Saturday, June 11, 2011

Bitcoin: Resilient Internet Payment

I blogged six months ago about why Bitcoin matters. Since that time, I've developed some services with Bitcoin and had two of them shutdown by PayPal freezing my account. I've also sold thousands of dollars worth of Bitcoins in cash sales on the street. I've come to the conclusion that my earlier statement about Bitcoin being "resilient in the face of disaster" may be Bitcoin's most important attribute.


Bitcoin has seven main features. Critics usually choose one feature, argue that it doesn't hold and conclude that Bitcoin will fail. I think any three of these features could fail simultaneously and the currency would still succeed. Consider it an architectural margin of safety. The seven features are:
  1. Predictable supply
  2. Anonymous payments
  3. Permanent payments
  4. Fast payments
  5. Low transaction fees
  6. Easy cross-border transfers
  7. All purchases allowed
Most of these features are well documented elsewhere so I won't explain them further. Fast payments (#4) may need some clarification. When I accept a credit card payment, it clears in a couple seconds. That corresponds exactly to a Bitcoin transaction arriving. After 180 days the credit card payment is essentially permanent. For Bitcoin, permanence takes about 1 hour. In that sense, Bitcoin is faster than credit card networks.


The Bitcoin investors I've worked with care almost entirely about the limited, predictable supply. Some of them are gold bugs or real estate mavens. They've gotten rich on the limited supply of those commodities and see similar opportunities with Bitcoin. Nearly ever feature except the inflation caps could fail and they'd still be happy. A deflationary spiral is their dream come true.

As this demographic holds greater Bitcoin wealth, anonymous payments and easy cross-border transfers will become more important. Bitcoin has potential to become the Swiss numbered account of the future.

Online Retailers

For businesses selling goods and services online, predictable supply is arguably irrelevant. As long as there's no hyperinflation, they'll do fine. However, they care deeply about features 3-6. Fraud and payment processing fees are substantial costs to their business. I know of at least one Bitcoin vendor who offers a 5% discount for Bitcoin purchases because Bitcoin eliminates those two transaction costs.

I've bought and sold services with Bitcoin dozens of times with people outside the United States. In each case, the experience was more pleasant and less expensive than using PayPal or a credit card. Features 1, 2 and 7 were completely irrelevant to these transactions.

Unpopular Commerce

The Internet has been a boon for unpopular commerce such as pornography, gambling, electronic cigarettes and now illegal drugs. Because the commerce is unpopular, many buyers want their orders placed anonymously (feature #2). Pornography and gambling have substantially higher chargeback rates than other industries (#3). Many mainstream payment processors prohibit transactions for these services (#7). In all three cases, Bitcoin provides a solution.

Other Bitcoin features are icing on the cake. They could be removed without reducing Bitcoin's utility for unpopular commerce.


It now seems common for governments to control dissident groups through the financial system. Banks and payment providers are threatened with punishment if they handle funds on behalf of dissidents. Features 2, 3, 6-7 appeal to these groups. Other features could fail and Bitcoin would still be useful for WikiLeaks or LulzSec (both of which accept BTC donations) or funding underground churches in China.


I don't presume to know all groups which might benefit from Bitcoin. I suspect that each of them will want a subset of Bitcoin's possible features. As long as that's the case, Bitcoin has a good chance of succeeding.