Bitcoin brings a variety of advantages to different actors in the global economy. Many people don’t know anything about these advantages because they still see Bitcoin through the tarnished lens of media hyped stories about drug money and cyber crime. This post explores some of the benefits to using Bitcoin for the various actors in the economy including; consumers, the unbanked, merchants, programmers, and entrepreneurs.
The first users of Bitcoin were the Cypherpunks whose ideas ushered in its existence. Quickly following (and often overlapping) were the Libertarians who were using Bitcoin for ideological reasons. They wanted to have a currency free from government control and manipulation. These people didn’t use it for its usefulness (because it wasn’t very useful, yet) but for what it could become. Bitcoin gained a new group of users when the first darknet market, Silk Road, was launched. Darknet markets created a safer and more secure way for users to purchase recreational and pharmaceutical drugs as well as other government banned or regulated items. Bitcoin online gambling sites came next bringing a flood of innovations such as provably fair and blockchain based gambling which could be done directly on the Bitcoin network without any need for the website.
These early adopters used Bitcoin for the advantages it brought them over the current financial system. Now that Bitcoin has been gaining in adoption and startups have been building new technology on top of it, these advantages and more can be realized by everyday consumers and merchants.
As consumers in first world countries there are 3 good reasons to use Bitcoin: protection from ID theft, better control over personal finances, and cheaper goods due to cutting out middlemen and no need for fraud protection services. Bitcoin also offers advantages to those sending remittances to developing countries and to the unbanked of the world.
Imagine we lived in a world where everyone stored their money in a vault with a combination lock. When we had to pay someone we told them the combination to our vault and asked them to go in, just take what we owe, and don’t tell anyone else our combination.
Insane, right? What’s insane is that this is actually a pretty good description of how our current payment systems work. When we hand someone our credit card, type in our credit card information in a web form, or give someone our bank account number we are handing them the keys to our money. We wouldn’t go around handing out our email password to everyone we met, so why are we fine with handing out the passwords to our money? We would actually have to try really hard to engineer a less secure system. Is it no wonder that 16% of persons age 16 and over in the United States have been victims of identity theft, with 78% of that being related to existing credit card and bank accounts?
Losses from ID theft in 2012 totaled $24.7 billion dollars, which was nearly double the losses due to property crimes. Many ID victims end up spending weeks, months, or years cleaning up their credit while having to deal with legal problems and debt collectors. And those numbers were all before the latest Target and Home Depot breaches, not to mention the ID thieves greatest gift so far; Apple Pay.
What most people don’t realize is that not all merchants are equal. Credit card issuers will require more personal information about the credit card holder from some merchants, but not others, depending on the business relationship they have with the merchant. If they really trust the merchant, they will allow them to pull out funds from a credit card that is past its expiration date, and if you happen to be Apple, credit card issuers will let you pull out funds from an account that has been canceled over a year ago because it was in a massive database breach. When Apply Pay launched they were dealing with fraud rates 60 times higher than traditional credit card fraud, despite being advertised as a more secure way to pay. Fraudsters would load up a canceled credit card from the Home Depot or Target breaches and since Apple was a trusted vendor, instead of being rejected as they should have, these already canceled cards were used to buy whatever the crooks desired.
And there is nothing you can do about this. You can’t change your account settings so that your credit card issuer won’t allow some merchants to charge your expired or canceled cards. All you can do is complain and start the fraud claims and hope you get all your money back.
If you use a Bitcoin bank (such as Coinbase) to purchase bitcoins and then use them for all of your purchases, you only have one entity with your sensitive account data instead of the hundreds or thousands of merchants you normally deal with (and eventually the billions of people who will have access to your account data once it is in a data breach). If you decide to go the extra step and purchase bitcoins with cash then you can completely free yourself from the horribly insecure system we live in.
With Bitcoin you have a public account (known as a Bitcoin address) and a private password (known as a private key). Anyone in the world can send bitcoins to your public Bitcoin address, but in order to send bitcoins you use your private key to cryptographically sign your transaction. No one ever has to see your private key but you, it can be kept completely secure. No one can reach in to your account and take money out except you.
Control Over Personal Finances
Have you ever had the pleasure of a bank freezing your funds or locking up your account for a period of time? Or having to wait days for a check you deposited to clear while you miss a payment deadline (despite having the money to pay it)? With Bitcoin you can save yourself from this kind of treatment. You don’t need a bank to pay someone in bitcoin or accept bitcoin deposits, and the longest you’d have to wait to make absolutely sure a payment is completely confirmed is an hour or so. You could sell a private island and be more confident in a bitcoin payment after one hour than after a week with a payment in the traditional banking system.
This is more of a little bonus than a must have but by cutting out the parasitic fees charged by credit card issuers and money transfer services, goods and services can be a little bit cheaper. Some merchants already directly offer discounts for using bitcoin. Without a need for middle men all the money that is extracted from the system to pay for personnel, infrastructure, shareholder’s profits, and fraud prevention will get returned to the consumers in the form of cheaper goods.
Until January 27, 2013 it was against the law to add a surcharge to credit card purchases to cover their fees. Because of this prices for items, even if paid for by cash, all had to rise to cover the fees. Since merchants used to be prohibited from charging separate fees this kept us, the consumers, ignorant of just how much more expensive items were because of the credit card industry. Many gas stations had offered (and continue to offer) different pricing for credit card and cash and were able to get away with it by claiming it was a discount for cash purchases and not a surcharge on credit cards (despite the two being the same thing). The price for cash purchases of gasoline can be 5% cheaper than credit cards (as credit card issuers usually charge 1-3.5% plus a transaction fee). Wouldn’t you like to save 5% on everything you purchase and still have the convenience of not having to pay with cash?
While Bitcoin brings a lot of advantages to consumers, it’s not all sunshine and rainbows. Bitcoin is still early technology, and while it is growing rapidly, it isn’t yet accepted by most vendors. As of the beginning of 2015 there were around 100,000 merchants worldwide accepting bitcoin. There are even many large names accepting bitcoin such as Overstock.com, Dell, Dish Network, Tiger Direct, New Egg, and Expedia.com. For companies that don’t yet accept bitcoin there are services such as purse.io and Fold which allow you to buy from Amazon and Starbucks using bitcoin, as well as services like gyft where you can purchase gift cards with bitcoin. This adds extra steps to purchasing goods but it is worth the free world class ID theft protection.
One other barrier to use is that the dollar to bitcoin exchange rate is quite volatile, so even with merchants accepting bitcoin they still price in dollars and you may gain or lose money frequently by holding bitcoin. To get around this people can opt to only hold a little bitcoin at a time and purchase from a bank or exchange (like Coinbase) as they need to make payments. Again this adds some complexity to the system that many will not want. The good news is that as bitcoin adoption grows these issues will go away.
2.5 billion people currently do not use or do not have access to the banking or financial sector. There are many barriers to entry for these people, but many of them have access to the Internet in some form. This means they could use bitcoin, engage with the global economy, and have no need for the traditional financial system they have been kept out of. To give one example of empowering the unbanked with Bitcoin, the company Film Annex started paying their workers in bitcoin to get around social and cultural prohibitions that keep most women in Afghanistan from having a bank account.
In 2014 remittances to developing countries are estimated to have reached $436 billion. The World Bank estimates that the average cost of sending money is around 8%. At the current USD price of bitcoin it costs around 2.5 cents for a bitcoin transaction (of any amount). This means if you wish to send $500 to someone using traditional financial systems (such as Western Union) you can expect to pay $40. If you sent that in bitcoin, you’d pay only 2.5 cents, so it would be 1600 times cheaper than sending cash.
The greatest advantage to merchants is that Bitcoin gives them a choice. Merchants don’t actually need a payment processor in order to accept bitcoin, since with Bitcoin anyone can be their own bank. However there are bitcoin payment processors (such as BitPay)which do offer value by creating a user friendly service, integrating with your systems, and offering to convert instantly a percentage (or all) of your bitcoin payments to cash. These payment processors currently charge 1%, which is significantly better than the current payment processors. Other than that, with Bitcoin there is no fee for the merchant.
A second advantage is that Bitcoin transactions can’t be reversed. With the current system a payment processor could reverse a transaction even months after it was made, which can be a nightmare for merchants. This is done as a service to consumers who use credit cards, as they can dispute charges after the fact. But this is mostly a consequence of fraudulent use of a credit card being spotted and contested. With Bitcoin, as we’ve mentioned before, fraud is virtually eliminated so such chargebacks are no longer needed.
Programmers and Entrepreneurs
The Internet was simply a technology that enabled computers to send information to any other computers anywhere in the world, and look what that simple technology has become. Bitcoin is a technology that allows people or computers to send value to any other person or computer anywhere in the world. See the similarity? Bitcoin is programmable money. The sending of value is done by a scripting language built in to the Bitcoin protocol. While the predominant use of Bitcoin is to send money to other people there are technologies that are being built on top of Bitcoin that will revolutionize the world.
A shared cryptographically secured ledger like Bitcoin can potentially replace almost anything that needs a central authority. You can trade stocks and no longer need exchanges (t0), you can store proof of ownership of digital goods (ascribe.io), you can accept payments for streaming content (streamium.io), identity and reputation management can exist outside of government bureaucracy (Bitrated), you can have fully decentralized crowdfunding to replace kickstarter (lighthouse) or marketplace to replace eBay (Open Bazaar), you can store all the production rights of music in the blockchain so that payouts are automatic (Ujo Music, using the Ethereum blockchain), you can allow people to use your Wifi for a fee (BitMesh), and so on.
If none of the other reasons for using Bitcoin resonated with you, the fact that Bitcoin is already changing the world should be enough. Even if you aren’t a programmer Bitcoin will become a part of your life at some point, just like the Internet has become a part of everyone’s life. Remember how long it took grandma to finally get online and send her first email? While you were checking facebook on your iPhone? Do you want to be stuck with whatever the AOL of Bitcoin might be, desperately trying to figure it all out while your friends are effortlessly using the technology and laughing at you as they help you navigate it?
I didn’t think so.
Here are some resources to help you get started:
- Getting Started With Bitcoin – Bitcoin.org
- A beginner’s guide to bitcoin – Coindesk.com
- Khan Academy Bitcoin Videos
- US Dept of Justice – Victims of Identity Theft, 2012 [PDF]
- Wall Street Journal – Apple Pay Stung by Low-Tech Fraudsters
- NerdWallet – Charged More at the Gas Station Because You Used a Credit Card?
- World Bank – Global Financial Development Report 2014 [PDF]
- World Bank – Migration and Development Brief 24 [PDF]
- BitPay blog