Updated August 01, 2017 19:41:32

Fewer people have been paying for their coffee using bitcoin in recent years.

Three years ago, Scott Riggs noticed that about 12 customers per week bought food and drink from his St Kilda cafe using the digital currency.

This has since dropped sharply to one or two customers per month.

When asked why, Mr Riggs said, "I think people are holding onto their bitcoin because it's worth so much now."

One bitcoin is worth $US2,816 (or $3,517 Australian dollars) at 6:08pm AEST.

This is an extraordinary surge when one considers each bitcoin was worth as little as $US310 ($386) back in 2014.

However, recent developments have called into question the future of bitcoin for its investors and the wider business community.

A civil war has been raging within the bitcoin community about the direction which the controversial digital currency should take.

This conflict could end in a bitter split and the creation of a rival cryptocurrency called bitcoin cash which is expected to launch at 10.20pm (AEST), Tuesday evening.

In the past three months, bitcoin's value has been very volatile to say the least swinging wildly between $US3,000 ($3,760) and $US1,300 ($1,630).

But what is behind this internal conflict and price volatility?

In one word speed. As the popularity of bitcoin has increased in the last few years, so has the time and delay in processing its digital transactions.

Some bitcoin users have reported that it can even take days for their payments to clear.

Currently, bitcoin's capacity allows it to handle a few transactions per second (about seven), whereas conventional payment methods like Visa can process thousands per second.

Bitcoin cash is expected to be able to process eight times more transactions than its predecessor.

But it is uncertain which digital currency exchange operators will support the spin-off currency and how well it will perform in the marketplace.

For the original bitcoin to be more widely accepted as a currency, its speed would certainly need to improve.

On the other hand, there are those who buy bitcoin and hold onto them (instead of spending them like a normal currency). They are speculating on its future value skyrocketing and hoping "get rich quickly".

"At the moment, it's purely speculation that's leading the price," according to technology author Steve Sammartino.

For example, US billionaire fund manager Bill Miller invested 1 per cent of his wealth into bitcoin back in 2014. It is estimated his bitcoin wealth has risen tenfold since then.

It is difficult to have it both ways for an asset to function as both a store of value and a tradeable currency.

In the end, bitcoin's existential conflict is between those who are betting it will become a mainstream currency of the future, and others who see it as a (speculative) repository of wealth like gold.

"The fact that bitcoin is de-centralised is what gives it trust," Mr Sammartino said.

"No one owns it [and] no one controls it.

"It can't be used as a form of quantitative easing. And the fact that it has that element is really what enables it to get trust in the long run."

However, members of the business community like AMP chief economist Dr Shane Oliver are sceptical of bitcoin's potential as a future currency.

Dr Oliver posed the question: "If bitcoin is a store of value, why has its value gone up and down so dramatically over the last few years?

"It's almost like you're investing in spec-y stocks on the share market. It's been on a bit of a roller coaster ride.

"Unless we have some sort of major crisis and go into some sort of global apocalypse where mainstream governments in the US, Australia and others disappear and collapse, and their currencies become worthless then I can't see people switching across to alternatives like bitcoin."

Mr Sammartino is optimistic about the future of bitcoin but said "there's a chance that the currency could fail, and we've seen currencies come and go over time".

Regardless of bitcoin's future, or whether it splits, there are more than 1,000 other alternative cryptocurrencies in a market worth US$93 billion ($116 billion).

The second largest digital currency ethereum has attracted a lot of attention from the business world.

More than 100 international companies including BP, Deloitte, JPMorgan and Microsoft are members of the Enterprise Ethereum Alliance.

These companies are experimenting with blockchain, the technology which powers bitcoin and ethereum.

Essentially, it can be used for more than just making digital payments. The business world hopes blockchain will be a disruptive technology that cuts down the time and cost of doing business in the future.

A recent example of this technology simplifying business is a recent collaboration between IBM, Westpac, ANZ and Scentre Group (the owner of the Westfield shopping centres).

In early-July, those companies announced that they participated in a successful trial to digitise "the bank guarantee process" for commercial property leasing.

It is currently standard practice (and has been for a long time) that commercial landlords require their retail tenants to first obtain bank guarantees before the lease is finalised.

A Westpac spokesperson explained that the guarantee is issued on paper which can easily be lost, and that there are "tens of millions of bank guarantees out there".

According to IBM's blockchain expert Michael Aaron, this process was "old-fashioned".

He said the technology behind cryptocurrencies can "reduce the time for businesses to work together, increase trust, eliminate the need for paper, and potentially prevent fraud in the future".

"Documents written on paper are more susceptible to fraud," Mr Aaron said.

Until the technology behind cryptocurrencies is mature and more widely used by businesses, the controversy over bitcoin still rages.

"I think bitcoin is probably going to stay on the sidelines," Dr Oliver said.

"It's going to remain of interest to tech heads and people who are worrying about paper currencies collapsing in value.

"But I'd be very surprised if in the next few decades it becomes mainstream."

In the meantime, for bitcoin's users and investors, it remains a case of "buyer beware".

This story will be on The Business tonight at 8:30pm (AEST) on the ABC News channel and ABC iview.

Topics: business-economics-and-finance, computers-and-technology, consumer-finance, money-and-monetary-policy, australia

First posted August 01, 2017 19:33:30

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Civil war threatens future of bitcoin as business waits for technology to mature - ABC Online