Is the cryptocurrency Bitcoin a good idea?

If Bitcoin did not offer substantial advantages to alternative digital currencies, it would not be seeing increases in market share.

In 2008, Paypal daily transaction volume was approximately $164 million dollars. On peak days, the Bitcoin network processes over $25 million in transactions. The largest online payment process, Alipay, does $300 million per day in transaction volume. (Update: bitcoin daily transaction volumes has increased 100% from when I wrote this article and now exceeds 50 million per day in transactions).

Bitcoin market cap now exceeds 500 million. Daily volume is 75 million. BTC is trading at over $50 BTC/USD.

Advantages of Bitcoin

Bitcoin is very similar to PayPal, but with several advantages and differences.

Advantages of Bitcoin: Bitcoin has lower transaction fees (zero), Bitcoin does not subject merchants to charge back risk. Bitcoin has stronger privacy protections than PayPal. Accounts are numbered, but have no personally identifiable information, similar to a Swiss numbered account.
Your bitcoin account cannot be frozen or seized. PayPal often freezes accounts used to sell virtual goods and stored value cards because of the high fraud and chargeback risks. Bitcoin is more suited for these applications.
Bitcoin transactions do not incur currency exchange fees. Capital controls in many countries and central bank fixed exchange rates which are below black market exchange rates create an incentive for bitcoin adoption. Bitcoin serves as a digital alternative to existing hawala networks.
Not everyone in the world has access to traditional banking services, but everyone in world who has a cell phone can use Bitcoin.

Differences from PayPal: Bitcoin is decentralized. Bitcoin is floated and not tied to the dollar. PayPal is pegged to the dollar (like the Yuan). Bitcoin exchange rates are established by markets. PayPal’s behavior is backed by a contractual relationship with a corporation. The Bitcoin protocol’s behavior is backed military grade cryptography, not by contracts. Bitcoin’s design reduces the counter party risk inherent in legacy payment systems such as eGold and PayPal.

Many feel that the level of privacy that bitcoin offers is immoral or dangerous. Regardless, there is an extremely large demand for the superior banking privacy that bitcoin offers.

The weight of the advantages of bitcoin make it extremely appealing to a diverse range of people for a diverse range of transactions.

Most Arguments Against Bitcoin are Grounded in Misunderstanding:

Bitcoin is not a ponzi scheme. Bitcoin does not pay interest on deposits. Adam seems to be using a “very unique definition” of ponzi scheme, which includes any asset which is appreciating in value. “Facebook stock is a ponzi scheme because the people who bought stock first made more money!”
Adam describes a bank run scenario on Bitcoin. Bitcoin does not have a bank or any counter party.

What is Bitcoin: Bitcoin is open source software. Bitcoin is a protocol for online payments, similar to PayPal but has several advantages over legacy payment systems for online transactions.

Bitcoin tokens have currency-like properties, but Bitcoin is not a “currency”. It’s something new. Calling Bitcoin a currency is like calling a PayPal account a “merchant account” simply because you can use it to receive credit card payments. They are conceptually similar because they are used for the same purpose, but they differ significantly in the details.

The vast majority of criticisms against Bitcoin attack the differences between Bitcoin and existing payment systems. However, it is exactly these differences which are driving Bitcoin adoption. If Bitcoin did not offer substantial advantages, it would not be seeing increases in market share.

Factors Driving Bitcoin Adoption: Bitcoin only needs to be better than alternative payment systems for specific applications. Bitcoin will be adopted where it has advantages over alternative payment systems PayPal became the dominant payment processor for eBay but has not seen much success at displacing credit cards for general online payments. PayPal adoption for instance was driven by the need of eBay merchants to transact payments digitally. PayPal had a niche to fill because most eBay merchants did not have the transaction volume required for a traditional merchant account. When Visa, Mastercard and Paypal froze the accounts of Wikilieaks, they were able to raise millions in donations through Bitcoin. Bitcoin is rapidly filling the cracks between legacy internet payment systems.

Bitcoin will be most successful in those niches (and geographic regions) where there are not already satisfactory alternatives.
People do not use Bitcoin because of its flaws, people use Bitcoin because of what it is good for.

Leave a comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.