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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

by minimax 13y ago

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?

Sambdala 13y ago
...currently. 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.
- BlackDeath3 13y ago
  And that's unfortunate. It's interesting and somewhat satisfying to see the get-rich-quick people kind of people try to get into Bitcoin, and instead get burned. There is merit to the system, but a lot of people just don't care.
  - Sambdala 13y ago
    I'm not entirely sure what point you're making?
    - BlackDeath3 13y ago
      You seemed to be implying that most peoples' interest in BTC is related more to its inflating exchange than anything else. I was remarking that I like to see willful ignorance, people who care not about actually understanding BTC, be punished for it. At any rate, there need not be any point to what I'm saying. Sometimes, a comment is just a comment.
      - jusben1369 13y ago
        I think his point was more "Most people aren't using Bitcoin because it doesn't provide enough value (utility) and there's not a lot of services built around it (yet)" The get rich quick folks you talk about probably do view that as enough utility to overcome the current barriers to use and thus aren't being burned and punished.
      - Sambdala 13y ago
        Some people are interested in the rising price, some people are interested in the interesting things that can be built with and/or on top of it, and some people are interested in some other aspect of the technology that has sprung up around it. Before you get too gleeful though, I would wager only a small percentage of people who have ever bought Bitcoins have sustained a loss as of today. Besides, there's nothing wrong with putting money behind a technology and then reaping either a gain or a loss based on how successful it becomes. My actual point was that you can't look at what the fee structure / usability / etc is today and conclude there's nothing useful there. This is especially true with the more common argument of, "Sure, I can see why someone would find it mildly useful for use a, b, or c; but I don't think it's useful today for more mainstream purpose x, y, or z, so I think it's worthless." Especially when (so far) the abc list keeps growing and the xyz list keeps shrinking. I'm not sure where that trajectory ends, but I personally think there's a lot of interesting problems that will be solved with crypto-currency.
cdixon 13y ago
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.
- kordless 13y ago
  I like this analogy Chris. We're already seeing an uptick in interest by developers around the platform: http://blog.bitcoinpulse.com/bitcoin-big-hit-with-developers-predicting-the-future-with-github/ http://blog.bitcoinpulse.com/bitcoin-big-hit-with-developers.... The most likely immediate use of your "Internet Spending Money" would be online services including apps, games, online advertising, storage, hosting and more.
  - cdixon 13y ago
    I also think this issue is going to become more urgent as native mobile apps that do have a "global" (OS-wide) payment system become more dominant. Open web needs something analogous to compete.
- tvladeck 13y ago
  Chris, are you looking into non-currency uses for BTC, a la Albert Wenger [0]? My own feeling is that the protocol (secure ledger) is more generally valuable and can likely be put to work in a lot of uses. Is that your feeling as well or are you primarily excited in its use as cash? [0] http://www.usv.com/posts/bitcoin-as-protocol http://www.usv.com/posts/bitcoin-as-protocol
  - cdixon 13y ago
    Definitely interested in lots of other uses for the ledger. If you or someone you know is working on something, we (a16z) would love to talk. I'm hoping next year we'll see a lot more startups building on top of the Bitcoin protocol.
jv22222 13y ago
I think the larger point is if there is enough commercial acceptance of bitcoin then there's no need for a conversion, we just use bitcoin.
codex 13y ago
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.
analog31 13y ago
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.
Spooky23 13y ago
Good point. 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?
johmas 13y ago
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.
- minimax 13y ago
  That is certainly an interesting datapoint, though paying your employees in bitcoin... I'm not sure how I feel about that in ethical terms. What would you as an employer do if you paid someone on Friday and on Monday that paycheck only bought half as much bread as it did on Friday? Also doesn't it make income/FICA tax kind of a pain?
  - nazgulnarsil 13y ago
    The employer as paternal unit paradigm needs to die. If the employee wants to take a risk they are an adult and should judge the merits of the scheme for themselves.
  - johmas 13y ago
    That's a good question. We don't exactly view it as an ethical issue. Anyone on the team can opt-in to whatever percentage of their compensation they'd like to be paid in bitcoin. Currently no one is taking 100%. We do educate how the currency functions and the risks there may be.
    - saalweachter 13y ago
      Do you let them specify any of their contracts in Bitcoin? Eg, a salary of $X + Y Bitcoins?
  - meowface 13y ago
    There are definitely a lot of risks involved in accepting Bitcoins as a salary. Anyone doing it should fully research the currency and be aware of the risks before ever accepting such an option.
salient 13y ago
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.
hyp0 13y ago
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.
nwzpaperman 13y ago
Technically, you'd be looking at BTC fiat CONVERSION cost + traditional TRANSACTION cost on the secondary party's ensuing transactions. Fundamentally, money is nothing more than a unit by which to quantify value. Fiats can temporarily solve some problems like the issuer's spending constraint caused by a lack of units. The problem is that the unit is not standardized and thus becomes undesirable for trade as contracts for future goods/services become speculative beyond the operating complexities. Which is longer: 2.54 cm or 1 inch? The traditional transaction cost of the legacy financial system depend on the legal system perpetuating. Without the legal system and administrators (government) and its users (everyone), there are no contracts, no taxes and no fiat money. This is why global legal harmonization is critical in the context of preserving the status quo. As discussed in the HyperMusic thread, changes in IP law in one "stable" country can engender massive economic flows to less regulation or more regulation depending upon who is favored. BTC and its forks represent a parallel financial system that could possibly facilitate the preservation of much of the world's functionality in the event that the present legal system doesn't survive its next iteration to global force.
ssmoot 13y ago
What is VISA? It's a group of Processors right? 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.)

by minimax 13y ago

Sambdala 13y ago

...currently. 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.

BlackDeath3 13y ago
And that's unfortunate. It's interesting and somewhat satisfying to see the get-rich-quick people kind of people try to get into Bitcoin, and instead get burned. There is merit to the system, but a lot of people just don't care.
- Sambdala 13y ago
  I'm not entirely sure what point you're making?
  - BlackDeath3 13y ago
    You seemed to be implying that most peoples' interest in BTC is related more to its inflating exchange than anything else. I was remarking that I like to see willful ignorance, people who care not about actually understanding BTC, be punished for it. At any rate, there need not be any point to what I'm saying. Sometimes, a comment is just a comment.
    - jusben1369 13y ago
      I think his point was more "Most people aren't using Bitcoin because it doesn't provide enough value (utility) and there's not a lot of services built around it (yet)" The get rich quick folks you talk about probably do view that as enough utility to overcome the current barriers to use and thus aren't being burned and punished.
    - Sambdala 13y ago
      Some people are interested in the rising price, some people are interested in the interesting things that can be built with and/or on top of it, and some people are interested in some other aspect of the technology that has sprung up around it. Before you get too gleeful though, I would wager only a small percentage of people who have ever bought Bitcoins have sustained a loss as of today. Besides, there's nothing wrong with putting money behind a technology and then reaping either a gain or a loss based on how successful it becomes. My actual point was that you can't look at what the fee structure / usability / etc is today and conclude there's nothing useful there. This is especially true with the more common argument of, "Sure, I can see why someone would find it mildly useful for use a, b, or c; but I don't think it's useful today for more mainstream purpose x, y, or z, so I think it's worthless." Especially when (so far) the abc list keeps growing and the xyz list keeps shrinking. I'm not sure where that trajectory ends, but I personally think there's a lot of interesting problems that will be solved with crypto-currency.

cdixon 13y ago

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.

kordless 13y ago
I like this analogy Chris. We're already seeing an uptick in interest by developers around the platform: http://blog.bitcoinpulse.com/bitcoin-big-hit-with-developers-predicting-the-future-with-github/ http://blog.bitcoinpulse.com/bitcoin-big-hit-with-developers.... The most likely immediate use of your "Internet Spending Money" would be online services including apps, games, online advertising, storage, hosting and more.
- cdixon 13y ago
  I also think this issue is going to become more urgent as native mobile apps that do have a "global" (OS-wide) payment system become more dominant. Open web needs something analogous to compete.
tvladeck 13y ago
Chris, are you looking into non-currency uses for BTC, a la Albert Wenger [0]? My own feeling is that the protocol (secure ledger) is more generally valuable and can likely be put to work in a lot of uses. Is that your feeling as well or are you primarily excited in its use as cash? [0] http://www.usv.com/posts/bitcoin-as-protocol http://www.usv.com/posts/bitcoin-as-protocol
- cdixon 13y ago
  Definitely interested in lots of other uses for the ledger. If you or someone you know is working on something, we (a16z) would love to talk. I'm hoping next year we'll see a lot more startups building on top of the Bitcoin protocol.

jv22222 13y ago

I think the larger point is if there is enough commercial acceptance of bitcoin then there's no need for a conversion, we just use bitcoin.

codex 13y ago

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.

analog31 13y ago

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.

Spooky23 13y ago

Good point. 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?

johmas 13y ago

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.

minimax 13y ago
That is certainly an interesting datapoint, though paying your employees in bitcoin... I'm not sure how I feel about that in ethical terms. What would you as an employer do if you paid someone on Friday and on Monday that paycheck only bought half as much bread as it did on Friday? Also doesn't it make income/FICA tax kind of a pain?
- nazgulnarsil 13y ago
  The employer as paternal unit paradigm needs to die. If the employee wants to take a risk they are an adult and should judge the merits of the scheme for themselves.
- johmas 13y ago
  That's a good question. We don't exactly view it as an ethical issue. Anyone on the team can opt-in to whatever percentage of their compensation they'd like to be paid in bitcoin. Currently no one is taking 100%. We do educate how the currency functions and the risks there may be.
  - saalweachter 13y ago
    Do you let them specify any of their contracts in Bitcoin? Eg, a salary of $X + Y Bitcoins?
- meowface 13y ago
  There are definitely a lot of risks involved in accepting Bitcoins as a salary. Anyone doing it should fully research the currency and be aware of the risks before ever accepting such an option.

salient 13y ago

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.

hyp0 13y ago

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.

nwzpaperman 13y ago

Technically, you'd be looking at BTC fiat CONVERSION cost + traditional TRANSACTION cost on the secondary party's ensuing transactions. Fundamentally, money is nothing more than a unit by which to quantify value. Fiats can temporarily solve some problems like the issuer's spending constraint caused by a lack of units. The problem is that the unit is not standardized and thus becomes undesirable for trade as contracts for future goods/services become speculative beyond the operating complexities. Which is longer: 2.54 cm or 1 inch? The traditional transaction cost of the legacy financial system depend on the legal system perpetuating. Without the legal system and administrators (government) and its users (everyone), there are no contracts, no taxes and no fiat money. This is why global legal harmonization is critical in the context of preserving the status quo. As discussed in the HyperMusic thread, changes in IP law in one "stable" country can engender massive economic flows to less regulation or more regulation depending upon who is favored. BTC and its forks represent a parallel financial system that could possibly facilitate the preservation of much of the world's functionality in the event that the present legal system doesn't survive its next iteration to global force.

ssmoot 13y ago

What is VISA? It's a group of Processors right? 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.)