Why Bitcoin Matters

http://mobile.nytimes.com/blogs/dealbook/2014/01/21/why-bitcoin-matters/

315 258 13 years ago

mobile.nytimes.com

"Finally, I’d like to address the claim made by some critics that Bitcoin is a haven for bad behavior..."

Just need more examples like Dogecoin funding the Jamaican Bobsled team[1] to keep the narrative going in the right direction.

[1]http://www.theguardian.com/technology/2014/jan/20/jamaican-b...

willholloway• 13 years ago

I've become a big Dogecoin proponent. I believe that Dogecoin will add another dimension to our online experience, and open up avenues for content creators to be rewarded that did not exist before.

I'm all in.

adrianwaj• 13 years ago

For sure, SoundCloud would be an awesome place for more tipping.

Aaronn• 13 years ago

Non-mobile version: http://dealbook.nytimes.com/2014/01/21/why-bitcoin-matters/

easy_rider• 13 years ago

The criticism that merchants will not accept Bitcoin due to its volatility is also incorrect. Bitcoin can be used entirely as a payment system; merchants do not need to hold any Bitcoin currency or be exposed to Bitcoin volatility at any time. Any consumer or merchant can trade in and out of Bitcoin and other currencies any time they want.

I don't understand this. Someone is taking the risk right now. Currently it's the exchanges and merchants directly, because they rely on the exchanges. With high volatility merchants wouldn't be getting about the same amount in 1 hour turnover time right now. Everything in the process should be synced according to current exchange rates. Obviously technology makes this possible, but the technical implementation effort would be huge for widespread adoption.

BTC as it stands now seems to be somewhat stabilizing, but anything is still possible until it becomes more widespread and trusted. Kind of paradoxical.

eatitraw2• 13 years ago

I don't understand this. Someone is taking the risk right now.

Correct.

Currently it's the exchanges and merchants directly, because they rely on the exchanges.

Incorrect. There is the solution: https://bitpay.com/ , which automatically does conversion for a small fee. Buyers pay in bitcoin, but sellers receives fiat money(e.g. USD). The risk is taken by bitpay, sellers always receive fixed amount in fiat money, and buyers have the window of 15 minutes to make BTC payment.

tptacek2• 13 years ago

"Fiat money" is as I've seen it used a political message, used most often to assumptively introduce the idea that government-backed currency is suspect. But fiat currencies are simply currencies that aren't backed by collateral. To the extent that you believe it's a currency and not a tradable instrument that happens to have interesting barter and liquidity characteristics (right now), Bitcoin is a fiat currency as well.

scott_s• 13 years ago

How "automatically"? Seconds? Minutes? Hours? In other words, how much time passes between the customer paying X bitcoins, and those are converted into Y USD?

candybar5• 13 years ago

The part about bitcoin entirely as a payment system makes no sense, because both the consumer and the merchant need an existing payment system, to convert into and out of bitcoin for this to work, in which case bitcoin is just a middleman doing no work. I suppose some payment systems are localized and bitcoin can work as a global bridge, but that seems like a trivial legal hack that will be shut down soon.

alextingle2• 13 years ago

The merchant needs a payment system that they trust, and the customer needs a payment system that they trust. But the payment systems don't really need to know or trust each other. He's saying that Bitcoin turns payment from a many-to-many problem, into a one-to-many problem.

candybar5• 13 years ago

Except, you're not getting around the problem here either - I need to find a real money payment system that the bitcoin exchange and I both trust and and the merchant needs to find a real money payment system that they and their bitcoin exchange both trust. You're doubling the problem no matter how you look at it, because the problem of you sending money to the bitcoin exchange is the exact same problem as you sending money to the merchant.

baddox2• 13 years ago

in which case bitcoin is just a middleman doing no work

So you're saying that, pessimistically, all Bitcoin could do is disrupt the credit/debit card companies? That's very pessimistic, and still a very big deal.

candybar5• 13 years ago

No that doesn't work either because you need an existing payment system to deposit money into a bitcoin account at an exchange. You can't disrupt something by requiring your customer to use it.

vasilipupkin3• 13 years ago

It sounds to me like what we need is a single place where I can deposit my credit card info, which I trust is secure, and then all the merchants transact with me by doing some version of auth against that web service/api without ever exchanging any credit card numbers. For consumers this is great, since they never have to update their credit card info on 10 million places. It's good for businesses, too. That kind of service would undercut one of the main premises behind bitcoin usefullness.

riemannzeta5• 13 years ago

This is my issue with A16Z's claim also. So Bitcoin eliminates one of the failure modes of digital transactions -- namely, confirming that a particular ID indeed is associated with a particular account value -- in a way that avoids the need for intermediaries. That's great, but that's not the most important failure mode, and only part of what is needed to solve the Byzantine Generals' Problem. The generals need not only to authenticate the sender and content of the message, but confirm receipt and intent to act based on that content to the sender. It's that second step that I don't see Bitcoin solving. We still need intermediaries to handle chargebacks that result from fraud by either buyer (I didn't authorize this) or seller (this isn't what I agreed to pay for).

VMG3• 13 years ago

Bitcoin allows for 2-out-of-3 (theoretically also m-out-of-n) transactions. Buyer and seller can agree on an mediator for dispute settlement.

https://www.bitrated.com/

jt2190• 13 years ago

  > The criticism that merchants will not accept Bitcoin 
  > because of its volatility is also incorrect. Bitcoin can be 
  > used entirely as a payment system; merchants do not need to 
  > hold any Bitcoin currency or be exposed to Bitcoin 
  > volatility at any time. Any consumer or merchant can trade 
  > in and out of Bitcoin and other currencies 
  > any time they want.

I'm having trouble understanding this point of view because it implies that someone, somewhere is always willing to buy in to BTC, no matter the circumstances. So, two questions:

1. Is BTC somehow immune to currency crises like many government-backed currencies have experienced? 2. If BTC is not immune to crises, have any parties emerged that will act to "defend" BTC in a crisis?

dmix• 13 years ago

1. no, but stability will increase with mass adoption. It's not tied down to one specific geographic market as nation-state currencies. Once it's based on global trade then it requires global instability, which is a higher threshold. USD has a similar global stability because of that vs other currencies.

2. no, how would this would decentrally? You could pay into an insurance policy maybe, that pays out in alternative currencies?

kaonashi2• 13 years ago

but stability will increase with mass adoption

I don't see how this is realistic; the needs for bitcoins will be endogenous to the people using it, whereas the supply increases based on arbitrary constants (until it stops increasing altogether).

That says to me that the more people that use it, the more volatile it will become (especially after the supply freezes). When it becomes less volatile, it's merely because the needs coincidentally line up with the supply (i.e. when transaction volume drops -- fewer people 'using' it).

pdq• 13 years ago

Coinbase (and others) provide merchant services, whereby they accept a small (1% if I recall) fee to convert BTC into USD, at the current spot price. So users can pay for a product in BTC, and the merchant receives USD at the spot price of when the transaction occurred (minus fees).

This eliminates BTC price fluctuation from a merchant who does not want to speculate.

baddox2• 13 years ago

I'm having trouble understanding this point of view because it implies that someone, somewhere is always willing to buy in to BTC, no matter the circumstances.

Why does it imply that? You could also say that the existence of cash USD implies that someone somewhere is always willing to buy in to USD, no matter the circumstances. Obviously, this won't literally always be the case, and there are always circumstances where people won't accept USD.

thomasmeeks• 13 years ago

Basically you just ask for a varying amount of Bitcoin based on the current value and immediately turn the Bitcoin received into US Dollars. Coinbase is a good example of a service that makes this easy.

As an example, you want $10 for a widget. At 10AM that might be .001 Bitcoin, at 1PM that might be .0015 Bitcoin. You still get your $10. If there is a Very Bad Event, then that $10 widget might cost 7000 Bitcoin, you are still getting your $10.Or close to it.

Generally your big risk is the value of Bitcoin falling through the floor in a matter of minutes and your system (or third party provider) failing to keep up with such a change.

To answer your questions.

1. No. Bitcoin's value fluctuates pretty wildly and there's dozens of things that could cause the currency's value to implode. I think the challenges and risks for Bitcoin are different from government-backed currencies, but it is by no means immune to a crisis (has already had a few).

2. No. I'm sure some organizations and individuals would prop up Bitcoin. But there's no central authority with policy-making power acting on behalf of Bitcoin.

Generally I think Bitcoin is going to make it. There's a lot of interest in the currency from the financial sector, and a lot of money flowing into companies that deal as service providers for the currency. Basically, enough people have a vested interest in it that it is worth taking seriously. But that's just my guess at the moment.

Spooky232• 13 years ago

No and no.

One of the big reasons that the US moved towards central banking and eventually paper currency is stability.

Any finite commodity is subject to rapid swings when supplies are constrained. In recent memory, copper, silver and electricity are all commodities whose price went crazy when either demand got wacky high, or supplies got very limited.

In history, the economy was traditionally very vulnerable to economic shock in the fall, because when agriculture dominated the economies small banks were starving for capital as they waited for the harvest (and payment of crop loans). Any hiccup would rapidly cascade through the system and lead to bank runs.

With the fiat system, capital is made available to smooth the bumps. Instead of a depression and widespread bank failures in 2008, the central banks flooded the markets with capital and blunted the impact of the crisis and avoided panic.

Nashhhh4• 13 years ago

This is true, but the end of your post implies that recessions have become rarer and less pronounced in a fiat system. They haven't. In other words, sure, central banks "flooded the markets with capital and blunted the impact of the crisis and avoided panic", but what system was in place that allowed the manic colossal 1995-2008 housing bubble to take place? Did it not have anything to do with central banking policies, say, I dunno, incredibly low interest rates for a decade?

The interesting part about your post is that it is in response to OP asking if people would be willing to buy BTC at any price (to which you responded no). But you gave the perfect example of mass psychology encouraging people to hoard an asset they believe to be safe: in this case, in 2008, it was the USD. Despite 'printing' (yes, I get it, it's not literally printing) massive amounts of USD, the world ate it up because the USD it the world's reserve currency and they (correctly) assumed that if the US is in trouble, every one else's currencies were in waaaaay worse shape. Thus the insatiable demand for something that was becoming 5x less scarce.

Now, if Bitcoin ever reaches that level of belief in its capacity as a store of value (for example, based on the fact that for the first time ever you have a currency/scrip/asset/commodity whose entire supply is predetermined, fixed and immutable politically, could you not conceive that it might to have buyers flock to it? (not asking if it's probable, only if it's possible; I'd agree that at this stage this isn't the case)

vasilipupkin3• 13 years ago

So, one big reason for merchants to accept bitcoins is the high fees charged by credit card processors? So, suppose they cut the fees? Does that kill bitcoin ?

pmorici• 13 years ago

No, there are other things about Bitcoin that are highly desirable from a merchant's perspective even ignoring fees.

1. There are no unilateral charge backs with Bitcoin and

2. You don't have to worry about keeping sensitive customer information safe. It is impossible for you as a merchant to be responsible for fraud against your customers due to stolen credit card numbers if they are using Bitcoin. It has the same properties of a Cash transaction minus the in person requirement and the potential for easy theft. In fact if you do it right it would be nearly impossible for dishonest employees to steal money from your business.

Taken in isolation it's easy to say well that isn't such a great advantage but when you look at Bitcoin vs anything else on the whole the advantages are clear.

chaz• 13 years ago

But why would I want Bitcoin as a consumer? I want chargebacks if the merchant screws me over, I get a rebate/miles/points with every purchase, and some cards offer warranties and return protection. AmEx does a pretty good job at flagging fraudulent activity, and I'm off the hook for any related charges. Plus, there's still a risk of losing Bitcoin. The right bug/malware/vulnerability on my laptop or my smartphone can mean my BTC is lost or stolen. We all know that security is hard, and at best inconvenient -- and that people are lazy.

If there are clear advantages to the vendor, it should be reflected in the price to the consumer. A 1% discount may get me interested, considering they'd save more than that on cc transaction fees alone.

sskates• 13 years ago

On any payment network the fees are a result of the risks of credit card fraud. Card processors can't cut fees without losing money. It's an efficient market as it is.

vasilipupkin3• 13 years ago

Wouldn't then all the fraud risks move to those businesses which take consumer credit cards and exchange them for bitcoins. So why would the aggregate fraud cost in the system be any lower ?

Also, I seriously doubt that 2.5% fee is all cost. Visa/Mastercard, etc. are massively profitable - they have plenty of room to cut those fees

SilasX2• 13 years ago

I thought the credit card fees were mostly to cover the escrow-like service they provide, in which you can challenge a merchant who fails to keep their end of the bargain but insists on billing you anyway?

TomGullen2• 13 years ago

It's an efficient market as it is.

That's a little naive.

minimax3• 13 years 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.

thinkcomp2• 13 years ago

This 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

aqme28• 13 years ago

This is interesting and the first I've heard of this. Can you elaborate more?

mr_luc2• 13 years ago

Huh. 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?

msvan• 13 years ago

True, 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• 13 years ago

You 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/BitP...

lhc-• 13 years ago

If 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).

ye8• 13 years ago

Yeah, 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.

pyvpx2• 13 years ago

does bitcoin have an intrinsic value? if so, what?

kaonashi2• 13 years ago

people start getting paid in Bitcoin (already happening) and accept it as payment (also already happening), all these exchange fees go away.

Still have to exchange for taxes.

minimax3• 13 years ago

You can place a buy ad on LocalBitcoins and actually buy at below the market rate.

Maybe in your town, but for me the spread on LocalBitcoins is hilariously huge. I just punched in my city (Chicago) and got $818 bid by $850 offered. That's a $32 spread, which is much larger than I see on any of the online exchanges.

edit: Actually I think you are talking about the equivalent of a resting order (placing an ad) which isn't what I'm talking about. My scenario involves crossing the spread, which in the localbitcoins case would mean answering an ad.

edit 2: I encourage everyone who hasn't seen localbitcoins to go check out the ads there. "Hilariously sketchy" is about the best way I can describe it.

kolev6• 13 years ago

LocalBitcoins.com is one of the most expensive places to acquire (only small quantities of) bitcoins... and the riskiest.

mgulaid• 13 years ago

But the bottom line argument is that when everyone gets paid in the same currency, the exchange fees go away. This can happen with US $ or Yan.

atmosx5• 13 years ago

[...] But once Bitcoin penetration is significant [...]

I think we passed that point, there is an adoption of bitcoin, but it will NEVER be used as a currency IMHO.

I really hope the price stops fluctuating so we can use it as a value storage medium, but even that can be disputed.

walden42• 13 years ago

The idea is that bitcoin gives you the option of value-added services, like conversion and what not, but you definitely don't have to use them. With fiat you don't have that option.

I accepted bitcoin for some freelancing work and I didn't convert it.

kolev6• 13 years ago

I 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• 13 years 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

Bitcoin isn't free, but it's far, far, cheaper than credit cards, and gives far less money to banks.

drcode8• 13 years ago

I run a bitcoin ecommerce site without converting to fiat. Just because Overstock wants to pay additional overhead doesn't mean everyone else has to.

VMG3• 13 years ago

Your points are fair when you look at national payments (with the current adoption), but the math changes when looking at international money transfer.

rib3ye2• 13 years ago

Investment related fess are tax deductible. To my knowledge, Visa fees are not.

nazgulnarsil• 13 years ago

wrong, 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.

shredfvz2• 13 years ago

Actually, 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• 13 years ago

That'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.

TomGullen2• 13 years ago

If 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.

minimax3• 13 years ago

If 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• 13 years ago

I 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• 13 years ago

Furthermore:

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.

marcamillion2• 12 years ago

I 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.

billyhoffman• 13 years ago

Some variation of "no or very low fees" appears 5 times in this article. Marc is doing a good job (re)setting the expectation that transaction fees are not going away. a16z's bitcoin companies are just going to utterly gut the existing payment industry's 2.5%

interstitial2• 13 years ago

Personally, I prefer websites that take as a form of payment the riskiest tranches of securitized subprime mortgages or cosmetic surgery loans, while amplifying risk with my fundamental misunderstanding of default swaps.

known• 13 years ago

There are only $1 trillion cash/coins in circulation. Everything else is debt. http://www.federalreserve.gov/releases/h41/current/h41.htm

Guvante5• 13 years ago

The USD is a debt based currency, so that is expected.

Bitcoins are a proof of work based currency, but unfortunately it acts more like a commodity at the moment.

varjag• 13 years ago

Proof of useless work based, to be precise: the only reason work tokens are hash computations instead of say push-ups or soap bubbles is the ease of bookkeeping. So it always puzzled me why that aspect matters.

hooande• 13 years ago

Andressen is making bitcoin out to be a decentralized paypal, when it was more intended to be a form of currency. It makes more sense as a long term investment or speculative bet than it does a way to transfer money from point A to point B.

An analogy would be if person A and person B conducted a transaction by converting their money from dollars to euros or vice versa (assuming A and B are both in the same country). Depending on the current exchange rate, this could be a good or a bad thing for both of them. If the dollar is weak, both parties stand to lose. If the dollar is strong then it won't last because the market will quickly be flooded with people trying to get in on the deal.

There is no way of controlling or predicting the bitcoin exchange rate. If I send money to someone in my country with paypal they are going to whack me with fees, but at least I know what the fees will be in advance. I can plan on it as a business. Having to deal with an unknown and uncontrolled exchange rate just doesn't sound fun. This is assuming that bitcoin stops having wild price swings over time and stabilizes to the level of established global currencies.

It just doesn't make sense to perform a currency conversion when transferring money to someone who uses the same currency as the sender. This article was amazing and pmarca opened my eyes to uses of bitcoin that I never would have imagined. But the only thing I can't imagine is this new currency living up to the utility that is expected of it.

Bitcoin the protocal, however, is freaking awesome. I expect to see a lot of startups taking advantage of some of the non-monetary uses, up to and including micropayments. It could be a very long time before bitcoin paychecks are mainstream. But electronic transactions of all kinds are going to be getting easier soon.

dllthomas6• 13 years ago

"Bitcoin the protocal, however, is freaking awesome. I expect to see a lot of startups taking advantage of some of the non-monetary uses, up to and including micropayments."

I agree with all of this except the implication that micropayments are a non-monetary use.

nhaehnle2• 13 years ago

The micropayments claim is a red herring. If Bitcoin were to actually take off for micropayments, it would no longer scale, and/or the operation of Bitcoin nodes would be limited to people with very serious hardware. At that point, we're back to the game that is currently being played by banks, just with different players in charge.

So it's understandable that many people hope that such a transition will happen and that they will end up in charge after that transition.

For the society as a whole, however, Bitcoin does not have an inherent advantage that is sustainably scalable.

simondlr• 13 years ago

Micropayment channels do provide very small payments without flooding the network: https://code.google.com/p/bitcoinj/wiki/WorkingWithMicropaym...

drcode8• 13 years ago

You're assuming no progress will be made in bitcoin scalibility in the near future, and comparing it to another technology stack that arguably hasn't seen any meaningful innovation in 40 years (since the advent of the debit/credit card.)

timelincoln• 13 years ago

Beautiful

comex• 13 years ago

Future email systems and social networks could refuse to accept incoming messages unless they were accompanied with tiny amounts of Bitcoin – tiny enough to not matter to the sender, but large enough to deter spammers, who today can send uncounted billions of spam messages for free with impunity.

Heh. Talk about historically backward:

http://en.wikipedia.org/wiki/Hashcash#Bitcoin

SilasX2• 13 years ago

I was thinking the same thing. If you want to impose costs on people who send you emails, you can just strip out the proof of work component of bitcoin (which indeed predated it), and use that as a challenge/response system.

sirsar2• 13 years ago

Implemented in Bitmessage, with free anonymity on the side.

bluekite2000• 13 years ago

anyone has experience with remittance from US to countries that don't have a local bitcoin exchange? How would it work in such case since the receiver can't convert the money to the local currency?

oafitupa4• 13 years ago

localbitcoins.com

kolev6• 13 years ago

Bitcoin matters, but it won't survive "as is" ("thanks" to hoarders and speculators). It just brought attention to a problem, which will get solved more elegantly.

drcode8• 13 years ago

Please let me know when web programming finally gets solved more elegantly, without the anachronistic ugliness of js/css/html.

kolev6• 13 years ago

Many have tried, but people keep using what they are used to. Same with Bitcoin. People will keep using their convenient credit cards regardless if they are a superior or a subpar technology. Until Bitcoin diehards get this simple fact and quit spreading delusions that Bitcoin is replacing cash, credit cards, and Western Union, people will not take them seriously.

Guvante5• 13 years ago

The practical consequence of solving this problem is that Bitcoin gives us, for the first time, a way for one Internet user to transfer a unique piece of digital property to another Internet user, such that the transfer is guaranteed to be safe and secure, everyone knows that the transfer has taken place, and nobody can challenge the legitimacy of the transfer. The consequences of this breakthrough are hard to overstate.

But bitcoin doesn't do this at all. This is what makes Bitcoin amazing, but it doesn't solve this issue yet. Bitcoin is interesting since it is a minor revelation from providing this, but it seems incorrect to assert that this is the cool thing about Bitcoins right now.

vladd2• 13 years ago

The reason I feel bitcoin is a scam is due to such misunderstandings. Bitcoin is not what makes any of this possible, the research happening for 20+ years in the background is.

Bitcoin is just a marketing term, a specific implementation of those principles that derives its power just from the number of clients installed across the world with it. All the arguments that Andreessen gave are not Bitcoin's, but are rather characteristic for all altcoins out there.

When you leave the research out, all you end up with is a term which denotes the first runner in a long-tailed race - http://coinmarketcap.com/ . And when you compute the long-term value, being today's winner of the race in terms of marketing and clients user-base is totally different than the open-sourced research that happened and what Andreessen invoked.

Fiat currency is sustained by our obligation to pay taxes in it and the legal tender notion that the law offers to it. Bitcoin is not offering such uniqueness, nor in the law nor by being the only system which provides the features involved in the article. It's only power comes from the specificity of its installed client-base, and anyone who sustains otherwise is either too less technical to notice the difference or comes close to border-line fraud to manipulate its interest in this bubble, at least in my book.

kordless• 13 years ago

I think it's safe to refer to most cryptocurrency methodologies as "Bitcoin" when talking to the masses. Making a casual relationship between misunderstandings of technology and a given implementation of it doesn't make a truth.

lectrick8• 13 years ago

Your argument is, paraphrased, "bitcoin is bad because it is new and does not fit well into current conceptions of money and current payment systems."

Well, first of all, most of this friction only happens when trading bitcoin for fiat. It's the fault of the existing system.

I can send any amount of Bitcoin in 5 seconds, anywhere in the world where there is an Internet connection or a reasonably good cellphone. So can any kid (who can't get a credit card), so can any third world unbanked person. You simply cannot do that trick with any other currency.

Cryptocoins, led by Bitcoin, truly are "of, by, and for the Internet".

Secondly, shit changes. Look at what the Internet did, and it too had its famous skeptics: http://kenhoma.wordpress.com/2011/09/15/the-internet-is-just...

Nashhhh4• 13 years ago

"Fiat currency is sustained by our obligation to pay taxes in it..."

I often see this argument, but it neatly ignores, for example, the Argentine Peso, which is losing 46% of its purchasing power (last few months, annualized) vs. US Dollars (or tomatoes, or cars, or whatever you want, on average), yet taxes are just as high as they ever been (higher, in fact: 35% tax just implemented on all cars above a certain threshold, for example). So where is that value-sustaining-tax effect I hear so much about?

Come to think of it, in 1989 when the Argentine Austral's value went to essentially zero (1-1 with the USD to 1-10,000 in a little over a year), taxes weren't low... so what happened? In fact, you could still pay taxes just fine with all that worthless paper with a bunch of zeros on it. Why didn't taxes and legal tender give it value?

Guvante5• 13 years ago

Fiat currency is sustained by our obligation to pay taxes in it and the legal tender notion that the law offers to it.

The USD clearly ignores that property. It is used in many places where people have to convert it to pay taxes.

the legal tender notion that the law offers to it

USD is debt (or is it credit) based so saying it holds value because it can be used to pay debts is a bit weird. It exists to pay debts yes, but whether that conveys its value is questionable.

It's only power comes from the specificity of its installed client-base

Things are valued based on how much people are willing to pay for them, ECON 101.

A lot of people are interested in it because it is unique. You also have a ton (I am curious how many) of Gen Y's with Bitcoins who don't understand investing at all.

anyone who sustains otherwise is either too less technical to notice the difference or comes close to border-line fraud to manipulate its interest in this bubble

There are two things people say.

* "Bitcoins can only go up due to the increasing interest" - That is just silly, interest can cause selling sprees just as easily as it can cause buying sprees (Now is my chance!). * "Bitcoins won't fully crash due to the increasing interest" - IMHO this has merit, there appear to be enough people who have faith in Bitcoins to keep the system running for the foreseeable future.

So while you may lose 95%+ of your value, you won't lose 100% of your value, which many other forms of investment run the risk of.

However it is still a silly thing to have a significant percentage of your assets in, unless you are actually a risk seeking individual.

sigil6• 13 years ago

Bitcoin is the first practical solution to a longstanding problem in computer science called the Byzantine Generals Problem.

Wait, isn't Paxos arguably the first practical solution to BGP? [0] [1] It's been in production use at Google since at least 2006. [2]

Furthermore, Paxos actually has a proof that timely consensus will be reached. Do we have the same level of rock-solid mathematical certainty about Bitcoin yet? The Eyal-Sirer paper [3] from late 2013 raised some concerns about a new mining strategy that might lower the attack threshold from 50% to 33%. Ed Felton's group at Princeton responded with some interesting analysis from game theory [4], but AFAIK there is no rigorous proof yet that the selfish mining equilibrium isn't a real threat.

If Bitcoin is The Way of the Future (I hope it is), we need to be sure about these things. Hand-waving statements about how Bitcoin isn't vulnerable because no one has found an exploit yet [5] are ridiculous and dangerous.

[0] http://en.wikipedia.org/wiki/Paxos_(computer_science)#Byzant...

[1] http://read.seas.harvard.edu/~kohler/class/08w-dsi/mazieres0...

[2] http://research.google.com/archive/chubby.html

[3] http://arxiv.org/pdf/1311.0243v2.pdf

[4] https://freedom-to-tinker.com/blog/felten/bitcoin-isnt-so-br...

[5] https://twitter.com/cdixon/status/412447615331360768

hendzen3• 13 years ago

No, Paxos is not a solution to BGP. Paxos explicitly does not consider malicious processes.

EDIT: fixed typo

sigil6• 13 years ago

Paxos is Byzantine Fault Tolerant. A malicious node is a special case of failed node.

"The objective of Byzantine fault tolerance is to be able to defend against Byzantine failures, in which components of a system fail in arbitrary ways (i.e., not just by stopping or crashing but by processing requests incorrectly, corrupting their local state, and/or producing incorrect or inconsistent outputs)."

http://en.wikipedia.org/wiki/Byzantine_fault_tolerance

maaku5• 13 years ago

but AFAIK there is no rigorous proof yet that the selfish mining equilibrium isn't a real threat.

It's very easy to detect and respond to. Point your miners at the large pools, and check if they are building off of non-public blocks. Respond accordingly.

sigil6• 13 years ago

How do you know they're building off of non-public blocks if they're doing so in secret collusion?

For what it's worth, Felten et al have a somewhat convincing (if not yet rigorous) argument that members of a so-called selfish mining pool have more incentive to defect than to continue cheating [0]. But, if a single entity controlled all of the 33%, defection is not a risk, and this entity could still claim an outsized share of the mining reward according to Eyal-Sirer.

[0] https://news.ycombinator.com/item?id=6689329

riemannzeta5• 13 years ago

Bitcoin is a digital bearer instrument. It is a way to exchange money or assets between parties with no pre-existing trust: A string of numbers is sent over email or text message in the simplest case. The sender doesn’t need to know or trust the receiver or vice versa. Related, there are no chargebacks – this is the part that is literally like cash – if you have the money or the asset, you can pay with it; if you don’t, you can’t. This is brand new. This has never existed in digital form before.

Doesn't this reveal the flaw in the "Bitcoin is the solution to the Byzantine Generals' Problem" argument? My understanding is that the bulk of transactions costs associated with most payment systems is associated with chargebacks. Some result from fraud by the payer and some by the payee. Regardless, a digital bearer instrument doesn't eliminate these failure modes; it simply avoids them entirely. If the BGP is about solving the problem of fraud, then Bitcoin hasn't solved it. It's simply avoided it.

eurleif2• 13 years ago

If the BGP is about solving the problem of fraud, then Bitcoin hasn't solved it.

Do you have any idea what the BGP is?

riemannzeta5• 13 years ago

I'm not an expert, but I read the paper. So you don't need an intermediary to confirm that a particular digital transaction took place between two people. By analogy to the original problem as stated, that's like saying you don't need an intermediary to confirm that a message with particular content was delivered between two generals. You still need an intermediary to confirm that the recipient is going to act on it as intended.

And I believe the history of Silk Road and its would be successors is evidence that an intermediary is still required post-Bitcoin. So you don't have to worry about the money not being there. You still need an escrow agent.

http://www.nytimes.com/2014/01/19/business/eagle-scout-ideal...

riemannzeta5• 13 years ago

This is the closest that I have seen to an answer:

<i>Since Bitcoin is a digital bearer instrument, the receiver of a payment does not get any information from the sender that can be used to steal money from the sender in the future, either by that merchant or by a criminal who steals that information from the merchant.</i>

I don't know enough about how the costs of payment fraud breakdown to know what percentage of the administrative costs of the system result from stolen card numbers. I can imagine it being a big percentage, but I can also imagine it being relatively small since solutions to it might be have the same characteristics of scalability as the fraud itself whereas the other failure modes associated with credit card fraud require more comprehensive human involvement both in their perpetration and in their redress.

For the moment then, it looks as if Bitcoin is an improvement to existing costly solutions to the BGP, but not an absolute solution. But that's better than no solution at all, which is how it seemed.

asciimo2• 13 years ago

I'm a Bitcoin believer but I feel a little embarrassed after reading this. I'm impressed that Marc Andreessen can get an entire Dealbook page to advertise a pet technology without any fact checking. (Is that the point of Dealbook? I almost never read it.)

Even Netflix, a completely virtual service, is only available in about 40 countries.

The implication is that mere payment logistics are inhibiting Netflix's internationalization. What about copyright and regional distribution restrictions?

Ben S. Bernanke, formerly Federal Reserve chairman, recently wrote that digital currencies like Bitcoin “may hold long-term promise, particularly if they promote a faster, more secure and more efficient payment system.”

Bernanke never said this (http://imaginarymarkets.com/reddit-corrects-bitcoin-quotes-a...), and it's tacky to perpetuate this falsehood.

But I hope that I have given you a sense of the enormous promise of Bitcoin.

Indeed, he succeeded here, though a little too breathlessly.

oafitupa4• 13 years ago

What about copyright and regional distribution restrictions?

Sounds like the kind of problems centralized services always run into.

marcamillion2• 12 years ago

Bernanke never said this (http://imaginarymarkets.com/reddit-corrects-bitcoin-quotes-a...), and it's tacky to perpetuate this falsehood.

I don't understand this. He did say it....here is the paragraph in it's entirety from his address to the Senate:

Historically, virtual currencies have been viewed as a form of “electronic money” or area of payment system technology that has been evolving over the past 20 years. Over time, these types of innovations have received attention from Congress as well as U.S. regulators. For example, in 1995, the U.S. House of Representatives held hearings on “the future of money” at which early versions of virtual currencies and other innovations were discussed. Vice Chairman Alan Blinder’s testimony at that time made the key point that while these types of innovations may pose risks related to law enforcement and supervisory matters, there are also areas in which they may hold long-term promise, particularly if the innovations promote a faster, more secure and more efficient payment system.

He was using Vice Chairman Alan Blinder's testimony to prove the point that while those innovations may pose risks there are areas which they may hold long-term promise.

So not sure what you mean by he didn't say that.

Marc's original statement is indeed accurate, per the transcript of Bernanke's speech. [1]

[1] http://qz.com/148399/ben-bernanke-bitcoin-may-hold-long-term...

asciimo2• 12 years ago

He's paraphrasing Alan Blinder's 1995 testimony in the context of the history of virtual currencies. It is more accurate to say, "In 1995, Alan Blinder stated that virtual currencies hold long-term promise, particularly if..."

My larger point is that whenever you see the Bernanke "bitcoin statement," it implies that he is a Bitcoin advocate. He may very well be a Bitcoin fanboy in his private life, but there is not public evidence that this is true.

nether• 13 years ago

Remember when everyone said bitcoin was doomed because it's deflationary?

base6983• 13 years ago

That's only people that read the 101 level of how the economy works and don't consider that bitcoin is infinitely divisible practically, unlike gold.

reqres4• 13 years ago

Unless you're saying that you can split 1 bitcoin into 2 bitcoins, I think your reasoning is flawed.

Or looking at it another way, inventing a new denomination like a millicent (= 0.001c) will automatically increase our money supply...

Crito• 13 years ago

I'd say that gold is infinitely divisible in practice, as much or moreso than bitcoin. There is what, a USD dollar or two worth of gold leaf in Goldschläger? You can trivially get down to flakes of gold worth fractions of pennies.

The only problem is the cost of division (making leaf is somewhat labor intensive, but not prohibitively so by any stretch).

The hard limit is $1e-20, according to wolfram alpha. IIRC bitcoin will only get you down to e-8.

chris123• 13 years ago

The crypto currency market = "winner take all" market ("all" >= 80%). That said, if the capital costs (mostly mining hardware) and operating costs (mostly electricity, with some rent and labor) leave room for a low-cost producer to enter the market (and the switching costs are not too high). Time will tell. Evolution will do its magic and the fittest will survive (at least until the wheel turns round again). Regardless of who "wins," crypto-currency-based disruptors are a comin' to a status quo near you. And that's a good thing.

deegles• 13 years ago

Aren't transaction costs being "paid for" by all those people running mining rigs? All that processing power used to confirm your transaction cost someone real money. Transaction fees ostensibly pay for this, but I haven't seen anyone do the math on how much to charge to make transactions break even. As the difficulty gets higher and higher, miners will have to rely on these fees to make any profit.

As a side note, is it possible to build mining rigs optimized for transactions vs. mining? or is that the same job?

lostsock• 13 years ago

It's the same job. The way that transactions are processed is that they are included in the block that is mined. At the moment there is an extra 25 BTC reward for mining a block in addition to the transaction fees of those transactions you have included but over time this extra reward will diminish to 0.

lectrick8• 13 years ago

The best lesson Bitcoin taught me is that the currencies we grew up with are just a shared illusion.

jude-• 13 years ago

How so? Currencies are only an abstraction layer on top of goods and services. Instead of directly trading my goods and services for yours, we use a currency--a common "interface" for doing so. The currency doesn't have intrinsic value; the reason it has value at all is because you can exchange it for a wide variety of goods and services. That's why people want dollars, but not Monopoly money.

lectrick8• 13 years ago

The currency doesn't have intrinsic value;

That is the #1 criticism of Bitcoin. Which means it's a meaningless criticism.

panabee• 13 years ago

this may be a stupid question, but how does the cap of 21 million coins affect bitcoin? does it not matter because each bitcoin is infinitely divisible?

sirsar2• 13 years ago

Divisible to 8 decimal places. There are thus 2 quadrillion atomic units.

judk• 13 years ago

I wish Will Satire would explain the etymology of "Why X Matters"

Why Bitcoin Matters

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