This PayPal Competitor Is Dropping Bitcoin Like a Bad Habit

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In the time before time, long before cryptocurrencies existed, one company attempted to become a pioneer in peer-to-peer transactions, outside the traditional confines of exchanging cash in person, sending a check, or sending money via wire transfer at a bank. That pioneer was PayPal (NASDAQ: PYPL).

Since its founding in 1998, PayPal has grown by leaps and bounds. According to StatisticBrain.com, 18% of all e-commerce transactions are processed by PayPal, with an average of $386 million a day changing hands over its network. There are also more than 183 million active PayPal accounts. Among pre-cryptocurrency peer-to-peer payment facilitators, it's a giant.

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Stripe rises to the challenge

But it's also not the only show in town. Stripe, which was founded in 2010, has been doing its best to make up ground on PayPal. Stripe helps more than 100,000 businesses do financial transaction online, including Target and Lyft, which is a little less than a quarter of the total businesses PayPal is currently working with. It's nevertheless impressive how quickly Stripe has ramped up and forged enterprise relationships in such a relatively short amount of time.

Arguably, Stripe's biggest differentiating factor is that it became the first major payments company to accept bitcoin back in 2014. PayPal followed suit after Stripe made the move. Given bitcoin's meteoric rise in 2013 to north of $1,200 per coin and the excitement surrounding peer-to-peer transactions without the need for a financial intermediary like a bank, Stripe believed it could use this to its advantage. Bitcoin was a particularly attractive option in regions that were underbanked, or with customers who had to deal with prohibitively high credit card interest rates or fees.

Four years later, however, this experiment is coming to an end.

Bitcoin is being dropped like a bad habit

As announced last week, Stripe plans to stop accepting bitcoin tokens as of April 23, 2018. Stripe notes that bitcoin's blockchain network -- blockchain being the digital, distributed, and decentralized ledger that underpins cryptocurrencies and logs all transactions -- has slowed dramatically over time, and the number of rejected transactions has increased.

What's more, a recently released analysis of transaction speeds from HowMuch.net found that bitcoin's network has a maximum capacity of processing just seven transactions per second. Comparably, Ethereum, Litecoin, and Ripple were capable of a maximum of 20, 56, and 1,500 transactions per second, respectively. Litecoin's seven-times-better performance in transaction speed than bitcoin, and its four-times-faster block resolution time of 2 1/2 minutes compared to bitcoin's 10 minutes, is a serious concern for bitcoin users.

Though Litecoin and bitcoin are considered complementary cryptocurrencies, this writer would suggest they're more foe than many would like to think. You see, Litecoin was able to integrate the SegWit (Segregated Witness) upgrade to its blockchain, helping to improve capacity, lower transaction fees, and speed up settlement times. Bitcoin hasn't been able to get consensus within its community to move forward with SegWit. As a result, the average Litecoin transaction costs well below $1, while the typical bitcoin transaction is now in excess of $28.

Stripe ultimately views bitcoin as a more of an asset to be held rather than a medium of exchange, which is why it's moving away from the world's most popular and valuable cryptocurrency by market cap in three months. Said Tom Karlo, Stripe's product manager:

Stripe is exploring the idea of using a crypto competitor

But the real kick in the pants for bitcoin and its investors is that Stripe isn't planning to ditch the idea of cryptocurrencies as a medium of exchange anytime soon. The blog announcement from Stripe specifically mentioned Lightning, Ethereum, OmiseGO, and Stellar as possible replacements they would look into.

Ethereum isn't too much quicker than bitcoin's network with regard to transaction processing speeds, but its blockchain is being tested in more small-scale and real-world tests than any other cryptocurrency. The Enterprise Ethereum Alliance currently has 200 organizations (many are brand-name companies) testing its technology in some capacity. Yet, few people actually consider the Ether token as a medium of exchange, beyond being used for transaction fees on the Ethereum network (which are below $1 per transaction). A Stripe partnership could potentially change that.

The biggest boost came from Stellar. Its XLM token exploded higher by more than 20% following the announcement that Stripe might consider incorporating it in the future. Stellar's claim to fame derives from its October 2017 real-world blockchain partnership with IBM (NYSE: IBM). This deal is allowing a dozen large banks in the South Pacific to deploy Stellar's blockchain to settle cross-border payments within a matter of seconds. IBM generates tens of billions of dollars from overseas clients, and a settlement time of a few seconds would be a major improvement over a possible multiday wait for cross-border payments to settle under the current banking system.

And then there's OmiseGO, which is essentially an Ethereum-based cryptocurrency built atop the ERC20 platform. OmiseGO's primary focus is on resolving the high transaction costs and inefficiencies that arise when exchanging one virtual coin for another, or exchanging dollars into a cryptocurrency. If OmiseGO can hit on its promise of fast and cheap transactions over its blockchain network, it could, like the others mentioned here, run circles around bitcoin.

Could we be watching the slow demise of bitcoin's crypto dominance? It's possible.

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Sean Williams has no position in any of the stocks or cryptocurrencies mentioned. The Motley Fool owns shares of and recommends PayPal Holdings, but has no position in any cryptocurrencies mentioned. The Motley Fool has a disclosure policy.