The Great Bitcoin Debate In Six Points

an economist, business advisor and Founder of Market Platform Dynamics
7:16 AM EDT May 30th, 2014

Last Friday PYMNTS ran a short article by me that made the pretty simple and accurate point that receives dollars when people use their Coinbase wallet to send bitcoins. Little did I know the firestorm I would start. Patrick Byrne, Overstock’s CEO, was not happy with me as evidence by his post here on not to mention his tweet bombs. I wrote a short elaboration which seems to have gotten a number of people even more riled up. Here are six follow-up points just to continue the “dialogue” over bitcoin’s efforts to become a currency or payment system or whatever.

1)  As I mentioned in the initial piece one merely has to state how this process works with Coinbase and similar wallets to see that it does not make any economic sense. Person takes $ from their bank account; gives it to the wallet provider; wallet provider uses the $ to buy BTC for the wallet; the person then wants to buy something for $; the wallet provider then sells the BTC for $; and the wallet provider pays the seller in $. The stutter step of buying and selling BTC simply introduces inefficiency and friction into the exchange. And the consumer bears risks. This is a fundamental point.

2)  It does not make any sense as a general matter for consumers to use wallets like Coinbase to buy from domestic merchants like Overstock. The consumer transfers dollars from their bank account to their wallet. Between the time they transfer dollars and the time they use their bitcoins to pay they incur exchange risk in addition to any fees they pay the wallet provider. If they go buy something from Overstock they could pay with PayPal or any other payment method for free, probably get various protections against the merchant, and possibly get rewards. See Ben Edelman’s piece here for a great exposition of this point. These wallets make a lot of sense for early adopters who want to support bitcoin for a variety of reasons or for exchanging bitcoins with other early adopters. But they don’t make sense for most consumers. They therefore probably won’t play a significant role in igniting bitcoin as a general purpose currency or bitcoin as general purpose payment system. This is another important point and the one bitcoin backers would be well advised to worry about.

3)  Coinbase and the other wallet providers are a good deal for the merchant.   Coinbase is currently charging a processing fee of 1 percent and only after the merchant has exceeded $1 million in sales. Putting the inefficiencies of dealing with small payment schemes aside, this is a good deal for the merchant. What’s surprising so far is that Overstock and the other merchants don’t seem to be giving people rewards for paying this way. Whether Coinbase can make money with this fee structure also remains to be seen.

4)  If Overstock and other merchants actually took possession of bitcoins rather than dollars, that could increase the odds that bitcoin could be ignited as a general purpose currency. Here’s how it would work. Overstock would get bitcoins. It would use the bitcoins to pay suppliers. Those suppliers would either exchange them or possibly use them to pay other suppliers. This would set up a virtuous circle and get bitcoins in widespread circulation and use. That is in fact how currencies get established. The fact that that is not happening for bitcoin is a huge problem for it.

5)  Mr. Byrne claims that his suppliers won’t take bitcoin. I don’t accept that. One of the things we know in B2B payments is that buyers, especially large ones, pretty much dictate how suppliers, especially small ones, are going to get paid. If Overstock told some of its smaller suppliers that they could either get paid in bitcoin, or go pound sand, my guess is they would take bitcoins. The total value of Overstock’s revenues based on bitcoin-related transactions is still trivially small so there’s no obvious reason why Overstock couldn’t use 100 percent of that revenue to pay suppliers. So I think the more plausible explanation is that Overstock really doesn’t want much in the way of bitcoins on its books.

6)  Fortunately, we’re not going to have to wait very long to find out whether my views on the likely ignition of bitcoin are correct or not. We’ll see from the data whether bitcoin transactions accelerate. They have been pretty flat for many months. My conjecture is that the fact that merchants really don’t really accept bitcoin as a currency is a big deal and that bitcoin transactions won’t get into a phase of explosive growth partly as a result of that. So ultimately this isn’t a philosophical debate. We will learn whether bitcoin goes into a phase of explosive growth as a transaction mechanism or whether it doesn’t.

I’d like to thank Dr. Byrne for his comments. Healthy debate is always good and I’m looking forward to hearing more from Overstock’s CEO and a big bitcoin proponent. So stay tuned.

  • Stephen Reed

    Interestingly, the price of bitcoin is proportional to the square of the number of transactions, users, and addresses – Metcalfe’s Law for network effects.

    Users jump through the hoops you mention because most of the economy runs on fiat. When bitcoin is accepted by many entities and employees can receive a portion of their salary in bitcoin then the need to transfer back and forth to fiat vanishes.

    A bitcoin savings account grows in value at an average of 10x annually. The $20 worth of bitcoin I buy today may buy $200 worth of goods next year. That is the bet that bitcoin users today are making.

  • Mark Norton

    A few observations on these points from a Bitcoin user:

    1. People won’t usually buy Bitcoin from Coinbase in order to buy goods on a site like Overstock. Rather, they buy bitcoins from one of many possible sources because they believe in it as an idea or because they hate banks and credit cards. Or, they have invested in Bitcoin when it was cheap and then decided to spend some of their ‘found’ wealth when the price rises. The inefficiency you talk about doesn’t exist because bitcoiners want to use them for reasons other than pure transaction. You seem to mistake Bitcoin as a credit card replacement. It’s not.

    2. Credit cards and PayPal do offer consumer protections, and that may be a reason for them to remain in business. On the other hand, the shenanigans banks play with people credit cards and credit scores coupled with the risk of identity theft more than counterbalances that advantage. Bitcoin allows me to save, spend or send my money to whomever, wherever, whenever without the assistance, approval or excessive fees of banks.

    3. I agree, it would be nice if merchants would pass on the savings from Bitcoin users, and there are plenty that do. To claim that a major bitcoin accepting site does not do so is a strike against Bitcoin is simply missing the point. Some merchants who work on thin margins might find it easier to stay in business if they don’t have to pay credit card charges. And remember, they aren’t only paying the 3% cut of the sale, they also pay a variety of fees to the payment processors.

    4 and 5. (Note that these are actually the same point, so giving them separate numbers seems like and error, or padding.) This point actually made me laugh out loud. The point is that Overstock must force its suppliers to accept Bitcoin. Forcing people or businesses to accept BTC before they are ready for it is a recipe for disaster. It would not benefit the suppliers because they would resent it, and it would not benefit Overstock because they would be accused of being a Bitcoin bully. Those suppliers well may be asking for payment in BTC in a couple years’ time when they have figured out the benefit of Bitcoin for themselves. That will create the virtuous cycle that will bring Bitcoin mainstream. On a personal level, I talk to a lot of people about Bitcoin, and I am always careful to tell them that I am not a salesman, and if they are not comfortable with the idea right now, that’s fine with me. I think Overstock is doing the same thing and I applaud them for it.

    I’m actually really surprised that Mr. Evans recommends that Overstock bully its suppliers. Bullying must seem like a natural, everyday activity to him.

    6. This is my own opinion, but it seems to me that Bitcoin is going to go through a number of stages of use, and that widespread merchant acceptance may actually be one of the last stages. Right now, it’s in a speculative stage. People are waiting for more of the infrastructure to be built out, for additional features like smart property, smart contracts, and decentralized companies to start kicking in, for more regulatory and tax clarity, etc. More than anything else, they are just watching the momentum of Bitcoin grow and grow. The next big movement for Bitcoin may be when a country on the financial edge goes over and all-of-a-sudden people start pouring their money into Bitcoin to retain value, or it may catch on as way for laborers in foreign countries to send money home to their families, or a business may come online that helps retirees take advantage of the huge growth potential of Bitcoin to save their retirements, or …

    Bitcoin will remain a speculative instrument until it is worth much, much more than its current price. Once it takes off, people who have even a little will start to feel this ‘found’ wealth and want to take advantage of it. Then we will see merchant adoption.

  • PLK

    Just one point–Coinbase and several other Bitcoin services actually use off-blockchain transactions, so the data you are looking at on the number of Bitcoin transactions on the blockchain is not necessarily representative.

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