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Bitcoin is not the cheapest way of money money – It’s the best way of moving money (sometimes)

September 16, 2017

tl:dr Bitcoin is a really, really expensive way of moving money.  OTOH, it turns out that FedEx and DHL are far, far more expensive ways of sending mail than first-class post, but people do that anyway.

I have to respond to one linkedin post that claims that bitcoin is superior to traditional ways of moving money because it is the cheapest way of moving money.  This happens not to be true, and it turns out that from a transaction fee point of view, bitcoin is substantially *more* expensive than bank wires.  But understanding that the value proposition of bitcoin has nothing to do with cheapness.

It turns out that bitcoin is expensive because it’s very “high touch.”  If you want to use bitcoin to transmit money then you have to go through a lot of hoops to get it done, and you have to go through a lot of people in order to do it.  For example, if you want to buy bitcoin from me, I will typically charge a 1.5% fee spread versus the exchange.  If you add all of the fees together you end up with about 3% which is much, much higher than a bank wire.  Also the price of bitcoin is highly volatile which means that either you handle the volatility yourself or else you pay someone to do it, and that gets expensive.

So why to people do it…..

reliability and traceability – Bank wires are cheaper *when everything works*.  The trouble is that every person has some experience where a bank has messed up a bank wire.  The problem with the bank wire system is that it is literally “pay and pray.”  Once a bank sends out a wire there is literally *no way* that the bank can trace where the money is, and *when* some bank messes up a wire, you are literally looking at days of headache.  Reliability and traceability also matters when you are dealing with people that you have only moderate levels of trust.  If someone tells me that the funds have been bounced and I need to resend the funds, I have no way of knowing if they are telling the truth or they are scamming me.

coverage – Bank wires are better when you can send a bank wire, but try sending a bank wire to someone in Tanzania, who does not have a bank account and wants the money in Tanzanian shillings.  It gets more interesting.  If I have a business that needs to pay *only* to Tanzania, there probably is a better way to do that then bitcoin.  However, suppose I have a business that needs to pay people in 50 different countries.  At that point, I can’t handle 50 different payment systems especially if I just have one person in Tanzania.  But I can set up my system to just use bitcoin, and then the person in Tanzania or the Ukraine or Vietnam figures out what to do with that.

speed and hours – Bank wires can take 2-3 business days.   Bitcoin is instant.  Also bitcoin doesn’t have this concept of a “business day” so if you want to send the stuff on a weekend, you can.

small transactions – The cost of a bitcoin transaction scales with the amount of the transactions, and it’s always about 2-3%, whereas a bank wire has a fixed cost that is about USD 100.  The reason for that has to do with the nature of the technology.  My biggest risk is that something will go wrong with the transaction, so I have to charge an amount that is proportional to the size of the transaction.

better customer service – Big banks have terrible customer service because they are trying to squeeze every cent out to cut costs.  One reason that my customers are willing to pay me 1.5% transaction fee is that I’m just nicer than a bank teller.  Also this happens to reduce my other costs such as credit risk or anti-money laundering.  Basically, I know that the people that buy bitcoin from me aren’t drug dealers so I don’t treat them like suspected drug dealers.  Also, one thing that I can do with a repeat client is that I can send them the bitcoin immediate if they show me a bank receipt.  Since I’ve done business with them before, I know they won’t forge a bank receipt.  Conversely, they’ve done business with me, so they know that I won’t take their money and run.

specialization – The other thing that you get with bitcoin is that you end up dealing with people that specialize in certain types of transactions.  For example, I end up buying and selling bitcoin for at the USD 1-10k range for Hong Kong dollar.  If you need 3 million USD in bitcoin, USD 300K, or USD 30K in bitcoin, I can’t do that but I can point you to people who can.

One other thing is that bitcoin can reduce costs, but not from transaction fees.  It turns out that if you pay a 1.5% transaction fee, but you don’t have to spend weeks tracking down a payment that’s much better for you if you are running a business.

The other thing to point out is that at least in Hong Kong, bitcoin is a B2B play and not a B2C play.  It turns out that when you are dealing with consumers, consumers don’t like to change the way that they pay, and they want convenience.  Part of the reason we have stores and retailers is that this is a way for consumers to push the pain onto the store.  You buy your potato chips, you give the store cash.  If the store has troubles with the bank, it’s not your problem.  Now the store has to handle the headaches of something going wrong so if the store has to pay an extra 1.5% but saves the cost of tracking stuff down.  It’s a bargain.

I should point out that the fact that bitcoin isn’t a cheap way of moving money explains why I’ve never gotten my China money moving business with bitcoin to work.  Because people move money from China to the United States or Mainland to Hong Kong all of the time, there are just better ways of doing it than using bitcoin.  The one client that is interested in buying bitcoin from me happens to be a remittance business that needs to move small amounts of money from China to places like Indonesia.

It’s really important to understand why bitcoin is useful because it indicates what business models work and models don’t.  It turns out that most Silicon Valley investments are based on the ideas of “cost cutting” and “disintermediation” and “horizontal integration” which works against bitcoin.  Bitcoin *increases* your costs and creates more middle men, but the value is that you end up with a faster, more reliable method of moving money with better customer service.


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One Comment
  1. AlphaRho permalink

    >>The cost of a bitcoin transaction scales with the amount of the transactions, and it’s always about 2-3%, […] <<

    this is not correct. the cost of a bitcoin transaction, i.e. the fee to the bitcoin network, scales with the size of the bitcoin transaction in terms of bytes, but not with the transacted value/amount.

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