Investigating Bitcoin 1 | 5. A series of articles investigating the disruptive potential of bitcoin and evaluating it as a currency.
The software underlying Bitcoin enables bitcoin as an elegant means of exchange. In this article, “Bitcoin” refers to
Investigating Bitcoin 1 | 5. A series of articles investigating the disruptive potential of bitcoin and evaluating it as a currency.
The software underlying Bitcoin enables bitcoin as an elegant means of exchange. In this article, “Bitcoin” refers to the open source, decentralized technology platform upon which “bitcoin”, the digital currency, depends. Like cash, transactions processed on the Bitcoin network are fast, irreversible, peer-to-peer, and nearly frictionless. Superior to cash, they can be completed quickly at any distance, with precision out to the eighth decimal place. Consequently, evangelizers often accept bitcoin as cash brought into the digital age, a logical step for innovating civilization’s means of exchange.
The blockchain supports Bitcoin and is the equivalent of a digital and transparent ledger that records every transaction ever made. Though a transaction can be propagated through the network near instantaneously, the first confirmation of its validity via incorporation into the blockchain takes about ten minutes. bitcoins can be transferred from one address to another without a central intermediary. As a result, all transactions, from those moving coins between smartphones, to others firing off large payments to vendors, can be equally rapid and efficient.
As is the case with cash, chargebacks are impossible after a bitcoin transaction, making them less vulnerable to fraud than other common payment mechanisms, like credit cards. The irreversible nature of bitcoin transactions, however, suggests that they lack the consumer protections provided by credit cards or other intermediated transaction mechanisms. While the US Consumer Financial Protection Bureau has alerted the public to risks associated with the use of bitcoin, including the lack of the kinds of protections provided by banks and credit cards, with the advent of multi-signature bitcoin wallets, tools for escrow and other sources of protection can be built on top of the Bitcoin protocol. bitcoin’s consumer protection apps are opt-in, empowering individuals to choose whether or not to pay for these services, but also necessitating educated users.
Currently, one of the most important advantages of bitcoin as a means of exchange is its low transaction fee structure. The fee per transaction can vary because fees serve as an incentive for the machines underlying the Bitcoin network— which are maintained by miners— to prioritize a given transaction in their next “block”. Since early 2012, the average transaction fee has been a mere 0.01%, with the bitcoin sender voluntarily electing to pay fees to miners to prioritize incorporation of their transaction into the blockchain. In 2014, Bitcoin facilitated $23.4 billion in total transaction volume for only $2.5 million in fees. The chart below illustrates the direct 0.01% bitcoin transaction fee compared to the average fees incurred for other types of transactions.
It is important to note, the fee included in this calculation is only the direct fee associated with bitcoin transactions carried out on the blockchain. On top of that fee could be another 1-2% for services like a bitcoin exchange or processor, such as Coinbase. These costs are not inherent to the Bitcoin network, but a function of limited acceptance and the consequent need to exchange into and out of differen