The article doesn't say anything about these things and the underlying principles other than that it's "suprisingly difficult". Instead it goes right into proposing a solution based on Bitcoin and making big picture comparisons with network protocols that probably sound very smart to the right audience.
Given the amount of agreement and hype that the article has received so far, I feel a bit like an outsider right now questioning what is proposed. I think I just don't get it. Is everybody just a lot smarter than me or does the community miss to address some basic questions here?
The problem with using a promise to move money is that you have to trust whoever's promising. That works alright if there's a central authority, like a bank, but less well if you don't want to trust the authority, don't have access to the authority, or are unable to comply with the rules of the authority. Also it's kind of a shitty experience, as is. (You wouldn't pay for all of your Amazon purchases with wire transfers, I'd imagine.)
The problem with moving physical money is that it's difficult to do over long distances or en masse.
In order to solve the problems with existing money transfer, then, bitcoin needs to be able to do without a central authority and without using a physical representation of money. Which it accomplishes by allowing you to store money - not just a representation or promise thereof - digitally.
Also, according to your response a domestic money transfer would suffer the same problems but these seem to work just fine (at least much better than international transfers).
Why does a mechanism that works just fine in between bank and customers and generally domestically just break down when country borders are involved?
Certainly they work better, but "just fine" is a much stronger claim and one I'd disagree with. I don't find myself spending money by wire transfer hardly ever, eg, and when I do it is a much larger affair then using cash. See also andrewla's comment here [1].
> Why does a mechanism that works just fine in between bank and customers and generally domestically just break down when country borders are involved?
Because banking systems and the regulations surrounding them are different in different countries, basically, and that adds lots of complications to an already extremely complex system. The bitcoin protocol is not different in different countries.
It's worth noting that EFTs (Electronic Funds Transfers) between domestic banks in Australia is nearly always free, and that in your case you're not transferring money overseas at all.
You are transferring money to PayPal Australia, who is then communicating to PayPal Hong Kong that all is well - so that PayPal Hong Kong can pay the merchant. Both entities can transfer to/from local bank accounts because they have explicitly set up B2B interfaces (and met regulations) that allow them to do so.
In this case, PayPal is the bank, and they are a bank seeking to specifically facilitate money transfers between countries. You could not, for example, transfer money to a merchant in (e.g.) Siberia - they wouldn't be able to get that money out of PayPal into their regular bank account, because PayPal has no local presence/connection to the banks there.
From the article: "This would not, of course, be the first global payments network. One obvious comparison is with PayPal. The fundamental advantage a Bitcoin gateway ecosystem has over PayPal is that it’s open".
XorNot: Please correct me if I am wrong.
USD is not a relevant comparison. What matters here is how money gets moved. When money is transferred within the country, a central bank (Fed Reserve, Bank of England, Reserve Bank of Australia) keeps an account for each local bank. Which means that when 'Alice' of Wells Fargo sends money to 'Bob' at Chase, the central bank actually debits and credits the banks. And then several times a day the banks will settle with each other and net out the differences.
But this is not possible internationally, that means banks must each other have direct bank relationship and have an account with each other. And if 2 banks don't have direct relationship, then they have to go through intermediary banks which they do have a relationship.
Enters Bitcoin, what bitcoin provides is not a reserve currency, what it provides in this context is a global ledger. Instead of the Commonwealth bank of Australia (CBA) needing to have a direct account relationship with Wells Fargo (WF) bank. CBA can just simply send bitcoin to WF.
There is a bit more about the underlying transfers here: http://gendal.wordpress.com/2013/11/24/a-simple-explanation-...
Although here is my question:
Why doesn't international transfers just go through the VISA network. The VISA network is essentially the global central bank
But this is all irrelevant to Bitcoin - which is marketed by its advocates a consumer currency, not an international system of exchange between institutions. Institutions have no need nor desire for such a thing - it is a saturated marketplace, with literally thousands of avenues of exchange, of which Bitcoin is a particularly poor one.
Which circles back to my original point: foreign currency transactions are very simple for anyone ranging from consumers to medium or large size businesses, barring tax issues (like not paying a lot of it). Bitcoin does not solve a problem not already solved for centuries by the banking system - this is literally the thing that got it started way back with the Knights Templar.
Because unlike domestic transfer where the central bank helps keep a ledger between banks, there is no "global ledger" internationally. So banks have to resort to "correspondant banking" which is why you see so many hops in international transfers.
Bitcoin provides such global ledger. I don't think FOREX is the issue here.
Instead of going through correspondent banking (many hops), 2 banks can simply send bitcoin to each other and immediately net off.
Could you clarify if my understanding is incorrect?
EDIT: Here is a document on how VISA handles international payments
http://www.bis.org/publ/cpss53p16.pdf
2.3.3 Clearing and settlement procedures ... Settlement is not carried out through Base II; Visa merely provides the data to allow settlement to be carried out. For settlement in US dollars, Chase Manhattan Bank, New York, acts as the settlement bank. For multicurrency settlement, Chase Manhattan Bank, London, acts as the settlement bank. All members may hold their own settlement account with any other financial institution, such that all requests for funds or payments are ultimately settled through the correspondent services of domestic clearing and settlement systems. ...
As for visa, I wrote about it recently here: http://gendal.wordpress.com/2014/07/05/why-the-payment-card-...
The thing to remember is that Visa authorisations are done in near real-time but settlement between issuers, Visa, acquirers and on to merchants is done over the normal banking system, as far as I know.
Do you see an advantage for bitcoin then by removing the need of peering banks?
What isn't obvious to me is what happens in international scenarios - you ask a great question.
[EDIT] - Actually - here's your answer.... See section 2.3.3 of this doc: http://www.bis.org/publ/cpss53p16.pdf
Moreover, there's no benefit here: dealing with separate Bitcoin services removes any end-user guarantees. If I send money from Australia to England, Paypal Australia has to deal with the Australian government and the British government to obey consumer law. With a Bitcoin exchanger, once the BTC is transferred you're at the mercy of whatever local exchanger you use at the destination.
Paypal wants to stay in both countries, which means there's an end-to-end legal protection for both parties.
The open-nature of Bitcoin is irrelevant. The USD is pretty damn open.
My hunch is that the trust required to move money is very similar to the trust required to have an account with money at your bank, but the main difference is you pay for that trust in different ways.
If you write a remittance, you trust it will be remotely delivered upon request (ie, immediately). That trust is ensured by an organization that has access to ready capital in many locations (which involves some opportunity cost, Western Union could just be pooling all that money and investing it). You pay for that trust through fees.
When you deposit money at a bank, you trust that they will return it to you at any of their branches at some point in the future. That's a very similar sort of trust. Yet here, you really pay for it by foregoing the opportunity cost of lending your money to strangers. Though they pool your money with the money of others to smooth risk, so they're getting a better return / less risky return from lending than you could get on your own. But you're really paying through the difference between the return you would earn by loaning it out and the interest you earn. You're paying that gap.
Similar problems occur in domestic money transfers, so domestic money transfers still have fees. However, I would expect that establishing trust with international money transfers involves dealing with multiple currencies (possibly some of which are being inflated by a government), magnifying the costs. I would expect the fees would tend to be higher.
(Western Union doesn't suggest this is the case. Sending $1000 instantly seems to bounce between $86 and $95 no matter where I send it, domestic or international. They may be making some money by setting exchange rates, I'm not sure. Also, they sometimes gave me wildly outlier fee quotes, so I'm not sure those are their actual prices, or how stable they are, or if there's not a bug in the website. For comparison, World Bank says remittances average around 8.14%: http://remittanceprices.worldbank.org/en )
Banks often charge more for international wire transfers, but weirdly tend not to change their prices based on the amount sent. Here's a chart of some of their fees: http://www.mybanktracker.com/news/2013/04/18/wire-transfer-f...
Bitcoin offers some opportunities to bypass some of the required trust, possibly resulting in drastically lower fees. (You still have to trust the network won't implode though.) That said, I don't want to suggest remittance services are gouging anyone. I have no doubt it's costly to set up an international trust network with cash on hand all around the world. But I think there's an argument to be made that the infrastructure for a cryptocurrency scales a bit more easily than the infrastructure for a Western Union. (On the other hand, ensuring there are buyers and sellers of bitcoin in whatever two cities you're using as endpoints isn't trivial either.)
That World Bank link above talks about the "5x5" goal of reducing remittance fees by 5% (from 10%) over 5 years (beginning in 2010). Work anywhere in the developing world or on development economics and you'll get a sense of how critical remittances are to developing economies (often swamping the impact of foreign aid). It's conceivable that many humanitarian and development goals might be hit if we could use technology to lower barriers to easier money transfers.
tldr: Even transfers within a single country are very complicated. Your bank just hides the complexity from you.
The gateways on each end would also want to take a fee.
Add to that the (MASSIVE) cost of compliance globally, and the costs of the model described by Stripe may not be much better than that of existing services (TransferWise, Western Union, etc.).
It's just an absolutely mind-bogglingly large, long, and costly endeavor, and the end results may not be worth it.
Is that true? I everyone around the world is moving money around, then most trades can be covered by not moving any money around, just between people in the same country.
If I want to move $1000 to France, and someone else wants $1000 from France, we just swap money, and two people in France do the same.
What is left is keeping track what everyone has put in, and what they have taken out.
And that's exactly what Bitcoin is; a secure digital ledger. It's a way to securely and globally record "person A has 10 BTC, gave person B 5BTC, then person B gave persone C 3 BTC" in a way that doesn't allow person A to simultanously have given those same 5 BTC to person D (who, given the anonymity of the internet, may also be person A).
That's all Bitcoin does; it provides a secure way to record such transactions without having a trusted third party who must trust to increment and decrement the right accounts in the right way.
A site allows bob and Alice to find each other, agree a shared amount to transfer, agree to which end point they will onwards transfers (hmmm this might be the breakdown point) and then record that in the block chain
I think oddly there is still an enormous amount of trust involved - trust that Alice will complete the final important step of giving the money to Bobs silver haired grandmother or whatever
> If money exchange is the main problem that Bitcoin solves, then why isn't the problem of money exchange attacked directly instead, i.e. through some other less volatile classical stores of value like gold or stock?
"Money exchange" is a poor way of phrasing the problem that Bitcoin solves. Satoshi called it "Peer-to-Peer Electronic Cash", which is a better way to think of it: currently, without Bitcoin, the only way to transfer money to a peer without relying on a third party of any sort is to hand deliver a wad of cash. Bitcoin enables that transaction to happen electronically, for free. I don't see how it would be possible to enable those features (no need for third party, free international transfer) while using classical stores of value, and as far as I know neither does/has anyone else.
> Why is money exchange a problem anyway and why couldn't a classical wire transfer solve the problem?
This is basically asking "why is the trust thing so important?" That's a pretty heavy question, but one simple answer that comes to mind is that trust is expensive, and economically inefficient. The capital involved in mimicking the behaviour of a company like Western Union is a small fraction of what they're worth by virtue of being Western Union (ie. having people trust them) and the fact that they meet regulatory requirements everywhere they operate. That brand is only valuable and those regulations are only necessary because transferring money used to be impossible without them.
Now, what Stripe is suggesting (and I happen to agree) is that there may always be trusted third parties and possibly some level of regulations involved to protect the consumer, but the level of trust and the amount of safeguards will ultimately be tempered by the enormously reduced barriers to entry (and hence vastly increased competition), potentially to the point where consumers will have almost the same variety of choice with their payment providers (ie. replacing credit card) as they currently enjoy with email. There are still a lot of technical hurdles to work out before that can become a reality, but that's the dream I'm excited about and the real value I see in Bitcoin.
The problem with making it "easy" to move money is that fraud becomes easy as well. There was an article on HN the other day about someone who wired $4k to a fraudulent AirBNB host. The credit card system skews towards assuming that the merchants are fraudulent and the customers mostly honest. Bitcoin goes in the other direction: it's entirely caveat emptor, there's no fraud protection or recovery at all. If your key is used to send bitcoins, by you or someone else, they're gone to that address. This allows for the low transaction fees but creates a trail of people who've lost money, whether on mntgox or localbitcoins or random internet purchases.
(I've been playing with the description "uber for banknotes" for a while; the disruptive evading of existing regulated systems is important to both Uber and Bitcoin)
Also, the money has to be kept in escrow until the possibility of a dispute is over, which adds a substantial delay.
As for the money being kept in escrow, that is the definition of escrow. The alternative is the scenario of credit card payment processors, which keep the money for a period, and retain a fixed percentage of sales turnover, as a guarantee for refunds. From the merchant perspective, the average payment delay should be shorter using bitcoin than it is with credit cards.
False. It requires trust in the liquidity of bitcoin. If you can't convert bitcoin to local currency, it has no value. Bitcoin's fragility is in its ability to act as a holder of value, as repeatedly show by speculative price swinging (sometimes without apparent cause).
Gold, for all its faults, has a huge track record as a value store.
I bought Bitcoins more than 1 year ago. If you look at Bitcoin in terms of years, and as a long-term store of value, Bitcoin is not volatile: the value is increasing until total adaptation. And I don't know anybody else who bought and held his bitcoins who's complaining :) (I'm not counting people who had Bitcoins held at MtGox, as they didn't have Bitcoins, just IOUs for Bitcoins)
That you bought something and had it go up is great for you, but it does not mean the volatility is low. Indeed, if it went up a lot, it means volatility is high. Volatility is the inverse of stability.
Lets say you have two magical safes, and you put $100 in each one.
The first safe gives you the real-dollar value of what you put in, less $0.50 per-month. So a year later, you get $94 worth of inflation-adjusted dollars no matter how high or low inflation has been over the course of the year.
The other safe gives you an additional dollar for each day you keep the money in it, but there is a 70% chance all but $10 catches on fire when you open the safe. So one year later you have $465 or $10, statistically averaging $149.5 .
The second safe might be worth gambling on as statistically you get almost a 50% return on investment: but if you need to be certain the value you put in is maintained, the first safe is the better option. Therefore, the first safe is a far better store of value.
in fact, one definition of a bubble is when people start to assume that an asset will always appreciate over time...
Bitcoin is only valuable because people choose to find it valuable. One example of how it could crash in value is if a competing cryptocurrency starts to gain momentum, and people jump ship, or if a major flaw is found.
There are many plausible scenarios for bitcoin going to 0.
The maximum amount of each cryptocurrency is hardcoded into their design, but nothing stops people from "printing" new cryptocurrencies. There's bitcoin, litecoin, peercoin, darkcoin, namecoin, primecoin, and of course dogecoin... Gimme a few hours and I could cook up xiphiascoin in your honor.
And when something happens that makes people migrate en masse from one *coin to another (perhaps a security flaw in the reference implementation), you might wake up to find that your old coins are now worth less than a Zimbabwe dollar.
The Times 03/Jan/ 2009 Chancellor on brink of second bailout for banks
> Storing value in an encrypted wallet on your computer is inconvenient to say the least
It's possible to store Bitcoin on sheets of paper, or entirely in your brain, safely and securely.
I get the distinct feeling you've never used Bitcoin before. Please, sign up for an account at Coinbase and buy $1000+ of BTC or otherwise put yourself in the shoes of someone who wants to buy a serious amount of coin before making these sorts of statements.
Bitcoin isn't about being a PayPal competitor. It's money outside the State, always has been, always will be. Unless of course it is corrupted from the inside out, probably by whitewashed companies who are too afraid to embrace a great thing in spite of what regulators would like them to do.
The process for making a secure paper wallet is far from convenient and brain wallets are about the worst possible way to store bitcoin and are far from safe and secure. If you're going to get some please do not use a brain wallet.
I think a lot of people would argue that sticking with their current system (banks, fiat currency, etc) is, in fact, much easier than that.
Seriously, the interface provided by Citibank is pretty freaking great. I work, I swipe my credit card places. As long as I do the former more than the latter, I don't need to touch anything else. Also every few months I accumulate enough points to buy something on Amazon for $50-$100 for free.
Bitcoin could be even better if I got paid in Bitcoin and could pay people in Bitcoin, but I can't.
Electrum is great and if you write down the words thats fine. If you try to memorize them without a backup there are a lot of events that can happen in your life that will lead to the total loss of your coins.
If it can still be used by die-hards like you to protect themselves from the State, all the better, but that part of it is never going to be of much interest to most people.
Yes, and it's the truth. What can bitcoin do that no other currency can? It can operate entirely outside of the existing banking system. That's the X factor of bitcoin, and NY regulators hate it for this reason.
The black market actually has _very_ wide appeal. It's worth north of 40% of GDP in certain developing nations. It's worth billions of dollars in America, and Bitcoin has that market cornered online. This _is not_ a bad thing. It is something worth celebrating.
I might add, the vast majority of Americans can't imagine a world in which the US Dollar isn't world reserve currency. Bitcoin was devised as a better currency system than the US Dollar ever could be, and that's why it's so special. Bitcoin doesn't try to be legal, it doesn't try to be whitewashed and savory, Bitcoin just _is_. And what it is, is a vastly superior form of money than fiat currency.
- every single wallet provider, including makers of open source wallets like Bitcoin-QT, in addition to Bitcoin exchanges and banks, are legally considered "Virtual Currency Businesses"
- each customer of a "Virtual Currency Business" must have a verified physical address and government issued photo ID on file in order to use Bitcoin
- each "Virtual Currency Business" must file suspicious activity reports on all transactions valued at over $3000 USD, meaning open source software like Bitcoin-QT must know each of its users at all times
- each "Virtual Currency Business" must retain records for no less than 10 years
- each "Virtual Currency Business" must maintain collateral in the form of USD including collateral for total Bitcoin balances
- each would-be creator of a cryptocurrency must register with the State before releasing 1 SLOC
The reason it's easy to transfer Bitcoin across long distances is that the system works without intermediaries. Regulation, as outlined by NY, involves polluting the Bitcoin protocol with precisely the same intermediaries that make the traditional banking system so awful.
> It will be a good thing when governments figure out how to regulate it
In other words, you believe it's a good idea to castrate Bitcoin and make it no different than PayPal, SWIFT, ACH, etc.
No, i think that quote makes it clear that bitcoin was released in staunch opposition to centralized currency, where some authority (central bank) can issue new units of currency at will and devalue the currency for everyone.
But everything else surrounding bitcoin, I don't find it useful at all. I just want/need something like bitcoin, but connected to my €-denominated bank account. I don't want or need an alternative "digital currency" and I find the mere idea of one stupid, I just want to make exchanges with current currencies (which are already "digital", something that for some reason is missed all the time, maybe because it's much easier to get attention on the internet using buzzwords).
Because bitcoin wants to be a currency, and a decentralized one at that, it needs to do the cool, but weird shit that the blockchain is. All the cryptography behind it, i find it a massively complex waste of time that only gets justified because of the absurd fetish of decentralization. The world just needs to safely and easily exchange money through internet, nothing else. An overengineered solution that tries to workaround the current financial system for no good reason is not a great solution for that need IMO.
I'm hoping that at some point someone (banks, credit card companies, paypal) will end up doing what bitcoin doesn't wants to do.
You should be aware that anything dependent on a small set of entities can fail spectacularly. You never know if they get hacked, bankrupt, sued, raided, etc ...
Yes, if you see bitcoin as a meme (in the traditional Dawkins sense of the word), then the unit of account aspect makes it a self-financing meme. The speculative frenzy may be unpleasant, but it is necessary bootstrapping mechanism, and not accidental.
If someone had said, "Hey, I'm starting a very thinly-traded currency and we're going to appoint an elite circle to have arbitrary authority to issue more whenever" ... eh, it's a much weaker sell, to put it mildly -- even if some ideal currency does have that property.
Which is consistent with the primary function and origin of money: because there is a division of labor it means a common medium of exchange must exist. The secondary functions of money - store of value and unit of account - are precisely that...secondary. You can't have the secondaries without the primary (see: gold). I sort of wish the OP wouldn't have made the characteristic of money as being a medium of exchange out to be a "oh well money is also this". The problem is that the press got a hold of Bitcoin for it's secondary reasons and drove the eyeballs to that without defining the problem to begin with: our medium of exchange, globally, is broken.
IMHO, Bitcoin adoption curve is taking exactly the course it should be: the exchanges that are at most threatened by poor inefficiencies ("third world") are seeing the most benefit. The first world doesn't have a problem moving money because there are solutions...they just cost money. Third world doesn't have solutions. Once they all see benefit the "first world" will adopt. It won't happen overnight and it shouldn't.
Primary and secondary is the wrong way to think about. "Medium of Exchange" is a high-level property that depends on the lower-level property "In Demand". And that is why the value of, or the demand for, bitcoin is critical to its success as a payments platform.
They're not doing the best job at demonstrating it, but I think they've been looking at Bitcoin in a clever way for much longer than Stripe :/
Bitcoin (the protocol) is awesome for payments. But that is a separate issue from the monetary policy underlying bitcoin (the currency), which is stacked against being a medium of exchange.
I've generally come around to this idea. I'm not even sure "bitcoin" as the blockchain of today needs to exist. But the distributed blockchain of transactions for financial transfers seems to be a really great idea.
I read people talking about the supposedly awful volatility, but they fail to mention that the volatility has a very distinct trajectory. Bitcoin is volatile as it increased in value by orders of magnitude year after year.
The article repeats this fear of volatility in the context of one's live savings. How frequently do people tap their life savings to pay for grocery runs? Isn't it the case that Bitcoin is by far the best possible store of value one could have adopted for their life savings over the past five years?
Ever heard the phrase "past performance is not an guarantee of future returns?"
My ballpark guess would be that the longest you might have held Bitcoin at a loss were if you purchased during a few day span during the peak of 2011. You would have had to have held for almost two years to have turned a profit. But on 95-99% of days in which you could have purchased bitcoin, you would have profited within 1 year.
I'll try and put that together. Should be interesting.
I think I would need to make a slider so that you could explore the concept at various time horizons -- 8 months might bring a 50% occurrence of profit.
But my expectation is that at 1 year 95% of investments are sound, while at 2 years it would be 100%.
But this boom is weird? I wonder if HFT's will be to blame, when we have the crash?
A competent Financial Advisor would calculate correlations between Gold price performance and your portfolio, and use the coefficient to recommend the right amount of gold to buy. Or they just spare you the jargon and do it for you.
When Facebook was raising money at $10 billion valuations would it be wise to predict that it had to "stop very soon"?
I don't disagree that Bitcoin will at some point stop revaluing upwards by orders of magnitude, and I don't pretend to know what the market cap will be in a few years time. But I don't think it would be all that surprising if Bitcoin were to be more valuable than say, What's App. And for that to happen we're going to likely see another order of magnitude adjustment.
Anecdotes are not market principles.
There are reasonable methods, however, to estimate likely outcomes of successful growth. I think its reasonable to predict that Bitcoin is likely to reach valuations of large publicly traded corporations. There are those that estimate it reaching valuations similar to gold, or the GDPs of industrialized nations.
But saying that the growth must stop because growth must stop isn't really saying much at all.
https://i.imgur.com/kV2IRT5.png
Tulips experienced exponential an order of magnitude shift in price during the course of one year in 1637.
Unlike tulips, Bitcoin is widely appreciated for its utility. I don't think the comparison is as meaningful as critics would make it out to be.
Steady logarithmic growth in valuations is a normal phenomenon among tech startups -- yet it seems to me that many otherwise smart people are flustered by this growth when applied to Bitcoin, thinking it must be too good to be true.
Did you fail to notice that your Bitcoin graph shows several occurrences of order-of-magnitude change over less than one year?
Anything can be made to look "steady" if you plot it on a log scale.
Comparing Bitcoin addresses to the IP layer of the internet is brilliant. Something that the Bitcoin community has been a bit slow to accept is the idea that "peer-to-peer exchange" may be occurring at the corporate level rather than at the individual level for most people--it's hard to imagine a world where that isn't true due to the points outlined in the "Comparison to the card networks" part of this article. However as long as the corporate implementation is done in such a way that anyone could jump in as an individual if they wanted to bear their own risk, then we are still miles ahead of how the traditional financial system currently works ("net neutrality" for money).