For all the people out there who are thinking about bitcoin as a payment technology: If you assume that customers get paid in dollars and that vendors will have to use dollars to pay their taxes, pay their employees and buy the raw materials for their products (reasonable assumptions, I think), then a payment consists of one conversion from dollars to bitcoins by the purchaser, and one conversion from bitcoins to dollars by the vendor.
Those two transactions will have associated costs. Exchanges take out trading fees and the market makers on the exchanges will want to see some profit as well (you will see this reflected in the bid/ask spread). The total cost for the transaction will be 2x the spread + exchange fees. People keep touting the 2.5% charge for using credit cards, but they don't compare it to a similar value for bitcoin. It clearly is not 0%. Exchange fees alone are can be something like 0.5%. If we double that (two conversions, remember) that's 1% just in exchange fees. Unfortunately, I don't have good numbers for bitcoin / dollar spreads because I don't watch that market very closely.
So we have 2.5% for credit cards and 1% + spread (unknown) for bitcoin. And with credit cards consumers at least get some protection in the case of fraud. Does anyone else have a better model for bitcoin transaction costs?
Here's one model that could work. Think of Bitcoin as analogous to physical cash. Cash = small casual payments in offline world. Bitcoin = small casual payments in online world. (btw, the original Bitoin paper says this pretty explicitly). I don't keep my savings in (physical) cash. I keep some spending money there. Similarly you will have your internet spending money. You'll converts to and from USD occasionally but not on every transaction. Maybe some people will store value in Bitcoin but they will be the exceptions.
But ultimately smarter people than me will figure out the right model. That's the beauty of software platforms.
We began accepting bitcoin last month and aren't converting all of our bitcoin to dollars. We have several employees who accept their pay in bitcoin.
Taking things a bit further, we are optimistic about bitcoin as a payment form with our suppliers as the volatility stabilises. As an example, one of our suppliers is Belgium based and we'd be able to save on the currency exchange with those payments. We've discussed it and they didn't turn their nose up to the idea.
So VISA can be thought of as a Protocol. Wether I'm a VISA Debit or Credit user doesn't really matter. I give money to my Bank, the Processor is going to (indirectly) get USD for my transactions. Then they're going to take a cut and give the money to a Merchant Bank, who in turn credits the Merchant.
So what if there was a "BTCP" Card that ran on the Bitcoin protocol? I see something I want priced in USD. I want to give them USD. My bank has issued me a BTCP card. So I ring up the charge. The bank sends the money to the Merchant Bank. Without a Processor. Merchants still carry an escrow with their bank for "chargebacks" and fraud. The two banks can sort out the rest of the details between themselves.
The Exchange price doesn't really matter. The Bank deals in USD. They can just agree to peg their debits/credits against the daily value of BTC. Or a Satoshi. Or whatever. It doesn't really matter since it's not like you're forced to sell your Bitcoin holdings at a particular offer price. You can send it to whomever you want for whatever you want.
So even if Bitcoin doesn't find success in replacing Paypal (and I think there's a good chance it will), the truly disruptive idea is that it's a simple standard that could replace Processors. (Though wow, that would be the fight of the century and I'm not sure I'd bet on the scrappy little guy there.)
In my view, if anybody could upset the monopoly of Visa and MasterCard by creating a new payment system with lower fees, they could do so today using dollars.
Bitcoin isn't the missing piece of this puzzle. In fact I suspect Bitcoin would be an obstacle, due to lack of public confidence.
The potential of Bitcoin is that volume can grow to be so high that the spreads are negligible. Meanwhile, bank interchange fees remain stubbornly high.
Some US dollars were paid to my paypal account; I won't convert them to local currency, but wait til I buy something in USD - and so avoid the exchange costs you mention. Meanwhile, my local currency works fine. Of course, the bigger the ecosystem for bitcoin, the better this works.
Credit cards are an incredible business for VISA etc. I agree with the article that circumventing it in some way, esp for micro-transactions, would be great. They probably should stop gouging, to deflate interest in alternatives.
It's a pity the press for bitcoin all bubble and crime. OTOH it is press, and niche adoption works.
I'm seeing a lot of parallels between dotcom era payment systems like PayPal and even Flooz. Paypal's original concept was paying friends for things like splitting lunch.
The hook that's different here is that once you deposit legal tender and covert to bitcoin, you're basically trading something that is commodity-like. Basically, it's no different than bartering shares of gold.
My question is, when the regulatory system catches up, is bitcoin better than a commodity?
I don't think most people are interested in Bitcoin primarily because of the utility it currently provides and the infrastructure that has so far been built.
It seems the more transactions are on exchanges, the lower they make the rate. Some like Bitpay I think offer flat rates per month, too, for businesses (starting at something like $30 a month, no extra commissions).
So while Bitcoin's transaction fees may not be zero, it does seem like it's trending towards zero, much like the price of everything else on the web trends towards zero.
This is the same naive analysis everyone makes when they first look at the payments system. "Look at all that money. 2-3% on every transaction. A $500B tax. LOOK AT ALL THAT MONEY."
The reality is this: Most of that money gets passed back to consumers via rewards, benefits and consumer protections.
It's not a tax so much as an incentive for consumers to keep using their cards. And so it is considerably harder to come up with an alternative that is appealing to merchants without taking anything away from consumers.
For example, the interchange on a Visa rewards card for a typical brick-and-mortar retailer is about 1.5 - 1.65%. (Processors mark that up, but that's the "wholesale" fee that goes to the card issuer.) But many rewards cards pay out at least 1% cashback, on top of other benefits. That leaves a much smaller margin to compete over.
And remember, a new competitive option faces massive rollout and adoption costs that the entrenched system does not. Even the acts of changing behavior, upgrading POS systems and training staff are adoption costs. So your new alternative has to offer significant benefits for both merchants and consumers. Significant enough to overcome adoption costs.
Oh, and there's one more thing: debit card interchange just got regulated down to almost nothing (0.05% + 21 cents) by the Durbin amendment. So there already is an alternative, low-fee option that merchants can steer consumers toward and that they already support fully. So that pretty much takes out the opportunity to offer a lower-fee, lower-consumer-benefit option. That already exists now.
That leaves what? A higher-consumer-benefit option? Why would merchants adopt that? A same-benefit option but at a lower cost? But how much lower would the cost be while still matching 1-2% cashback reward programs and whatnot?
But.. but.. LOOK AT ALL THAT MONEY. :-)
(Btw, the digital cash for micropayments and garage sales and whatnot does sound interesting to me. My criticism is limited to the project of competing with Visa/Mastercard/banks.)
If card companies are paying it all back to consumers, then what are their shareholders ending up with?
I agree with you that not all the $500Bn is going directly into the pockets of shareholders, but the reality is that there is a huge transaction cost in taking a clip and then passing part of it back to a consumer. However much is lost in the process, it might not be $500Bn but it is definitely a lot of money, and it is unnecessary.
There are a lot of arguments as to why merchants won't adopt Bitcoin for payments, the main one being that they actually need most of the features of modern finance that these companies charge for. The fees though are definitely an argument for Bitcoin, and not against.
My view is that the whole system was designed for a different era and not for the web. The problems include 1) consumer having to fill out a form at each merchant, 2) consumer having to decide if she trusts the merchant (1 & 2 lead to the strategic asset of "cards on file"), 3) the bank trying to determine with probabilistic algorithms whether it was really me paying, 4) the security of the whole system is very flawed. 5) all the money spent on marketing these services (including rewards) when instead the services should be baked into the internet.
That said, I agree with you that the digital cash / new behaviors are the most interesting part of Bitcoin. Just much harder to explain.
If you compare interchange with rewards rates, they seem comparable, but most merchants pay much more than interchange. Direct relationships with issuers isn't feasible, even for the largest merchants. There are network fees and usually other middleman processors involved.
Visa and First Data each make >$10B/year revenue, which is already 0.2% of US GDP, and none of that money goes toward cardholder rewards.
Aren't rewards also subsidized by interest rates charged on those cardholders who carry a balance at the end of the month? My understanding was that that's a very significant income stream, and that's missing from your comparison of ~1% rewards to the 1.5-1.65% interchange.
18.6 billion is still quite a bit of money to extract for the service of letting people spend their own money.
All those extra benefits should be unbundled and it'll be interesting to see how many consumers purchase them when their costs aren't being subsidized by cash buyers.
I too am fascinated by Bitcoin and still in learning mode. I think there's one important distinction to add here though. Credit cards can charge 2.5% because they're awesome Some guy in Arizona can set himself up online, sign up for Stripe, have no set fees, and accept a payment from someone in Germany (or NY or Australia) that afternoon. That's amazingly empowering and 2.5% doesn't seem to bad for the people running those rails to collect (fraud, global movement etc)
So let's not come at it from "credit cards and payments are a bloated gouging industry" I'm not buying that and it also is too merchant focused (vs consumers who really decide what a merchant will do in terms of payments) Now, there are some really interesting fringe cases that Chris touches upon that can open the door for Bitcoin. Micropayments are broken when it comes to credit cards. It's not the %, it that's "+ 30 cents" that is brutal. So Bitcoin could play a roll there. There are disbursements and marketplaces. I suspect TaskRabbit would probably like to have the ability to move money from buyers on their platforms to the TaskRabbiter's with a reduced payment friction than today. There might be 5% margin businesses (Chris' example sounds like the founder of Dwolla) that really are motivated to drive you to Bitcoin.
So what happens over time is Bitcoin focuses in on those areas where it has a strategic advantage over cards and ignores those where it doesn't. It uses that experience to become a legitimate, scaled set of payments rails. Solutions are implemented so that consumers are comfortable with using and paying with Bitcoin. Then at that 5 - 15 year mark it's ready to take on mainstream payments. Assuming issues like fraud and settlement and wild fluctuations are worked out.
EDIT: I am definitely thinking out loud and on the fly so am ok with some serious rebuttals.
"Some guy in Arizona can set himself up online, sign up for Stripe, have no set fees, and accept a payment from someone in Germany (or NY or Australia) that afternoon."
Anyone can take payments using Bitcoin in less time than it takes to sign up for and implement the Stripe API (I would know; I've done both), and you don't have to have a bank account in an approved jurisdiction in order to do so.
They can either do this by using the technology directly or using an intermediary such as Coinbase.
"Bitcoin focuses in on those areas where it has a strategic advantage over cards and ignores those where it doesn't."
Thankfully Bitcoin doesn't care what it's used for, and there will probably be people trying to implement a Bitcoin solution for all these areas; the ones that find a niche will survive, and the ones that don't will fail. Either way, we'll (in theory) end up with the services that Bitcoin is suited for, and the ones that it isn't suited for will continue to use more traditional methods.
> Credit cards can charge 2.5% because they're awesome Some guy in Arizona can set himself up online, sign up for Stripe, have no set fees, and accept a payment from someone in Germany (or NY or Australia) that afternoon.
Last I checked, it takes at least a month to apply for and receive a credit card, so this is obviously wrong. Guess what, I could set you up with a bitcoin account and some bitcoins in less than a minute.
> 2.5% doesn't seem to bad for the people running those rails to collect (fraud, global movement etc)
Yeah, as long as something else doesn't come along that's even better at fraud prevention and global movement and only charges 0.01% (like bitcoin, for instance)
Setting up for bitcoin transactions is even easier and faster. I often see bitcoin addresses listed on github accounts, asking for a small tip. Also: http://www.reddit.com/r/bitcointip
I remember some years ago when people were getting excited about microtransactions, but nobody found a good way to make them work. It seems like Bitcoin might be a viable way of bringing the idea back.
I used to believe that the reversibility of transactions was a major benefit of using cards, but it turns out that is really just a reversibility of liability.
Credit cards are an outdated tool. They pass plain text data about a user to authorize a transaction allowing hackers to pull something off like the Target hack. One of the advantages of bitcoin is the ability to digitally authorize a transaction that cannot be reused. In an online marketplace it's far far easier to accept bitcoins than credit cards because you have no fraud risk, which is a HUGE problem in online retail.
I expect a lot of online retail stores to start accepting bitcoin payments at large discounts to cash just for this reason.
> In an online marketplace it's far far easier to accept bitcoins than credit cards because you have no fraud risk, which is a HUGE problem in online retail.
I'm not sure how you are getting this. Bitcoin is absolutely susceptible to various forms of fraud. Let's make this a bit more concrete: assume eBay accepts BTC. I could sign up for a seller account, make some auction listings, once some people buy them, never ship the goods, and disappear. I could set up a fake seller account, list some fake items, and then also make a fake buyer account, purchase the fake goods with my fake buyer account from my fake seller account, report that everything went well, and now I've laundered some money. That kind of activity can cripple a business.
As a consumer, the irreversability of BTC transactions is a bug, not a feature. You only need to look at the incredible amount of fraud that's happened in the Dogecoin community to see how fraudulent activity can be rampant, and can harm consumer confidence. Consumers expect the ability to be able to initiate a chargeback when fraudulent activity happens. You can't do that with just plain old BTC. When I was home over the holidays, the local TV station ran a story about how you should be using credit cards rather than debit cards to purchase things online, specifically because the credit cards' chargeback policies are often better. "With a credit card, you'll have the money taken off your statement, but with a debit card, it could take over two weeks to get your money back." etc.
Bitcoin is digital cash. Online stores don't allow you to mail them an envelope with $20 inside, because that would be kind of ridiculous for all parties involved. It's only when certain financial instruments are built on top of Bitcoin that have the same kinds of consumer protection and regulatory compliance built in.
> In an online marketplace it's far far easier to accept bitcoins than credit cards because you have no fraud risk, which is a HUGE problem in online retail.
I currently work for a large online marketplace. A very typical fraud scenario (maybe the most common) is someone collecting payment for an item that they don't actually possess. This would only be harder to deal with and correct if the payment were disbursed to an anonymous seller in bitcoins.
As an online retailer, what do you do if someone reports fraud? Shrug your shoulders and tell them they should have been more careful with their wallet?
If Bitcoin == cash, what does a storefront do if someone comes to them and says "my stolen cash was used to buy items here"? Usually nothing, yes? Is that what we're saying is the burden of responsibility for an online store with Bitcoin?
Magnetic stripes are outdated, but smartcards fix that problem.
Reversable transactions moves the onus of security to the people who can really do something about it. A consumer can only chose "purchase or do not purchase", whereas a merchant can elect to use (for example) more secure payment methods and stronger identity verification.
There is no reason we cannot have credit card like things that do not pass plain text authorization. I believe some places have already switched to useing smart cards which leverage cryptography to proved identification without revealing the secret. I'm not sure exactly what crypto is used in practice, but as a proof of concept you can imagine this being done with normal public key chryptography.
We don't know what the cost of transactions in Bitcoin will be yet.
Bitcoin includes two methods to pay miners for the infrastructure costs of running the network: mining rewards and transaction fees. The idea is to bootstrap the network off of mining rewards, and then switch to relying on transaction fees in the future, as Bitcoin reaches its limit of 21 million coins.
The problem is that mining rewards are currently very, very non-negligible, even if they're decreasing. In 2012, the Bitcoin supply increased by over thirty percent. In 2014 another 1.3 million Bitcoins will be minted and sold by miners to pay for the cost of operating the bitcoin network. At current prices, that's nearly a billion dollars.
As mining rewards continue to decrease, that billion dollars a year is going to need to be made up through transaction fees. Mastercard takes in less than 8 billion a year, so those transaction fees are probably going to be substantial.
You're assuming that mining revenue must never decrease, but there's no reason for that to be true. A more likely scenario is that as block rewards go away, instead of transaction fees going up, overall mining revenue goes down. Some miners will exit, but as long as there's money to be made there will still be miners. Bitcoin users and miners will adjust fees until they reach a compromise that's mutually acceptable.
The reason why people should get excited about Bitcoin is not a bubble or money, but rather a something completely new. Large group of people put financial rules into software and agreed that they are going to use these rules without external central entity and enforcement.
If this continue to roll, same might be applied to many other areas I believe.
It is just my random fantasy at this moment, but why we will need enforcement, if we will have guarantied income in bitcoins and laws system built same way as bitcoin (i.e. opensource and agreed to use by most people) and law enforcement as a function of guaranteed income amount.... Just random thought.
or finally having AI which can exist on its own, buy components of its environment (i.e. machines, networks, etc)
I believe what is emerging right now as a Bitcoin is much wider phenomena than just a way to avoid pay taxes and inflation.
But now you're putting a libertarian political agenda into Bitcoin again, and this is what makes many people (including me) very nervous. You see, many people think about the terrible pain and suffering the US experienced about a century ago when the economy and law were largely unregulated and unenforced. Much of the country became quickly enslaved to a small group of individuals; terrible exploitation and rampant poverty ensued. It was through a lot of hard work that Americans were able to place government regulation to free themselves from the tyranny of the robber barons. So when many people today hear the words "without external central entity and enforcement" the horrors of the gilded age flash before their eyes.
Also, your ideas about an AI-directed or general-consensus utopia are nice but naive. People don't usually agree on what utility function you'd want to maximize, as there is no "right way" for a lot of things that matter to people. Would your Bitcoinish utopia allow late-term abortions? Or school prayer? Or same-sex marriage? Politics is a constant battle of values, many of them are deeply emotional.
But Dixon's idea of Bitcoin as internet pocket-money is actually something I can live with.
How much of the 2.5% credit card fees goes towards combating fraud and enabling reversibility of transactions? I assume it's a significant fraction because you get a better rate if you use services like "verified by visa", no? Is there any reason to believe that fraud rates will be lower with bitcoin?
And as far the programmable money idea goes, I'd like to see more compelling applications than M of N transactions or escrow. The examples I've seen so far seem rather unexciting.
ed: Maybe cdixon's real point is that the technology behind bitcoin is disruptive to the financial industry? I can get behind this, and I'm waiting to see how the government-backed bitcoin clones fare.
> Is there any reason to believe that fraud rates will be lower with bitcoin?
Yes, the risk of fraudulent creation of bitcoins or of double spending of a well-confirmed bitcoin are essentially zero (assuming no major flaw in the current science of cryptography.)
Also, the odds of stolen identities (name/address/birthdate/ssn) would be zero, since those are not needed for sending bitcoins.
I don't think Bitcoin will ever be a viable currency, at least not on the scale of national currencies. Despite all the flaws fiat currency has, it is actually backed by something - the power of the country's government to tax. Thus, any buyer of sovereign debt has a calculable probability of return. Despite America's printing of dollars, inflation has actually been mild so far.
Bitcoin has nothing backing it but an artificial supply limitation. That in itself is not a solution because its monetary base cannot possibly grow at the rate overall goods do, and thus have a stable price point.
I don't understand the argument that "the power of the country's government to tax" is a point in favor of a currency. I would say that it is pretty clear that the opposite is true for almost every significant tax; that a country collecting taxes in a currency would be a disadvantage of a currency. The fact that countries need to pass laws allowing taxation of non-local currencies seems to support that.
For a limited class of taxes, namely, taxes directly denominated in a currency (like property taxes), the taxability of a currency adds to the demand for that currency. But for the most part, since non-local currency transactions and barter transactions are taxed at the effective exchange rate / fair value, the fact that taxes are collected in dollars would seem to neither hurt nor help the currency.
That said, in summary, the "artificial supply limitation" applies to both Bitcoin and dollars, with dollars relying purely on trust that America will not increase the money supply unnecessarily. That inflation has actually been mild is a "bug" in the system -- the Fed is deliberately trying to spur inflation, and has not been having success, for reasons that nobody (including themselves) completely understands. The calculable probability of return that you refer to has been pretty reliable (just like MBS's in 2006, couldn't resist), so that is true, but I don't see that being related to the taxability of the currency so much as to the lack of apparent inflation compared to the nominal returns on sovereign debt.
The monetary base argument also seems specious; M0, the "monetary base", is not generally considered (except by non-mainstream economists) to be all that significant compared to the higher-order money supply factors caused by dollar-denominated assets of varying liquidity. Once (or if) Bitcoin develops a credit market, then the medium-term effective money supply will grow and shrink as the market demands.
It's only mild if you use their fraudulent CPI accounting, and only if you use the latest version of it, designed solely to hide inflation. If you use the 1980 CPI we're running at 9% inflation, which is not mild at all. In fact, Volcker would have raised rates long ago to fight that level of inflation.
It's exactly the same way they commit fraud in obscuring the real unemployment rate - the U6 - while referring only to the U3 anytime they want to talk about the economy. 14% vs. 6.8% is a dramatic difference, and it only works because they hide the people that have fallen out of the labor force.
Folks make this statement: "but a currency must have backing, or intrinsic value" and feel that they have just proved bitcoin can't work. But not many contributors seem capable of stating WHY they believe this. Care to elaborate?
In any case, I think it's entirely possible that you're wrong, and I've written a long argument against your claim if you're interested:
The TLDR is that yes, historically currencies have required intrinsic value or government backing of some kind - but it is not an economic law of nature that a currency has to be backed as such. If you can get the economic costs of securing agreement over a currency, then a currency of "mere agreement" is possible. Given that the internet and the design of Bitcoin itself have dramatically reduced those costs - it may actually have a shot at gaining wide acceptance.
The inherent value of Bitcoin is that it allows one to conduct (some types of) business globally without a bank account (kind of). There are caveats, of course, but in my opinion this is its primary innovation and everything else is mostly noise.
Kind of off topic, but I have some questions related to transaction fees.
1) Is there a "reference value" in terms of how much transaction fee you have to pay to make a payment from one bitcoin/altcoin address to another?
2) Is there a "message" payload that would allow us to include JSON or transaction details? I've read that it costs a larger fee for more bytes in a transaction, so I'm assuming you can add whatever you want to the transaction.
3) When I last made a transaction with an altcoin [1], it got "split" to two addresses. One of these addresses was not my target receiving account nor an address that I owned. Does anyone know why this other address got coins? Does this happen in many/all cryptocurrencies?
4) If I made a payment gateway that created a unique address for every user to send payments to, would it be unreasonably expensive to collect all of these funds into a single address later? (N user payment accounts * 1 outbound transaction => Large Central Account/Wallet)
1) Yes and no... the QT client has default/"suggested" transaction fees, but unless a block is completely full you're not likely to see any difference in processing time if you exclude a fee entirely [a]
2) As of recently [b], yes... you can add a small amount of junk data
3) When you send a transaction using input address(es) that don't add up to exactly the desired amount, there will be some "change", which needs to go to a new address. Thus, some of your change comes back to you at a new address.
4) Yes, that's possible. But you probably don't want to do that, since it leaks information [c]
There is so much unexplored territory when it comes to Cryptocurrency. I think people will find innovative uses and start amazing businesses with this.
And to me, the great thing is, that there is no real reason to hate it. There's not company of brand that you can hate, it's just people and ideas.
> Let’s say you sell electronics online. Profit margins in those businesses are usually under 5%, which means the 2.5% payment fees consume half the margin. That’s money that could be reinvested in the business, passed back to consumers, or taxed by the government. Of all of those choices, handing 2.5% to banks to move bits around the Internet is the worst possible choice.
In other words, better wealth distribution? This is precisely what libertarians are fighting for, no?
Playing the devil's advocate here - couldn't this argument be turned around to say something like "That’s money that could be reinvested in banks which hire the best people to find the best and most efficient use of capital."? (as opposed to consumers or small business owners who can't)
Payment fees typically go to Visa or MasterCard, I thought. And considering the financials of those companies, operating the existing payment networks must be costly- both companies are growing & profitable, but not nearly as much as you might expect if the payment networks were zero-cost to operate.
I know it's not quite "not relying on banks and credit card companies", but removing ONE of them from the equation (credit cards skimming fees) is what I'm working on now. This is how it works https://www.youtube.com/watch?v=QR5UTLxe5zA&feature=youtu.be
By removing them and decentralizing the banking process by centralizing it into a third party (which could be many third parties), I think we'll allow anyone who wants to start a bank of any size to compete for marketshare with the big boys by providing better services.
Bitcoins are an amazing investment if you have the money;the only problem in investing into it is that there is absolutely nothing close to a guarantee that you will receive any sort of return of investment with profit (not that it's expected to with this type of unofficial currency);however, a problem with it is that you would have to bank wire the money into the place you purchase your BTC from such as BTC-E which would take a few days and for all you know;it could drop or rise at that time (most likely rise) in which you would then not have enough or you could just wait again for it to drop;if it ever were to.
Everyone here trades private currencies (often called credit) all the time. Those Visa bucks are not dollars- they are IOUs from Visa to the merchant accepting them. When the monetary system is functioning well, Visa bucks (or Chase dollars, Wells Fargo dollars etc.) trade at par with legal tenders (US gov. backed cash). Only in times of turmoil does the hierarchy of money reassert itself.
In this paradigm, would you rather be holding US cash or bitcoins (or something else) if there was a political or economic crisis?
This is refreshing. I suspect even though the libertarians are the most vocal among bitcoin adopters (and that's ok), a lot of people actually agree with this.
I know this is completely off-topic, and I know this is a war I will lose, but must we call ourselves "bullish"/"bearish"?
Anyway, Bitcoin may not save the world, but if it does anything like what this blog post says, it may very well save the Internet from the advertising platform it's become.
One important fact that seems to be getting ignored with payment fees is that credit cards have much higher fees than debit/ATM cards.
If bitcoin intends to be a cash-like currency, the more apt fee comparison would be swiping ATM cards, which are much closer to 1% (rather than credit card fees of 2.5%+).
I think Bitcoin is an indication of a larger trend, similar to search in the early 90's and social networks in the early 2000's.
Will Bitcoin emerge as the predominant online currency of the 21st century? Who knows? But it'll solve a lot of hard problems, and as a result, something will.
Given your more liberal leanings, have you looked at Freicoin[0]? It's a perishable currency that is meant to counteract the natural tendency of money to be a wealth transfer device in the hands of bankers.
This reminds me. Bitcoin is so complicated and controversial these days. I miss the days before 2013 when bitcoins were used almost exclusively on the deep web among nerds.
Regardless of what any armchair economist thinks about the federal reserve, how can you love bitcoin as a currency if you think that the fed 'plays an important function'?
In discussions I've read about bitcoin in HN, I've seen how some people call "leftie" to those who think like this, mainly by right leaning Americans, the funny thing is that they use that word as an insult, when in other rich countries you only have center-left, moderate-left and far-left flavors for political parties.
minimax|12 years ago
Those two transactions will have associated costs. Exchanges take out trading fees and the market makers on the exchanges will want to see some profit as well (you will see this reflected in the bid/ask spread). The total cost for the transaction will be 2x the spread + exchange fees. People keep touting the 2.5% charge for using credit cards, but they don't compare it to a similar value for bitcoin. It clearly is not 0%. Exchange fees alone are can be something like 0.5%. If we double that (two conversions, remember) that's 1% just in exchange fees. Unfortunately, I don't have good numbers for bitcoin / dollar spreads because I don't watch that market very closely.
So we have 2.5% for credit cards and 1% + spread (unknown) for bitcoin. And with credit cards consumers at least get some protection in the case of fraud. Does anyone else have a better model for bitcoin transaction costs?
cdixon|12 years ago
But ultimately smarter people than me will figure out the right model. That's the beauty of software platforms.
johmas|12 years ago
Taking things a bit further, we are optimistic about bitcoin as a payment form with our suppliers as the volatility stabilises. As an example, one of our suppliers is Belgium based and we'd be able to save on the currency exchange with those payments. We've discussed it and they didn't turn their nose up to the idea.
ssmoot|12 years ago
So VISA can be thought of as a Protocol. Wether I'm a VISA Debit or Credit user doesn't really matter. I give money to my Bank, the Processor is going to (indirectly) get USD for my transactions. Then they're going to take a cut and give the money to a Merchant Bank, who in turn credits the Merchant.
So what if there was a "BTCP" Card that ran on the Bitcoin protocol? I see something I want priced in USD. I want to give them USD. My bank has issued me a BTCP card. So I ring up the charge. The bank sends the money to the Merchant Bank. Without a Processor. Merchants still carry an escrow with their bank for "chargebacks" and fraud. The two banks can sort out the rest of the details between themselves.
The Exchange price doesn't really matter. The Bank deals in USD. They can just agree to peg their debits/credits against the daily value of BTC. Or a Satoshi. Or whatever. It doesn't really matter since it's not like you're forced to sell your Bitcoin holdings at a particular offer price. You can send it to whomever you want for whatever you want.
So even if Bitcoin doesn't find success in replacing Paypal (and I think there's a good chance it will), the truly disruptive idea is that it's a simple standard that could replace Processors. (Though wow, that would be the fight of the century and I'm not sure I'd bet on the scrappy little guy there.)
analog31|12 years ago
Bitcoin isn't the missing piece of this puzzle. In fact I suspect Bitcoin would be an obstacle, due to lack of public confidence.
codex|12 years ago
hyp0|12 years ago
Credit cards are an incredible business for VISA etc. I agree with the article that circumventing it in some way, esp for micro-transactions, would be great. They probably should stop gouging, to deflate interest in alternatives.
It's a pity the press for bitcoin all bubble and crime. OTOH it is press, and niche adoption works.
jv22222|12 years ago
Spooky23|12 years ago
I'm seeing a lot of parallels between dotcom era payment systems like PayPal and even Flooz. Paypal's original concept was paying friends for things like splitting lunch.
The hook that's different here is that once you deposit legal tender and covert to bitcoin, you're basically trading something that is commodity-like. Basically, it's no different than bartering shares of gold.
My question is, when the regulatory system catches up, is bitcoin better than a commodity?
Sambdala|12 years ago
I don't think most people are interested in Bitcoin primarily because of the utility it currently provides and the infrastructure that has so far been built.
salient|12 years ago
So while Bitcoin's transaction fees may not be zero, it does seem like it's trending towards zero, much like the price of everything else on the web trends towards zero.
nwzpaperman|12 years ago
[deleted]
abalone|12 years ago
The reality is this: Most of that money gets passed back to consumers via rewards, benefits and consumer protections.
It's not a tax so much as an incentive for consumers to keep using their cards. And so it is considerably harder to come up with an alternative that is appealing to merchants without taking anything away from consumers.
For example, the interchange on a Visa rewards card for a typical brick-and-mortar retailer is about 1.5 - 1.65%. (Processors mark that up, but that's the "wholesale" fee that goes to the card issuer.) But many rewards cards pay out at least 1% cashback, on top of other benefits. That leaves a much smaller margin to compete over.
And remember, a new competitive option faces massive rollout and adoption costs that the entrenched system does not. Even the acts of changing behavior, upgrading POS systems and training staff are adoption costs. So your new alternative has to offer significant benefits for both merchants and consumers. Significant enough to overcome adoption costs.
Oh, and there's one more thing: debit card interchange just got regulated down to almost nothing (0.05% + 21 cents) by the Durbin amendment. So there already is an alternative, low-fee option that merchants can steer consumers toward and that they already support fully. So that pretty much takes out the opportunity to offer a lower-fee, lower-consumer-benefit option. That already exists now.
That leaves what? A higher-consumer-benefit option? Why would merchants adopt that? A same-benefit option but at a lower cost? But how much lower would the cost be while still matching 1-2% cashback reward programs and whatnot?
But.. but.. LOOK AT ALL THAT MONEY. :-)
(Btw, the digital cash for micropayments and garage sales and whatnot does sound interesting to me. My criticism is limited to the project of competing with Visa/Mastercard/banks.)
jval|12 years ago
I agree with you that not all the $500Bn is going directly into the pockets of shareholders, but the reality is that there is a huge transaction cost in taking a clip and then passing part of it back to a consumer. However much is lost in the process, it might not be $500Bn but it is definitely a lot of money, and it is unnecessary.
There are a lot of arguments as to why merchants won't adopt Bitcoin for payments, the main one being that they actually need most of the features of modern finance that these companies charge for. The fees though are definitely an argument for Bitcoin, and not against.
cdixon|12 years ago
That said, I agree with you that the digital cash / new behaviors are the most interesting part of Bitcoin. Just much harder to explain.
dlubarov|12 years ago
Visa and First Data each make >$10B/year revenue, which is already 0.2% of US GDP, and none of that money goes toward cardholder rewards.
rictic|12 years ago
kybernetikos|12 years ago
http://www.bcsalliance.com/creditcard_profits.html
18.6 billion is still quite a bit of money to extract for the service of letting people spend their own money.
All those extra benefits should be unbundled and it'll be interesting to see how many consumers purchase them when their costs aren't being subsidized by cash buyers.
jusben1369|12 years ago
So let's not come at it from "credit cards and payments are a bloated gouging industry" I'm not buying that and it also is too merchant focused (vs consumers who really decide what a merchant will do in terms of payments) Now, there are some really interesting fringe cases that Chris touches upon that can open the door for Bitcoin. Micropayments are broken when it comes to credit cards. It's not the %, it that's "+ 30 cents" that is brutal. So Bitcoin could play a roll there. There are disbursements and marketplaces. I suspect TaskRabbit would probably like to have the ability to move money from buyers on their platforms to the TaskRabbiter's with a reduced payment friction than today. There might be 5% margin businesses (Chris' example sounds like the founder of Dwolla) that really are motivated to drive you to Bitcoin.
So what happens over time is Bitcoin focuses in on those areas where it has a strategic advantage over cards and ignores those where it doesn't. It uses that experience to become a legitimate, scaled set of payments rails. Solutions are implemented so that consumers are comfortable with using and paying with Bitcoin. Then at that 5 - 15 year mark it's ready to take on mainstream payments. Assuming issues like fraud and settlement and wild fluctuations are worked out.
EDIT: I am definitely thinking out loud and on the fly so am ok with some serious rebuttals.
Sambdala|12 years ago
Anyone can take payments using Bitcoin in less time than it takes to sign up for and implement the Stripe API (I would know; I've done both), and you don't have to have a bank account in an approved jurisdiction in order to do so.
They can either do this by using the technology directly or using an intermediary such as Coinbase.
"Bitcoin focuses in on those areas where it has a strategic advantage over cards and ignores those where it doesn't."
Thankfully Bitcoin doesn't care what it's used for, and there will probably be people trying to implement a Bitcoin solution for all these areas; the ones that find a niche will survive, and the ones that don't will fail. Either way, we'll (in theory) end up with the services that Bitcoin is suited for, and the ones that it isn't suited for will continue to use more traditional methods.
drcode|12 years ago
Last I checked, it takes at least a month to apply for and receive a credit card, so this is obviously wrong. Guess what, I could set you up with a bitcoin account and some bitcoins in less than a minute.
> 2.5% doesn't seem to bad for the people running those rails to collect (fraud, global movement etc)
Yeah, as long as something else doesn't come along that's even better at fraud prevention and global movement and only charges 0.01% (like bitcoin, for instance)
saltylicorice|12 years ago
I remember some years ago when people were getting excited about microtransactions, but nobody found a good way to make them work. It seems like Bitcoin might be a viable way of bringing the idea back.
jafaku|12 years ago
I'm not from Arizona, so Stripe isn't an option. But then there is Bitcoin. Countries: All. Requirements: Internet.
quack|12 years ago
Credit cards are an outdated tool. They pass plain text data about a user to authorize a transaction allowing hackers to pull something off like the Target hack. One of the advantages of bitcoin is the ability to digitally authorize a transaction that cannot be reused. In an online marketplace it's far far easier to accept bitcoins than credit cards because you have no fraud risk, which is a HUGE problem in online retail.
I expect a lot of online retail stores to start accepting bitcoin payments at large discounts to cash just for this reason.
steveklabnik|12 years ago
> In an online marketplace it's far far easier to accept bitcoins than credit cards because you have no fraud risk, which is a HUGE problem in online retail.
I'm not sure how you are getting this. Bitcoin is absolutely susceptible to various forms of fraud. Let's make this a bit more concrete: assume eBay accepts BTC. I could sign up for a seller account, make some auction listings, once some people buy them, never ship the goods, and disappear. I could set up a fake seller account, list some fake items, and then also make a fake buyer account, purchase the fake goods with my fake buyer account from my fake seller account, report that everything went well, and now I've laundered some money. That kind of activity can cripple a business.
As a consumer, the irreversability of BTC transactions is a bug, not a feature. You only need to look at the incredible amount of fraud that's happened in the Dogecoin community to see how fraudulent activity can be rampant, and can harm consumer confidence. Consumers expect the ability to be able to initiate a chargeback when fraudulent activity happens. You can't do that with just plain old BTC. When I was home over the holidays, the local TV station ran a story about how you should be using credit cards rather than debit cards to purchase things online, specifically because the credit cards' chargeback policies are often better. "With a credit card, you'll have the money taken off your statement, but with a debit card, it could take over two weeks to get your money back." etc.
Bitcoin is digital cash. Online stores don't allow you to mail them an envelope with $20 inside, because that would be kind of ridiculous for all parties involved. It's only when certain financial instruments are built on top of Bitcoin that have the same kinds of consumer protection and regulatory compliance built in.
mcfunley|12 years ago
I currently work for a large online marketplace. A very typical fraud scenario (maybe the most common) is someone collecting payment for an item that they don't actually possess. This would only be harder to deal with and correct if the payment were disbursed to an anonymous seller in bitcoins.
diminoten|12 years ago
If Bitcoin == cash, what does a storefront do if someone comes to them and says "my stolen cash was used to buy items here"? Usually nothing, yes? Is that what we're saying is the burden of responsibility for an online store with Bitcoin?
sliverstorm|12 years ago
Reversable transactions moves the onus of security to the people who can really do something about it. A consumer can only chose "purchase or do not purchase", whereas a merchant can elect to use (for example) more secure payment methods and stronger identity verification.
gizmo686|12 years ago
saalweachter|12 years ago
Bitcoin includes two methods to pay miners for the infrastructure costs of running the network: mining rewards and transaction fees. The idea is to bootstrap the network off of mining rewards, and then switch to relying on transaction fees in the future, as Bitcoin reaches its limit of 21 million coins.
The problem is that mining rewards are currently very, very non-negligible, even if they're decreasing. In 2012, the Bitcoin supply increased by over thirty percent. In 2014 another 1.3 million Bitcoins will be minted and sold by miners to pay for the cost of operating the bitcoin network. At current prices, that's nearly a billion dollars.
As mining rewards continue to decrease, that billion dollars a year is going to need to be made up through transaction fees. Mastercard takes in less than 8 billion a year, so those transaction fees are probably going to be substantial.
modeless|12 years ago
hippich|12 years ago
If this continue to roll, same might be applied to many other areas I believe.
It is just my random fantasy at this moment, but why we will need enforcement, if we will have guarantied income in bitcoins and laws system built same way as bitcoin (i.e. opensource and agreed to use by most people) and law enforcement as a function of guaranteed income amount.... Just random thought.
or finally having AI which can exist on its own, buy components of its environment (i.e. machines, networks, etc)
I believe what is emerging right now as a Bitcoin is much wider phenomena than just a way to avoid pay taxes and inflation.
pron|12 years ago
Also, your ideas about an AI-directed or general-consensus utopia are nice but naive. People don't usually agree on what utility function you'd want to maximize, as there is no "right way" for a lot of things that matter to people. Would your Bitcoinish utopia allow late-term abortions? Or school prayer? Or same-sex marriage? Politics is a constant battle of values, many of them are deeply emotional.
But Dixon's idea of Bitcoin as internet pocket-money is actually something I can live with.
wsxcde|12 years ago
And as far the programmable money idea goes, I'd like to see more compelling applications than M of N transactions or escrow. The examples I've seen so far seem rather unexciting.
ed: Maybe cdixon's real point is that the technology behind bitcoin is disruptive to the financial industry? I can get behind this, and I'm waiting to see how the government-backed bitcoin clones fare.
drcode|12 years ago
Yes, the risk of fraudulent creation of bitcoins or of double spending of a well-confirmed bitcoin are essentially zero (assuming no major flaw in the current science of cryptography.)
Also, the odds of stolen identities (name/address/birthdate/ssn) would be zero, since those are not needed for sending bitcoins.
So yes, fraud will be a lot lower with bitcoin.
nicholas73|12 years ago
Bitcoin has nothing backing it but an artificial supply limitation. That in itself is not a solution because its monetary base cannot possibly grow at the rate overall goods do, and thus have a stable price point.
andrewla|12 years ago
For a limited class of taxes, namely, taxes directly denominated in a currency (like property taxes), the taxability of a currency adds to the demand for that currency. But for the most part, since non-local currency transactions and barter transactions are taxed at the effective exchange rate / fair value, the fact that taxes are collected in dollars would seem to neither hurt nor help the currency.
That said, in summary, the "artificial supply limitation" applies to both Bitcoin and dollars, with dollars relying purely on trust that America will not increase the money supply unnecessarily. That inflation has actually been mild is a "bug" in the system -- the Fed is deliberately trying to spur inflation, and has not been having success, for reasons that nobody (including themselves) completely understands. The calculable probability of return that you refer to has been pretty reliable (just like MBS's in 2006, couldn't resist), so that is true, but I don't see that being related to the taxability of the currency so much as to the lack of apparent inflation compared to the nominal returns on sovereign debt.
The monetary base argument also seems specious; M0, the "monetary base", is not generally considered (except by non-mainstream economists) to be all that significant compared to the higher-order money supply factors caused by dollar-denominated assets of varying liquidity. Once (or if) Bitcoin develops a credit market, then the medium-term effective money supply will grow and shrink as the market demands.
adventured|12 years ago
http://www.shadowstats.com/alternate_data/inflation-charts
It's only mild if you use their fraudulent CPI accounting, and only if you use the latest version of it, designed solely to hide inflation. If you use the 1980 CPI we're running at 9% inflation, which is not mild at all. In fact, Volcker would have raised rates long ago to fight that level of inflation.
It's exactly the same way they commit fraud in obscuring the real unemployment rate - the U6 - while referring only to the U3 anytime they want to talk about the economy. 14% vs. 6.8% is a dramatic difference, and it only works because they hide the people that have fallen out of the labor force.
grovulent|12 years ago
In any case, I think it's entirely possible that you're wrong, and I've written a long argument against your claim if you're interested:
http://reviewsindepth.com/2013/12/bitcoin-krugman-and-the-me...
The TLDR is that yes, historically currencies have required intrinsic value or government backing of some kind - but it is not an economic law of nature that a currency has to be backed as such. If you can get the economic costs of securing agreement over a currency, then a currency of "mere agreement" is possible. Given that the internet and the design of Bitcoin itself have dramatically reduced those costs - it may actually have a shot at gaining wide acceptance.
pault|12 years ago
possibilistic|12 years ago
1) Is there a "reference value" in terms of how much transaction fee you have to pay to make a payment from one bitcoin/altcoin address to another?
2) Is there a "message" payload that would allow us to include JSON or transaction details? I've read that it costs a larger fee for more bytes in a transaction, so I'm assuming you can add whatever you want to the transaction.
3) When I last made a transaction with an altcoin [1], it got "split" to two addresses. One of these addresses was not my target receiving account nor an address that I owned. Does anyone know why this other address got coins? Does this happen in many/all cryptocurrencies?
4) If I made a payment gateway that created a unique address for every user to send payments to, would it be unreasonably expensive to collect all of these funds into a single address later? (N user payment accounts * 1 outbound transaction => Large Central Account/Wallet)
[1] http://dogechain.info/address/DLqfuYFwVmroo4oaiVU9oSGTjsEBvQ...
stuhood|12 years ago
2) As of recently [b], yes... you can add a small amount of junk data
3) When you send a transaction using input address(es) that don't add up to exactly the desired amount, there will be some "change", which needs to go to a new address. Thus, some of your change comes back to you at a new address.
4) Yes, that's possible. But you probably don't want to do that, since it leaks information [c]
----
[a] subject to some limitations: https://en.bitcoin.it/wiki/Transaction_fees#Sending
[b] https://bitcoinfoundation.org/blog/?p=290
[c] https://medium.com/p/7f95a386692f
neals|12 years ago
And to me, the great thing is, that there is no real reason to hate it. There's not company of brand that you can hate, it's just people and ideas.
mbesto|12 years ago
In other words, better wealth distribution? This is precisely what libertarians are fighting for, no?
Playing the devil's advocate here - couldn't this argument be turned around to say something like "That’s money that could be reinvested in banks which hire the best people to find the best and most efficient use of capital."? (as opposed to consumers or small business owners who can't)
sliverstorm|12 years ago
unknown|12 years ago
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unknown|12 years ago
[deleted]
tomasien|12 years ago
By removing them and decentralizing the banking process by centralizing it into a third party (which could be many third parties), I think we'll allow anyone who wants to start a bank of any size to compete for marketshare with the big boys by providing better services.
suedadam|12 years ago
radicaldreamer|12 years ago
In this paradigm, would you rather be holding US cash or bitcoins (or something else) if there was a political or economic crisis?
infruset|12 years ago
diminoten|12 years ago
Anyway, Bitcoin may not save the world, but if it does anything like what this blog post says, it may very well save the Internet from the advertising platform it's become.
taylorhou|12 years ago
this is the internet. make it happen.
drinkzima|12 years ago
If bitcoin intends to be a cash-like currency, the more apt fee comparison would be swiping ATM cards, which are much closer to 1% (rather than credit card fees of 2.5%+).
chaseadam17|12 years ago
Will Bitcoin emerge as the predominant online currency of the 21st century? Who knows? But it'll solve a lot of hard problems, and as a result, something will.
maaku|12 years ago
[0]: http://freico.in/
iblaine|12 years ago
MrBlue|12 years ago
I stopped reading here.
aggronn|12 years ago
taylorhou|12 years ago
done.
lingben|12 years ago
pacofvf|12 years ago