I know I’m a broken record on how stupid I think BitCoin (BTC) is, but I just can’t help it. I’m taking such perverse joy as Mt. Gox, one of the BTC exchanges, implodes because they were inept at handling financial transactions.
The reason you may have heard about BTC being accepted at things like Starbucks or Overstock.com is because it looked like the price of the “currency” was stable, and doing a transaction in BTC was very cheap for a vendor. If you were to use Visa or Mastercard to buy something online, Visa may charge the online vendors, say 5% of the transaction. This is money you as the consumer don’t see, but it does come out of the vendor’s pocket as a cost to use Visa (this is why, for example, you couldn’t use American Express at a lot of vendors – AmEx charged higher fees).
BTC charges ridiculously low fees – in some cases free. So, to a vendor like Overstock.com, if you charge $10 for something that cost $9, with a Visa fee of 5%, Overstock gets $9.50 and Visa gets 50 cents, where using BITC you might get all $10.
However, the reason these BitCoin exchanges charge such low fees is because they have no… friggin’… idea… just how to keep these transactions secure (Mt. Gox implosion is because of this). In order to keep transactions secure, you have to spend, let me think, um…, a lot of money. Also, Visa has to follow silly little things called “laws” and “regulations”, which make them liable for fraud. Since they have to pay out when somebody steals Billy-Joe’s credit card and rings ups fraudulent transaction, they *are* going to pass that onto their other users, through fees.
Seeing how utterly inept BTC vendors are with transactions reminds me of an episode of The Office – where Michael and Ryan build a competing paper company that implodes because they used a “fixed cost model” instead of a “variable cost model” for shipping paper. Here is a transcript from that exchange (I wanted to find a video, but I guess NBC has made sure The Office clips can’t be on YouTube):
Michael: How much can we afford to pay a delivery guy?
Financial Guy: Well, if these numbers you gave me are correct–
Michael: They are correct, sir.
Financial Guy: Then you can’t afford to pay him anything.
Michael: Okay. A lame attempt at humor. Swing and a miss.
Financial Guy: Your prices are too low.
Michael: Lowest in town.
Financial Guy: Why do you think Staples and Dunder Mifflin can’t match your prices?
Pam: Corporate greed?
Ryan: Look, our price model is fine. I reviewed the numbers myself. Over time with enough volume, we become profitable.
Financial Guy: Yeah, with a fixed cost pricing model that’s correct.
Financial Guy: But you need to use a variable cost pricing model.
Michael: Okay, sure. Right, so– why don’t you explain what that is to– so that they can under– just explain what that is.
Ryan: Explain what you think that is.
Financial Guy: Okay.
Michael: Explain that.
Financial Guy: As you sell more paper and your company grows, so will your costs. For example, delivery man, health care…
Michael: Well, we don’t–
Financial Guy: …business expansion–
Michael: Whatever, yeah.
Financial Guy: At these prices, the more paper you sell, the less money you’ll make.
Michael: Our prices are the only thing keeping us in business.
Financial Guy: They’re actually putting you out of business.
Michael: Okay, okay. Hold on, hold on. Ty, I would like you to crunch those numbers again.
Ty: It’s a program. There’s no such thing–
Michael: Just crunch ’em. Just crunch ’em please.
Ty: [presses key on computer] Crunch.
Pam: Did it help?
BitCoin is a complete joke. Just like Michael trying to undercut Dunder Mifflin by using incorrect rules of finance, BTC is using incorrect math to justify why it is good. Their transaction fees aren’t because it is an “internet currency”. The transaction fees are low because the people running these exchanges are inept, or criminal, or both.
Now, this isn’t to completely dismiss BTC having any possible benefit to us as consumers. While mostly Visa and Mastercard charge what they charge for fees is because of laws and regulations, there is a very good chance that lack of competition and complacency is causing them to charge more fees than they reasonably should be allowed to get away with. If BTC’s low fees prove to be a good thing for vendors, despite the fluctuation in the value of the “currency” (seriously, I cannot help putting the word currency in quotes, because BTC is not a currency), then Visa and Mastercard will have to lower fees. At which point, we all win.
But until that happens, I will continue to enjoy watching BTC flail about. The libertarian ideologues who love it are endlessly entertaining. I’m waiting for the time one of these goofballs starts railing against the government, claiming the government is behind BTC’s collapses, and then veering off into complaining about fluoride in the water supply.