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?

The reality is this: Most of that money gets passed back to consumers via rewards, benefits and consumer protections.

It's not a tax so much as an incentive for consumers to keep using their cards. And so it is considerably harder to come up with an alternative that is appealing to merchants without taking anything away from consumers.

For example, the interchange on a Visa rewards card for a typical brick-and-mortar retailer is about 1.5 - 1.65%. (Processors mark that up, but that's the "wholesale" fee that goes to the card issuer.) But many rewards cards pay out at least 1% cashback, on top of other benefits. That leaves a much smaller margin to compete over.

And remember, a new competitive option faces massive rollout and adoption costs that the entrenched system does not. Even the acts of changing behavior, upgrading POS systems and training staff are adoption costs. So your new alternative has to offer significant benefits for both merchants and consumers. Significant enough to overcome adoption costs.

Oh, and there's one more thing: debit card interchange just got regulated down to almost nothing (0.05% + 21 cents) by the Durbin amendment. So there already is an alternative, low-fee option that merchants can steer consumers toward and that they already support fully. So that pretty much takes out the opportunity to offer a lower-fee, lower-consumer-benefit option. That already exists now.

That leaves what? A higher-consumer-benefit option? Why would merchants adopt that? A same-benefit option but at a lower cost? But how much lower would the cost be while still matching 1-2% cashback reward programs and whatnot?

But.. but.. LOOK AT ALL THAT MONEY. :-)

(Btw, the digital cash for micropayments and garage sales and whatnot does sound interesting to me. My criticism is limited to the project of competing with Visa/Mastercard/banks.)

So let's not come at it from "credit cards and payments are a bloated gouging industry" I'm not buying that and it also is too merchant focused (vs consumers who really decide what a merchant will do in terms of payments) Now, there are some really interesting fringe cases that Chris touches upon that can open the door for Bitcoin. Micropayments are broken when it comes to credit cards. It's not the %, it that's "+ 30 cents" that is brutal. So Bitcoin could play a roll there. There are disbursements and marketplaces. I suspect TaskRabbit would probably like to have the ability to move money from buyers on their platforms to the TaskRabbiter's with a reduced payment friction than today. There might be 5% margin businesses (Chris' example sounds like the founder of Dwolla) that really are motivated to drive you to Bitcoin.

So what happens over time is Bitcoin focuses in on those areas where it has a strategic advantage over cards and ignores those where it doesn't. It uses that experience to become a legitimate, scaled set of payments rails. Solutions are implemented so that consumers are comfortable with using and paying with Bitcoin. Then at that 5 - 15 year mark it's ready to take on mainstream payments. Assuming issues like fraud and settlement and wild fluctuations are worked out.

EDIT: I am definitely thinking out loud and on the fly so am ok with some serious rebuttals.

Credit cards are an outdated tool. They pass plain text data about a user to authorize a transaction allowing hackers to pull something off like the Target hack. One of the advantages of bitcoin is the ability to digitally authorize a transaction that cannot be reused. In an online marketplace it's far far easier to accept bitcoins than credit cards because you have no fraud risk, which is a HUGE problem in online retail.

I expect a lot of online retail stores to start accepting bitcoin payments at large discounts to cash just for this reason.

Bitcoin includes two methods to pay miners for the infrastructure costs of running the network: mining rewards and transaction fees. The idea is to bootstrap the network off of mining rewards, and then switch to relying on transaction fees in the future, as Bitcoin reaches its limit of 21 million coins.

The problem is that mining rewards are currently very, very non-negligible, even if they're decreasing. In 2012, the Bitcoin supply increased by over thirty percent. In 2014 another 1.3 million Bitcoins will be minted and sold by miners to pay for the cost of operating the bitcoin network. At current prices, that's nearly a billion dollars.

As mining rewards continue to decrease, that billion dollars a year is going to need to be made up through transaction fees. Mastercard takes in less than 8 billion a year, so those transaction fees are probably going to be substantial.

If this continue to roll, same might be applied to many other areas I believe.

It is just my random fantasy at this moment, but why we will need enforcement, if we will have guarantied income in bitcoins and laws system built same way as bitcoin (i.e. opensource and agreed to use by most people) and law enforcement as a function of guaranteed income amount.... Just random thought.

or finally having AI which can exist on its own, buy components of its environment (i.e. machines, networks, etc)

I believe what is emerging right now as a Bitcoin is much wider phenomena than just a way to avoid pay taxes and inflation.

And as far the programmable money idea goes, I'd like to see more compelling applications than M of N transactions or escrow. The examples I've seen so far seem rather unexciting.

ed: Maybe cdixon's real point is that the technology behind bitcoin is disruptive to the financial industry? I can get behind this, and I'm waiting to see how the government-backed bitcoin clones fare.

Bitcoin has nothing backing it but an artificial supply limitation. That in itself is not a solution because its monetary base cannot possibly grow at the rate overall goods do, and thus have a stable price point.

1) Is there a "reference value" in terms of how much transaction fee you have to pay to make a payment from one bitcoin/altcoin address to another?

2) Is there a "message" payload that would allow us to include JSON or transaction details? I've read that it costs a larger fee for more bytes in a transaction, so I'm assuming you can add whatever you want to the transaction.

3) When I last made a transaction with an altcoin [1], it got "split" to two addresses. One of these addresses was not my target receiving account nor an address that I owned. Does anyone know why this other address got coins? Does this happen in many/all cryptocurrencies?

4) If I made a payment gateway that created a unique address for every user to send payments to, would it be unreasonably expensive to collect all of these funds into a single address later? (N user payment accounts * 1 outbound transaction => Large Central Account/Wallet)

[1] http://dogechain.info/address/DLqfuYFwVmroo4oaiVU9oSGTjsEBvQ...

And to me, the great thing is, that there is no real reason to hate it. There's not company of brand that you can hate, it's just people and ideas.

In other words, better wealth distribution? This is precisely what libertarians are fighting for, no?

Playing the devil's advocate here - couldn't this argument be turned around to say something like "That’s money that could be reinvested in banks which hire the best people to find the best and most efficient use of capital."? (as opposed to consumers or small business owners who can't)

By removing them and decentralizing the banking process by centralizing it into a third party (which could be many third parties), I think we'll allow anyone who wants to start a bank of any size to compete for marketshare with the big boys by providing better services.

In this paradigm, would you rather be holding US cash or bitcoins (or something else) if there was a political or economic crisis?

Anyway, Bitcoin may not save the world, but if it does anything like what this blog post says, it may very well save the Internet from the advertising platform it's become.

If bitcoin intends to be a cash-like currency, the more apt fee comparison would be swiping ATM cards, which are much closer to 1% (rather than credit card fees of 2.5%+).

Will Bitcoin emerge as the predominant online currency of the 21st century? Who knows? But it'll solve a lot of hard problems, and as a result, something will.

[0]: http://freico.in/

I stopped reading here.

done.

I agree with you that not all the $500Bn is going directly into the pockets of shareholders, but the reality is that there is a huge transaction cost in taking a clip and then passing part of it back to a consumer. However much is lost in the process, it might not be $500Bn but it is definitely a lot of money, and it is unnecessary.

There are a lot of arguments as to why merchants won't adopt Bitcoin for payments, the main one being that they actually need most of the features of modern finance that these companies charge for. The fees though are definitely an argument for Bitcoin, and not against.

That said, I agree with you that the digital cash / new behaviors are the most interesting part of Bitcoin. Just much harder to explain.

Visa and First Data each make >$10B/year revenue, which is already 0.2% of US GDP, and none of that money goes toward cardholder rewards.

http://www.bcsalliance.com/creditcard_profits.html

18.6 billion is still quite a bit of money to extract for the service of letting people spend their own money.

All those extra benefits should be unbundled and it'll be interesting to see how many consumers purchase them when their costs aren't being subsidized by cash buyers.

Anyone can take payments using Bitcoin in less time than it takes to sign up for and implement the Stripe API (I would know; I've done both), and you don't have to have a bank account in an approved jurisdiction in order to do so.

They can either do this by using the technology directly or using an intermediary such as Coinbase.

"Bitcoin focuses in on those areas where it has a strategic advantage over cards and ignores those where it doesn't."

Thankfully Bitcoin doesn't care what it's used for, and there will probably be people trying to implement a Bitcoin solution for all these areas; the ones that find a niche will survive, and the ones that don't will fail. Either way, we'll (in theory) end up with the services that Bitcoin is suited for, and the ones that it isn't suited for will continue to use more traditional methods.

Last I checked, it takes at least a month to apply for and receive a credit card, so this is obviously wrong. Guess what, I could set you up with a bitcoin account and some bitcoins in less than a minute.

> 2.5% doesn't seem to bad for the people running those rails to collect (fraud, global movement etc)

Yeah, as long as something else doesn't come along that's even better at fraud prevention and global movement and only charges 0.01% (like bitcoin, for instance)

I remember some years ago when people were getting excited about microtransactions, but nobody found a good way to make them work. It seems like Bitcoin might be a viable way of bringing the idea back.

I'm not from Arizona, so Stripe isn't an option. But then there is Bitcoin. Countries: All. Requirements: Internet.

> In an online marketplace it's far far easier to accept bitcoins than credit cards because you have no fraud risk, which is a HUGE problem in online retail.

I'm not sure how you are getting this. Bitcoin is absolutely susceptible to various forms of fraud. Let's make this a bit more concrete: assume eBay accepts BTC. I could sign up for a seller account, make some auction listings, once some people buy them, never ship the goods, and disappear. I could set up a fake seller account, list some fake items, and then also make a fake buyer account, purchase the fake goods with my fake buyer account from my fake seller account, report that everything went well, and now I've laundered some money. That kind of activity can cripple a business.

As a consumer, the irreversability of BTC transactions is a bug, not a feature. You only need to look at the incredible amount of fraud that's happened in the Dogecoin community to see how fraudulent activity can be rampant, and can harm consumer confidence. Consumers expect the ability to be able to initiate a chargeback when fraudulent activity happens. You can't do that with just plain old BTC. When I was home over the holidays, the local TV station ran a story about how you should be using credit cards rather than debit cards to purchase things online, specifically because the credit cards' chargeback policies are often better. "With a credit card, you'll have the money taken off your statement, but with a debit card, it could take over two weeks to get your money back." etc.

Bitcoin is digital cash. Online stores don't allow you to mail them an envelope with $20 inside, because that would be kind of ridiculous for all parties involved. It's only when certain financial instruments are built on top of Bitcoin that have the same kinds of consumer protection and regulatory compliance built in.

I currently work for a large online marketplace. A very typical fraud scenario (maybe the most common) is someone collecting payment for an item that they don't actually possess. This would only be harder to deal with and correct if the payment were disbursed to an anonymous seller in bitcoins.

If Bitcoin == cash, what does a storefront do if someone comes to them and says "my stolen cash was used to buy items here"? Usually nothing, yes? Is that what we're saying is the burden of responsibility for an online store with Bitcoin?

Reversable transactions moves the onus of security to the people who can really do something about it. A consumer can only chose "purchase or do not purchase", whereas a merchant can elect to use (for example) more secure payment methods and stronger identity verification.

For a limited class of taxes, namely, taxes directly denominated in a currency (like property taxes), the taxability of a currency adds to the demand for that currency. But for the most part, since non-local currency transactions and barter transactions are taxed at the effective exchange rate / fair value, the fact that taxes are collected in dollars would seem to neither hurt nor help the currency.

That said, in summary, the "artificial supply limitation" applies to both Bitcoin and dollars, with dollars relying purely on trust that America will not increase the money supply unnecessarily. That inflation has actually been mild is a "bug" in the system -- the Fed is deliberately trying to spur inflation, and has not been having success, for reasons that nobody (including themselves) completely understands. The calculable probability of return that you refer to has been pretty reliable (just like MBS's in 2006, couldn't resist), so that is true, but I don't see that being related to the taxability of the currency so much as to the lack of apparent inflation compared to the nominal returns on sovereign debt.

The monetary base argument also seems specious; M0, the "monetary base", is not generally considered (except by non-mainstream economists) to be all that significant compared to the higher-order money supply factors caused by dollar-denominated assets of varying liquidity. Once (or if) Bitcoin develops a credit market, then the medium-term effective money supply will grow and shrink as the market demands.

http://www.shadowstats.com/alternate_data/inflation-charts

It's only mild if you use their fraudulent CPI accounting, and only if you use the latest version of it, designed solely to hide inflation. If you use the 1980 CPI we're running at 9% inflation, which is not mild at all. In fact, Volcker would have raised rates long ago to fight that level of inflation.

It's exactly the same way they commit fraud in obscuring the real unemployment rate - the U6 - while referring only to the U3 anytime they want to talk about the economy. 14% vs. 6.8% is a dramatic difference, and it only works because they hide the people that have fallen out of the labor force.

In any case, I think it's entirely possible that you're wrong, and I've written a long argument against your claim if you're interested:

http://reviewsindepth.com/2013/12/bitcoin-krugman-and-the-me...

The TLDR is that yes, historically currencies have required intrinsic value or government backing of some kind - but it is not an economic law of nature that a currency has to be backed as such. If you can get the economic costs of securing agreement over a currency, then a currency of "mere agreement" is possible. Given that the internet and the design of Bitcoin itself have dramatically reduced those costs - it may actually have a shot at gaining wide acceptance.