Okay, Seriously: What The Heck Is Bitcoin, And Why Do So Many People Prefer It To Dollars And Cents?
LAS VEGAS—It’s easy, oh so easy, to hate Bitcoin.
Some of the virtual currency’s more public uses have been to buy drugs or procure hit men. The Winklevoss twins, having graduated from claiming to have invented Facebook, love the virtual currency so much that as of November they bought up 1 percent of all “BTC” in circulation. It’s spawned a host of other made-up currencies, some a lot loopier (“Dogecoin” and “Coinye West,” anyone?) than others.
And yet: Paying for goods and services is not one of those practices that we humans can claim to have perfected. And it’s not as if we’ve never trafficked in alternative currencies before. Microsoft Points and Facebook Credits didn’t take off, but Amazon gift cards function as an alternative currency, albeit with a fixed 1:1 exchange rate with dollars. Frequent-flyer miles—redeemable not just for air travel but a variety of gifts—represent yet another way besides dollars through which you can pay and be paid.
So set aside the libertarian utopianism around Bitcoin. Why is this “crypto currency”—“mined” by solving complex equations on increasingly specialized computers, with transactions confirmed through peer-to-peer math—good for you, the customer? And why should you be wary?
More efficient transactions—with a catch. Your credit card may look free to you, but merchants pay a small fee to accept it, historically around 2 to 4 percent, that invisibly pads out your bill. That’s much less of a factor with Bitcoin transactions: One small retailer I talked to at an event last night (Silver Spring, Md.-based BitcoinShop.US) pays a $30/month flat fee to have BitPay process those purchases.
Why? There’s no short-term interest-fee loan involved. On this level, Bitcoins operate like cash—the money goes directly from you to the merchant. That, in turn, means that the transaction doesn’t come with a credit card’s traditional guarantees of security. You can ask nicely for your money back, but by default there’s no third party to step in on your behalf and reverse the transaction.
Credit-card payments have changed a lot in recent years, however—think of how phone- and tablet-based card readers like Square’s have broadened the outdoors utility of plastic. Traditional processing services are getting a lot more competition, which could steadily narrow the gap between credit cards and Bitcoin.
And the inexperience of some Bitcoin processors can inflict different costs. At the tech-policy site Techdirt.com, founder Mike Masnick elected to take Bitcoin as payment starting in November, using Bitpay to handle those transactions. “Bitpay’s customer service was dreadful,” he wrote, citing issues getting transactions over $100 to go through.
An easier way to send money across borders. Because Bitcoin isn’t run by a central bank, it can cross international boundaries much more easily and quickly. That’s an easy thing to overlook in the U.S., where you could bring suitcases full of cash through customs as long as you fill out a form for sums over $10,000.
Central banks aren’t the only obstacle Bitcoin can route around. WordPress.com (disclosure: my own blog host) began accepting payments in BTC in late 2012 because of all the countries where traditional processing services won’t take locals’ money.
But if you want to finish an international Bitcoin transaction by converting those funds back to your own country’s currency, you can hit some usual and unusual roadblocks. It may take longer to complete that triangular transaction than traditional foreign-exchange methods would require. And the very governments that don’t appreciate their citizens moving money out of the country can clamp down on domestic Bitcoin transactions.
In December, the Chinese government took that route, forcing major domestic payment processors to stop accepting BTC—which then caused the currency to tumble in value worldwide.
A dicey investment. There’s the rub: If you can’t conclude a Bitcoin transaction by moving the proceeds to your own, dollar-denominated bank account, it’s not like forgetting to withdraw money from PayPal. Bitcoin’s exchange rate has soared and swooned to a vomit-inducing degree.
For people who timed things right, that’s made Bitcoin a great investment. But in a functioning market, currencies shouldn’t look like investments. Their value is supposed to be boring.
“I don’t think Bitcoin is a good store of value, at least not yet,” wrote Jerry Brito, senior research fellow at George Mason University’s Mercatus Center in Arlington, Va.— and one of the more bullish people about the currency. “What will get us there is if Bitcoin delivers on its promise as If it does, it doesn’t matter that many today are speculating that it will. Once it does deliver on the promise, the market won’t see any more huge upside and the price will be what it will be.”
I now have a tiny personal stake in that. Over the span of all of three minutes Sunday night, I downloaded a Bitcoin wallet app to my phone, put a $5 bill into a Bitcoin ATM set up at an exhibit here, held the phone up to the ATM so it could scan the QR code generated by the app—and moments later, saw the app report my receipt of the funds.
Maybe I just gambled $5 away. If so, it wouldn’t be the first time that’s happened here.