), Bitcoin is a currency, and simultaneously a financial asset to to its fixed supply (21 million).
The fact that a single bitcoin was approximately equal to a few cents when it first came out but now is worth tens of thousands, is very troubling.
This is a product of supply and demand. When there are fewer items, the value increases. When you have a full bag of potato chips, you are willing to let people have some. The closer you get to having none left, the more hesitant you become to give them away. This is because each of them has a higher value now.
With all due respect, you have a few problems with economics. You use a narrow set of definitions which really need to be expanded.
Here's the question, what I don't understand and I haven't been able
to find the answer to, is if I own some bitcoin, how does that help me
buy groceries at the market, or gas for my car? The market I go to
doesn't accept bitcoin and neither do the gas stations. If I can't do
that, how is bitcoin worth anything to me?
The key problem is the term "worth". "Worth", along with its near-synonym "value" is always relative, subjective and context-dependent.
A gedanken (thought) experiment. An uncle you barely know died and left you 1000 bitcoins. What is it worth to you? Well, at current market rates I strongly suspect that it's worth about 6 million bucks (as long as uncle's total estate was under 11 million and depending on his state). Or do you disagree?
The question which you seem to be confusing this with is, "How useful is bitcoin as an everyday currency for buying groceries and gas?" And you answered that one yourself: not very.
Also how are people supposedly getting rich with bitcoin? I thought it
was a currency, where we can buy things. Then I find that it's also a
commodity where we can trade it.
In large part, other answers have addressed this (buy low and sell high), but you really ought to be aware that there is an enormous international market in all of the world's currencies. Speculation on these markets has been known to hammer the economic performance of various countries. So why should bitcoin be any different?
Finally, I cannot pass up discussing a comment you made: "if bitcoin was a globally accepted currency with all vendors, then I see a real value to it". What you seem to mean is that the volatility and limited acceptance of bitcoin makes you unwilling to use it. Fair enough, although "globally accepted" seems like an unnecessarily stringent criterion. If your local grocery store accepts bitcoins for groceries, why would you care about "global acceptance"? Much worse is the possibility that you believe in "real value" in the larger sense. Look, you need to understand that all value is subjective. There is simply no such thing as universally accepted, objective value. As Robert Heinlein put it in "Starship Troopers", "Something is worth what someone will give you for it." Granted, there are number of hidden caveats and assumptions lurking in there, and the principle can be badly misused (in the sense of unfairness), but it remains true nonetheless.
It's actually not true that "all value is subjective". In the context of currency, the consensus on the value of a dollar bill, for instance, is sufficiently broad so as to make it functionally objective.
if I own some bitcoin, how does that help me buy groceries at the
market, or gas for my car? The market I go to doesn't accept bitcoin
and neither do the gas stations. If I can't do that, how is bitcoin
worth anything to me?
Also how are people supposedly getting rich with bitcoin? I thought it
was a currency, where we can buy things. Then I find that it's also a
commodity where we can trade it.
Same as forex trading. USD and EUR are also currencies as well as commodities. BTC is just one that is much more volatile than most, therefore it is easier to make money swing trading it. Add to it leverage and shorting, and you can profit from each wave, up and down, with a multiplier.
The early buyers/holders from a few years back could have made a lot of money by selling it anywhere in the past year. Good traders have been multiplying their stacks within any few months of this year - while it was crashing and bouncing and crashing again.
This brings me to another point though - however volatile BTC may be, it is still less volatile than some national currencies. A lot of Nigerians, Venezuelans, and recently Turks and Iranians have flocked to crypto because it was more secure and/or less volatile than their national currencies, as well as due to corruption, inflation or sanctions.
Living an ordinary life in a well regulated stable country - you may not need BTC. There are however many people who do, and widespread adoption, if it comes, will more likely come from that angle.
The fact that a single bitcoin was approximately equal to a few cents
when it first came out, but now is worth tens of thousands, is very
troubling.
Why would this be troubling? You could say the same about any stock.
