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Bitcoin is the first Internet-wide payment system where transactions either happen with no fees or very low fees (down to fractions of pennies). Existing paymen
by minimax 13y ago
Bitcoin is the first Internet-wide payment system where transactions either happen with no fees or very low fees (down to fractions of pennies). Existing payment systems charge fees of around 2 percent to three percent
As long as consumers are paid in their local currency and vendors pay their employees, their taxes, and their other costs in local currency, then bitcoin as a payment technology has similar costs as credit cards. Those costs are reflected through exchange fees and bid/offer spreads.
Let's walk through a transaction. I want to buy something that costs 1 bitcoin. The going rate on the bitcoin exchange is $825 bid by $830 offered. I take my cash to the exchange and convert it to bitcoin. Assume exchange fees are .5%. To buy 1 bitcoin I pay $834.15 (fees included). I transfer the bitcoin to the vendor, who then does the reverse transaction. He recieves $820.875 (fees included). The cost for transaction was $13.275 (834.15 - 820.875) which comes out to 1.59%. That is cheaper than the oft quoted 2.5% rate for credit cards but is very much in the same ballpark. If you factor in that some credit cards give you 1% cash back then bitcoin and credit cards are back at basically even in terms of net transaction costs.
With bitcoin as a payment technology, the transaction costs flow to the bitcoin exchanges, market makers, and dealers. A dealer is sort of like an exchange combined with a market maker. The dealer quotes you a price to buy or sell bitcoins and you transact directly (not on an exchange). The dealer, like a market maker, makes money on the bid/ask spread. The only reason I'm going on about this is because one of a16z's big bitcoin investments is in a company called Coinbase, which is a bitcoin dealer. When you buy or sell bitcoins with Coinbase, Coinbase always takes the other side of the transaction. They make money on the bid/ask spread, and in some cases ("instant exchange") they charge you a 1% fee on top. It's a pretty clever business.
Just putting this out here so that everyone understands how the guys out there touting bitcoin for payments plan to make money from the people using bitcoin for payments.
- msvan 13y agoTrue, but the alternative vision is that we cut out the USD<->BTC exchange process entirely. For instance, I could get paid in BTC, then I go to Target and pay for their goods in BTC, whereafter they keep the BTC. But Andreessen Horowitz wouldn't like that, of course.
- arasmussen 13y agoYou can already get paid in BTC too [1] so you don't even have to convert USD -> BTC in the first place. Why wouldn't a16z like that? Wouldn't they love that? If BTC becomes that commonplace then all of these companies they're invested in will skyrocket. [1]: http://www.businesswire.com/news/home/20140113006504/en/BitPay-Announces-Bitcoin-Payroll-API#.Ut7BkGTTmOE http://www.businesswire.com/news/home/20140113006504/en/BitP...
- presty 13y agoI'm guessing msvan means that "Coinbase" wouldn't like that (at least in the short term) since they have a 1% transaction fee
- gnaritas 13y ago> You can already get paid in BTC too Unless your salary is denominated in BTC, i.e. you make the same BTC every paycheck, I'd argue you're still being paid in USD and just using a third party service to hide the exchange from you and deliver your paycheck in BTC.
- lhc- 13y agoIf you noticed though, the article constantly referenced the ability of both consumers and merchants to NOT possess any actual bitcoins. The actual bitcoin is so volatile, not to mention the gold-standard-like deflationary nature of them, that convincing most people that holding onto actual bitcoins rather than fiat currency does not seem to be a16z's goal (which is a good decision on their part). So its hard to argue the merits of the article while basically rejecting one of its main points (that you dont need to hold any bitcoins for it to still be super cheap).
- ye 13y agoYeah, you described pretty much the worst case scenario where everything goes through fiat. But once Bitcoin penetration is significant and people start getting paid in Bitcoin (already happening) and accept it as payment (also already happening), all these exchange fees go away. With fiat you're stuck with the fees forever. Also your 0.5% assumption is wrong. You can place a buy ad on LocalBitcoins and actually buy at below the market rate. Also, coinsigner.com.
- pyvpx 13y agodoes bitcoin have an intrinsic value? if so, what?
- neals 13y agoAh yes, this question has not been asked yet. Such economic insight.
- pyvpx 13y agoperhaps I've yet to find a sufficient answer? ;)
- benajnim 13y agoThe bitcoin network's transaction verification mechanism, and all the hash power behind it (users) does give bitcoin "intrinsic value". Its true value comes from network effect.
- Lambdanaut 13y agoDefine "value", because I'm pretty sure that 99% of globally used currencies won't have this magical "intrinsic value" that you speak of.
- venomsnake 13y agoThe usd has intrinsic value - it saves you from years in jail if you cough up as much as Uncle Sam requires of you every year.
- deleted 13y ago[deleted]
- thinkcomp 13y agoThis is absolutely correct. One other key point: Marc and his portfolio companies (among others) are deliberately evading regulations. Those regulations have real costs, which is why they are worth evading at all. Were companies like Coinbase to actually comply with U.S. law, they'd each have to spend $20 million on money transmission licenses and associated bonds (not including legal fees). These costs are not presently taken into account with a 1% fee structure. Disclaimer: My company is the plaintiff in an ongoing lawsuit about this. http://www.plainsite.org/flashlight/case.html?id=2434524 http://www.plainsite.org/flashlight/case.html?id=2434524
- deleted 13y ago[deleted]
- aqme28 13y agoThis is interesting and the first I've heard of this. Can you elaborate more?
- mr_luc 13y agoHuh. An 'unfair competition' lawsuit by someone with a nominally competing payment product ('FaceCash') ... After reading your CrunchBase profile, where I saw that you have your own competing product, and looking at the list of defendants in that lawsuit, may I just say that while I don't bear you any ill will (and in fact I wish you well), I don't hope that you win this. That doesn't mean much since I base that opinion on so little, but here's my thinking, in case it's useful to you in communicating to others: We need innovation in this space in the worst way possible. The VCs are showing up, and I'm nervous about their interaction with BitCoin. But however unsavory or unfair their motives or tactics, in the fight between traditional 'money transmitters' and bitcoin, the VCs find themselves on the side of the angels, fighting against premature regulation of a potentially world-changing technology. BitCoin is a completely new and different thing, and it provides a lot of capabilities to companies that use it that those companies would otherwise have to do themselves -- and that central banks have to do, as well. Sure, if BitCoin didn't exist, you'd have to do a lot of things yourself that the BitCoin network now makes trivial. But why should those companies be forced by law to pretend that BitCoin and its network don't exist? And don't have the properties that they have?
- kolev 13y agoI got tired arguing with people with vested interest in Bitcoin that Bitcoin is not cheaper. You see a lot of people on Reddit getting super excited buying junk at Overstock and saying: "The banks got nothing!" without realizing that: 1) Coinbase sold their bitcoins at Bitstamp. 2) When more people sell than buy, Coinbase needs to wire money from Bitstamp to their European bank account and then to their US one; 3) Overstock gets an ACH daily from Coinbase; 4) If you got your bitcoins from Coinbase, an ACH was made for the purchase and if Coinbase gets more buys than sells, it needs to daily wire money from their US bank account to their European one, and then from it to Bitstamp. In other words, this over complicated process involves a lot more banking activity than credit cards! I get 1.5% cash back without any limits from my PayPal Debit Card and Coinbase charges me 1% + $0.15 to buy bitcoins.
- toomim 13y ago> In other words, this over complicated process involves a lot > more banking activity than credit cards! No, it's still FAR less banking activity than credit cards. You have no idea what happens behind the scenes when you swipe! Go watch this 11-minute Khan Academy video to see how much banking activity goes on behind the scenes when you swipe your card: https://www.youtube.com/watch?v=IPxQQNyCxas https://www.youtube.com/watch?v=IPxQQNyCxas Bitcoin isn't free, but it's far, far, cheaper than credit cards, and gives far less money to banks.
- kolev 13y agoNo, it's not far cheaper - it just has a different way to compensate its processing costs. In fact, without even considering Coinbase fees, it's still more than credit cards: https://blockchain.info/charts/cost-per-transaction-percent https://blockchain.info/charts/cost-per-transaction-percent
- drcode 13y agoThat's misleading: A lot of those transactions are microtransactions (not possible at all with credit cards) so of course the % will look elevated.
- nipponese 13y agoInvestment related fess are tax deductible. To my knowledge, Visa fees are not.
- nazgulnarsil 13y agowrong, with credit cards you have a 2.5% fee with every single transfer you ever make. A pays B pays C pays D, each step has a fee. With Bitcoin ONLY the people who do fiat exchanges pay a fee, A pays B pays C pays D, only A and D pay a fee. This has massive economic implications if bitcoin starts getting penetration.
- shredfvz 13y agoActually, depending on your respective tax authority's treatment of Bitcoin taxes, it's more like: A pays B (A now owes taxes on realized gains) B pays C (B now owes taxes on realized gains) C pays D (C now owes taxes on realized gains) However, as a commodity with limited supply, BTC may still be a good store of value. Basically what you guys need to realize is Bitcoin only makes sense when you completely disregard "the system". If nobody pays any taxes, nobody does AML/KYC, and everybody uses BTC ubiquitously, then yes, it's a cheaper and more efficient system. What irks me to no end as a proponent of Bitcoin is how many people are into Bitcoin nowadays purely as a get-rich-quick scheme or because it's en vogue. There are real, significant societal conversations that need to be had on a massive scale before Bitcoin makes sense for the average person, and most people just aren't willing to bring that conversation to the forefront. Too busy raising VC.
- return0 13y agoThat's a very valid observation and one of the reasons that bitcoin will accumulate real value as money reserve over time. It will start its mass adoption as an 'intermediate currency', until people get fed up with exorbitant fees and just leave their money as bitcoins. People will understand that there is an inherent trade off between trust and volatility in bitcoin, which is a positive thing. Eventhough companies like coinbase are well positioned to profit from exchange rates, bitcoin is poised to generate much more value than that.
- TomGullen 13y agoIf what you say is true, and will be true in the future when Bitcoin goes more mainstream (I don't think it will hold true for the long term) I'd still rather give my %'s to Bitcoin companies than the banks. And I think a lot of consumers are similarly motivated to do the same.
- minimax 13y agoIf what you say is true, and will be true in the future when Bitcoin goes more mainstream I wasn't making a prediction. I was just doing the math for bitcoin-as-payment-technology plugging in what I think are reasonable values. I'd still rather give my %'s to Bitcoin companies than the banks This is a popular sentiment on HN and I'm not quite sure I understand it, but if Coinbase (or similar) companies get big enough the banks will just buy them.
- nroose 13y agoI guess I am missing something. How do you get your money to the exchange and how do you get it back? If you are buying 1 bitcoin for $830, how do you get your $830 to the exchange? Do you give them your credit card number? Your paypal account? Don't they then have to pay the 2-3% to the credit card processor? And then I guess if you sell one bitcoin, how do they get your $825 to you? Do they send you a check? Do they wire it to you? Do they pay the costs for that transfer back to you? Or do you just assume you will keep the bitcoin and use it to buy something? And then how are we calculating the value of it vs. $? Do merchants use the same exchange rate or do they get to decide on the fly what exchange rate they are going to use? How do we know we are not losing at least 2% on that?
- ronaldx 13y agoFurthermore: By making transactions in Bitcoin, you lose legally-mandated formal protection such as chargebacks and FDIC insurance. Despite what Marc says in the article, I find this is a big minus for Bitcoin on a day-to-day transaction scale. Traditional banking is pretty robust against bad actors, but if I put my Bitcoin in the wrong place for just a second... it's gone. A great deal of infrastructure is needed to solve these problems, which is partly why it's a good bet for Marc to invest: if successful, there is potential for an uncompetitive oligopoly even compared to traditional banking.
- marcamillion 13y agoI think the obvious flaw in your argument is that the market is very underdeveloped for BTC exchanges. As with any other market, as competitors file in the bid/ask spread will be squeezed significantly. See the currency market. Also...as positive network effects kick in as Marc said, and more merchants accept it, there will be less incentive to convert to USD. That's where the real value is. As the network of merchants grows, then the transaction costs go to 0 - i.e. in a BTC to BTC world. I expect companies to come up with products/services that allow you to 'lock in' prices without having to do conversions immediately (kinda like options). So you can expect to see much more innovation in this space. Either way...what is clear is that the current spread is the worst that it will ever be because as the network grows that will shrink.