Wired has article arguing that bitcoin is nothing more than a replacement for Western Union. That it is merely a complementary system to incrementally improve our lives.
Wired could not be more wrong.
After making the usual hand-waving at how bitcoin value dropped 90%, yet conveniently skimming over how bitcoin value is up 1600% from a year ago, the article launches into a set of statements without any solid backing.
Bitcoins are volatile in their worth or exchange rate, but that is totally expected and fine. The author makes the mistake of generalising bitcoins performance now, to its future. The worth of a bitcoin is determined by how much people are willing to buy and sell at- its price is set by the market.
If someone decides they want to buy 100 BTC, and there is only 10 BTC being sold at the current market rate of $4, they will have to bid at the next highest ask where there is maybe another 8 BTC for $4.1. In this way they move the market price upwards.
This happens in euros and dollars too. Namely that if a multi-billionaire suddenly sells a huge amount of euros for dollars, they will move the price down for euros and up for dollars. For comparatively small amounts that everyday people buy and sell at, it is not large enough to move the market exchange rate.
The network effect
Bitcoin is a smaller system with less people. Therefore it is much easier to move the market price. Everything has an equal and opposite reaction. When you jump in the air, the earth moves away from you too, but you are so comparatively small that the force you exerted on the earth is not noticeable. However something as large as the moon does cause the earth to wobble in its orbit. A buyer of bitcoins carries far more weight in this small market with their $10,000 than they do in the usd-eur forex market.
Volatility of bitcoin is a consequence of it being the early days. Of bitcoin being small. Of bitcoin being undeveloped. Of bitcoin not having reached its full potential.
The author then goes on to tout that credit card fees are great because they offer consumer protection against chargebacks and fraud. The author then explains how such systems could exist alongside bitcoin if you pay for them, at which point bitcoin has no benefit over credit cards.
What the fuck! How about I get to choose whether I want those services or not! Let the consumer decide whether they are important benefits worth paying for; don’t mandate that everyone has to subsidise the service at over-inflated prices!
Bitcoin v Western Union
The article now reaches its penultimate conclusion: wire-transfers are very expensive, and bitcoin has low fees. Bitcoin is kick-ass at free international transfers. Ignoring all the benefits of bitcoin like decentralised, impossible to shut-down, privacy, divisibility/microtransactions, security and efficiency the author suddenly decides that this one aspect of bitcoin is the only dimension of bitcoin.
Bitcoin as a metacurrency.
This makes no sense. The term is meaningless. One does not hold US dollars because one loves the beautiful designs on them. No, US dollars are a useful mechanism of trade for you.
Likewise, if bitcoins are useful for buying foreign currency or buying online services, then at some point you will need to be holding bitcoins. That interlude when you have aquired bitcoins will be when you spend them in the general economy.
I know what the author is trying to get at- that nobody would ever what to hold bitcoins because the price is volatile and that the only use for bitcoin ever is as a service for changing money. That’s all.
What the author fails to realise is this: market volatility is a consequence of bitcoin being small, and if the economy booms due to people using bitcoin as a forex tool then the volatility would disappear suddenly. If market trading became more professional then we would see arbitrage and professional speculation.
Arbitrage is where a person sees the price of the USD:BTC to be $4, and the GBP:BTC price to be 2.7. Because 4 USD = 2.55 GBP, they see that by buying bitcoins at $4 and selling them for 2.7 GBP, they can make profit. This also works the other way with selling bitcoins for GBP and buying USD. The net effect is that the price across all exchanges matches each other.
Professional speculators stabilise the price. If a sudden news story generates a lot of excitement, then the price may spike upwards. A professional speculator sees that this is nothing more than irrational exuberance and sells, driving the price downwards. This also works the other way; if a sudden scare happens and the price nose-dives, the speculator buys and brings the price back upwards. Speculators cushion the price movements to not be so erratic.
Chicken and egg
Right now because bitcoin prices are so volatile, merchants are at risk. If I price a good in bitcoins at a certain dollar rate, the market can move and my customers pay less than they would. If there are no limits set, they can repeat the process and make big profits off the merchant. Therefore a merchant not only has to pay a mark-up on the price to account for volatility, but they must also limit their daily bitcoin volume.
With a growth in bitcoin, and a decrease in fluctuating bitcoin prices, people are more willing to hold bitcoins. Merchants are more likely to price their goods in bitcoin. With the increased services, bitcoin users are encouraged further to hold bitcoins and spend them within the system. There currently exists many traders, but nothing in particular that I need or want. If more merchants were to exist, then it is conceivable my needs will eventually be catered to- in bitcoin.
Bitcoin is young. And there is far more to bitcoin than any single one property. Bitcoin has far reaching effects on a global scale.
Chill out. At this point, any publicity is good publicity.
That’s true
Lots of Disinf on Bitcoin, but equally, many people haven’t thought about all the angles and so may be genuine.
Even if Bitcoin were just a low cost alternative to Western Union, that in itself would be a major plus, but it’s so much more as well.
I think the masses haven’t caught onto Bitcoin yet, obviously.
The way to make your investment in bitcoin work is not to speculate but to build online business.
Most of the public are not interested in speculating, they just want to know can I buy that music track online with Bitcoin, make sure they can and Bitcoin will flourish.
Baby steps. Wired is giving bitcoin a second look, and so others will as well. They’re not digging in their heels.
I think it’s reasonable to call it a meta-currency for the time being.
Few people know enough about bitcoin to actually want to hold them, but they would be quite happy to receive payment to their paypal account from a bitcoin user using bitinstant.com for instance.
But as some point people will start saying ‘just give me the bitcoins’ once they realize all the extra layers aren’t necessary.
Maybe this bubble and bust cycle will teach people that a currency has exactly one purpose – to enable commerce by solving the double coincidence of wants problem.
Everything else that is commonly attributed to currency is either a side effect or an illusion.
“There currently exists many traders, but nothing in particular that I need or want.”
there are several sites offering amazon coupons for bitcoins
Yeah Jack but currency could be used as worth hoarding.
Yep. Genjix, you have it right, and the “Wired” author is incompetent. This is independent of the outcome of the Bitcoin project; the “Wired” article just makes no sense.
The only problem is that most people prefer fancy words over logic. They’ll keep producing misinformation until they’re not only proven, but demonstrated wrong. So the fight for Bitcoin is a tough one. But it’s worth the hassle.
From a startup mindset, selling Bitcoin as an alternative to Western Union is not a bad beach head. I wouldn’t dismiss Wired’s advice because it doesn’t consider the whole picture; people’s understanding of new any technology seldom does.
I think that the Wired article has, in spite of several weaknesses, a very good point: Bitcoin is becoming a real competitor to wire transfer services like Western Union.
This is because these services are very, very expensive – up to 20 % for low amounts. And the main customers of them are migrant workers which come from poor countries like Cameroon, Mexico or Afhganistan and work in rich countries like France, the US, or Saudi-Arabia. They have to rely on Western Union to send money to their family and relatives. They work very hard and often earn very little. They cannot send large amounts. They send money for essential needs like school books, medicine, to help somebody who had an accident or things like that. And the height of the fees is a scandal. They are so high that there is an online camapingning organization, avaaz.org, made a campaing with the parole “Stop the crippling fees!” (http://bit.ly/h0O4s4 , you can google for that as well).
The entirely valid point which the article makes is that bitcoin is already a capable competitor if both senders and receivers can change their money without too much risk or cost. For the senders, this is possible in most developed and rich countries now – the US, Euroland, France, Japan, Switzerland. I think Saudi-Arabia is missing. For the destination countries, this is still more difficult, but India, China and Chile and maybe Poland show that enough interest is there – Mexico, Marroco, Brazil, poor Arabian Countries and the Phillipines would be good candidates.
It could be very worthwhile for bitcoin supporters and investors to support the founding of local currency exchanges in these contries, to raise awareness of bitcoin as a way to transfer money, and to create a suitable network of trust. This means also that more support is needed for translations and services for these countries. For the large exchanges like Mt Gox, it would be a wothwhile endeavour to expand to that contries – the Phillipines alone count a hundred Million people. In many parts of Africa, cell phones are already used for payments because they are more accessible for normal people than banks. Suitable mobile applications could become a killer application.
I’m not so sure about the western union replacement function. The problem is that money transfer is likely to be one way. In other words lots of bitcoins arriving in Africa from Europe and the US wanting to be changed into African currencies. But for it to work, there also has to be people wanting to trade African currencies into Bitcoins, which would mean they have to be able to do something with those bitcoins (like buy western consumer goods).
I’m not saying it won’t happen, but at the moment its probably not the case.
First they ignore you, then they laugh at you, then they fight you, then you win. Needless to say, I’m all about Bitcoin and Ron Paul.
As a business owner who has a larger technical following online we are definitely going to be accepting Bitcoins once the modules exist for the platform we develop upon (Ubercart). We sell electronics. We have a significant mark-up on the products as we are niche. In all likelihood if the price drops significantly we would see an increase in sales and that might actually help us. What can’t happen is it drops so much that our costs exceed what we are charging. However we charge $30 for items that may cost us a dollar in many cases. So that $17 down to $2 may be ok provided we take it into account and work around it (limit bitcoins holdings) and the bitcoins charged is equated to the USD equivalent.
Essentially you’re saying that your margins on each item you sell are so high that you’re willing to absorb bitcoin price fluctuations. That is pretty awesome that you are doing that. Best of luck.
Bitcoin is like any other currency with some major differentiation:
Not controlled by Government – read political entities with power and authority on all matters including those not explicitly defined.
These conventional, many, currencies play out globally in a zero-sum game manner; They are in material form (paper) and have Gold Reserves as backup.
Bitcoin is dematerialized in form, is globally a single currency,
is non-governmental in control and thus has the potential to offer better services, especially to the “internet crowd”. This will take time.
The wired view about Bitcoin and Western Union, is, simply, a low hanging fruit of the potential. There will be many more fruits to come.
I just want to say that the sheer number of grammatical mistakes makes it a lot harder to take this article seriously. You should make an effort to write in proper English when you’re trying to communicate effectively.
I have to disagree with both the Wired article, and with with you. Bitcoin DOES NOT function as an alternative to international money transfer systems at all.
I live in South Africa, and a couple months ago I tried to buy some bitcoins. It was almost impossible. My choices were to either buy a single bitcoin off Ebay for $10 (Quadruple its mtgox price at the time), or use existing international money transfer systems like SWIFT or Western Union to buy them from Japan.
I don’t think the volatility of BitCoin is entirely down to the fact that it’s not very big yet. That partly explains the day-to-day swings, but not that it moved 1600% in a year, then dropped 90% in a month.
The latter happened because BitCoin is an entirely new kind of thing, and nobody can really tell how much it will ultimately be worth. If it lives up to its potential, it could quickly reach many, many times its current value. While it finds its ultimate level, it will also potentially see very, very large drops.
This isn’t something I normally have to worry about dealing in dollars and yen. Currencies in developed countries move around, but they don’t normally more than double or halve. Working with BitCoin, it’s going to be an issue for many years to come.
That said, volatility is much less of a deal-breaker than the Wired guy makes out. In practice regular vendors will probably mostly set our prices in dollars for a while to come, and adjust our BitCoin prices to match. If we only do a small part of our business in BitCoins, the volatility doesn’t matter much; If I lose 5% of my cash holdings, I can live with that, and if I’m suddenly the recipient of a huge, unexpected windfall, well – I’m sure I’ll cope one way or another.
As the thing grows we’ll also be able to effectively insure ourselves against large drops in the value of our BitCoins, which will be useful to businesses that hold a lot of cash, do it mostly in BitCoins, but have costs to settle later denominated in legacy currencies.