Why I Lost Faith In Bitcoin As A Money Transfer Protocol
As 2013 came to an end, many reflected on last year’s biggest tech news — and Bitcoin was a serious contender. But the main question remains: why are people interested in Bitcoin?
This whole debate reappeared when Charlie Stross stated that “Bitcoin looks like it was designed as a weapon intended to damage central banking and money issuing banks, with a Libertarian political agenda in mind — to damage states ability to collect tax and monitor their citizens financial transactions.” Paul Krugman then quoted his post, neither denying nor approving this thought.
But Chris Dixon (and Fred Wilson in the comment section) reiterated their strong interest in Bitcoin while sharing that they are both Democrats.
If major Bitcoin enthusiasts don’t have any political agenda in mind, then what is the future of Bitcoin? At its heart, Bitcoin is a cryptocurrency that doesn’t rely on any central bank. Bitcoins are just a chain of characters defined by algorithmic rules, and transactions are handled by the network of miners.
Yet, in a month’s time, the value of a bitcoin went from $200 to more than $1,000 on all the exchanges. In other words, it is as volatile as it can get. Right now, there are only around 12 million of bitcoins in circulation, and many Bitcoin holders are recent converts that buy and sell every day. So how could you think about using bitcoins to pay the rent? You could simply hold your bitcoins and expect to triple your wallet value in a couple of weeks instead.
That’s why I believe Bitcoin isn’t the next world currency. Bitcoin’s true purpose is not what everyone originally expected — you won’t buy a pizza in bitcoins anytime soon. Moreover, Bitcoin won’t be able to remain an unregulated currency for long.
So Bitcoin’s true purpose lies somewhere else. As Bitcoin is a peer-to-peer payment network, you don’t need any banking institution to make large transfers. Bitcoin could become the first meta-currency that sits on top of traditional currencies, the common language between USD and EUR. That’s what Dixon finds interesting, Bitcoin is as much a money transfer protocol as a currency. And it has the potential of disrupting the traditional banking system.
Replacing Forex Transactions With Bitcoin
As I live in France and work for an American company, I thought I would be the perfect candidate for this particular use case. I tried to use Bitcoin to transfer a small amount of money between the U.S. and France. At first, I purchased bitcoins using Coinbase and my U.S. bank account (a couple of dollars in fees). The process was very easy, but because I don’t meet the requirements to make instant purchases, I had to wait about a week before I could actually do anything with my bitcoins. Coinbase had to verify the transaction first.
While I take Coinbase as an example here, there aren’t many trustworthy and easy-to-use services to make Bitcoin transactions yet — and all services have flaws. People ask me all the time how they could buy bitcoins, and I don’t have a simple answer.
In that period of time, bitcoins went from about $850 a bitcoin to more than $1,000, then back to $700 — I only could sit back and enjoy the ride. Then, when I finally got my bitcoins, I transfered them to Bitstamp in a couple of hours (no fee) — it was flawless and a great example of the beauty of Bitcoin. Finally, I transfered my bitcoins to my French account ($1.24 fee to convert into EUR with a very good conversion rate). I had to wait a few days before getting my money because of the traditional banking system.
Overall, it was a painful experience, even more painful than using traditional foreign exchange services. But more importantly, I don’t see how I could trust Bitcoin as a money transfer protocol with such a high volatility. Fees were much lower, but it doesn’t matter if you don’t know how much money you will get on your bank account in the end.
A couple of weeks ago, Bitcoin’s value went from more than $1,100 to around $650 in a few hours, because of a new rule in China. You can’t use Bitcoin for serious amounts of money if there is a chance of losing 40 percent of your money overnight.
As long as Bitcoin remains a young and volatile currency, Bitcoin’s mechanisms will remain beautiful on paper. Using it for real world transactions would be crazy, and I think we are still a couple of years away from getting a stable Bitcoin that can be trusted. Until then, using Bitcoin will remain a wild ride — it’s definitely fun, but don’t take Bitcoin seriously just yet.