

Transaction Fees and the Adoption of Bitcoin - fredoliveira
http://disruption.vc/blog/2014/2/transaction-fees-and-the-adoption-of-bitcoin

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lingben
this is ignoring several key costs associated with bitcoin:

1) knowledge (the average person needs to invest time to learn what bitcoin
is, how to use it, how to protect themselves from fraud, etc.)

2) hidden cost of buying and selling bitcoin (bid ask gap) that is, no one
really uses bitcoin, they barter with it between currency transactions with
real currencies like USD or Euro, this cost is appx. 2-3%

3) the cost of loss due to fraud, theft, etc. and zero recourse when that
happens (there have been so many examples, I'll just leave you to google
specific cases)

In the end, when you calculate these implicit and explicit costs, bitcoin
comes out to cost about the same or more than existing transaction options.
But with the added 'advantage' of having zero recourse if anything goes wrong
(libertarian wet dream) and requiring your Aunt Judy to learn fun new things
like blockchains, hashes, encryption, etc.

Yay!

~~~
sporkmonger
Completely agree that my post is ignoring those things. The post is an
extremely forward looking one. Bitcoin could crash and burn before anyone gets
a chance to implement something like this. It could be replaced by a second
generation cryptocurrency that doesn't have a public ledger. There's a lot of
scenarios here where nobody ever gets to do what I was talking about.

I opted to focus entirely on the costs of transmitting the money. If we did a
full analysis, we'd also have to look at chargebacks, figure out how to set a
value on the speed of the transaction, and deal with the fact that sometimes
Western Union just 'loses' your money and isn't sure where it is. Not all of
these costs would be paid by the same person, but they do all add up to a
systemic cost.

But that's not actually the primary point. There's plenty of reason to believe
(besides transaction cost) that cryptocurrency and smart contracts have a long
future ahead of them. I'm simply trying to point out that there are business
models here that aren't yet being explored.

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jusben1369
Those credit card fees are really high. Ie in the US they're closer to 1.5%
for any merchant doing decent volumes.

Many of the fees associated with non Bitcoin transactions reflect the cost of
regulation. So until Bitcoin is regulated these comparisons are misleading.
(and it will need to be subjected to some types of regulations if it wants
broad adoption vs niche adoption)

Lastly, LevelUp is trying to do the "very cheap to no fee processing" and
making it up with mining data and providing BI services for a fee back to
their merchants. Not sure if they'll succeed or not.

~~~
sporkmonger
I used credit card transactions rates published by Stripe for the table.
Square's pricing is pretty similar, though they don't have a '\+ X cents' for
non-manually entered transactions, which does make them a very good choice for
buying a $3 coffee. Certainly Walmart is going to get better volume rates than
anybody using Square or Stripe, but most people are not large retailers.

Bitcoin is actually regulated already, however the costs of Bitcoin regulation
cannot be reflected in the protocol's transaction fee. An additional fee could
be assessed by the service provider, but so far these fees typically happen
right now at currency exchange points, rather than as a bonus 'sales tax'.
BitPay has chosen to charge a flat rate monthly payment for their non-free
plan while Coinbase charges 1% to cash out to USD.

Also I'm well aware of LevelUp. Point was not that other payment mediums
cannot do the same but that Bitcoin can potentially provide valuable insight
for a much larger set of transactions once you're able to make sense of a big
enough chunk of the blockchain.

~~~
saurik
Stripe's pricing is ludicrously expensive. And Square is trying to be more
than just a payment processor. These companies are competing for markets that
seriously care more about "pretty website" than "efficient business". I mean,
even PayPal had much better rates than Stripe: that $1 charge would have a
$0.10 fee if done via PayPal (even using PayPal's direct credit card billing
solutions). For larger price points, Stripe finally added some volume
discounts, but they are nowhere near as good as their competitors (like, they
require so much volume as to be unattainable for most merchants). Using Stripe
as a comparison for this kind of purpose is thereby just silly...

~~~
sporkmonger
Fair enough. That said, I know of small businesses that are charged vastly
larger %s going through a merchant account, etc (like nearly double what
Square/Stripe charge) so I don't think the rate is entirely unfair. I'd rather
aim for a median rate than 'lowest possible' for a table like this, but I
haven't seen anybody post average rates that are anything but estimates and I
am reluctant to publish a number in a table like that that I'd just pulled out
of thin air. I believe median card-not-present rate is ~2.5%, but that's a
thin air number.

~~~
saurik
The issue at hand is that you've pulled a ludicrous flat overhead fee for the
low-end numbers, leading to a 33% charge... even normal un-negotiated merchant
accounts are usually not that expensive (the percentage gets higher, but the
fixed fees are normally lower). PayPal (which as far as I know anyone could
get) is 5%+$0.05, which works out to 10% on the $1 charge.

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dustcoin
The typical fee for a simple transaction is currently 0.0001 BTC (~$0.07), not
$0.38.

I also do not think it is fair to say off-chain bitcoin transactions are free.
There is some cost in implementing, running and securing an off-chain database
of balances.

~~~
sporkmonger
I used 0.0005 BTC (~5kb), but you're absolutely right that a simple
transaction is substantially cheaper. My assumption here is that as the
economy grows, due to the underlying technology of Bitcoin, more BTC will need
to be 'gathered' together in a wallet before being sent out. This results in a
larger transaction size and a higher fee to exceed the priority threshold.

I suspect that in the future, this will be a fairly common case. I suppose I
might liken the theory here to defragging a hard drive. An unused hard drive
stays in a nice neat, contiguous state. But use it a whole bunch and things
get messy. And in BTC's case, you have to pay a bit extra for the miners to
come along and tidy everything up.

I could be totally wrong on whether that will ever become common, and the
developers could just as easily reduce fees over time as well, but such is the
nature of taking guesses at the future.

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tomasien
Feb 24th we're coming out with a way to make payments at $.18 a payment (no
fees under $2) in under 30 seconds without making a new account. I hope
everyone reads this article and keeps it in mind when we launch!

