Why Bitcoin Matters
<i>Bitcoin is the first Internet-wide payment system where transactions either happen with no fees or very low fees (down to fractions of pennies). Existing payment systems charge fees of around 2 percent to three percent</i><p>As long as consumers are paid in their local currency and vendors pay their employees, their taxes, and their other costs in local currency, then bitcoin as a payment technology has similar costs as credit cards. Those costs are reflected through exchange fees and bid/offer spreads.<p>Let's walk through a transaction. I want to buy something that costs 1 bitcoin. The going rate on the bitcoin exchange is $825 bid by $830 offered. I take my cash to the exchange and convert it to bitcoin. Assume exchange fees are .5%. To buy 1 bitcoin I pay $834.15 (fees included). I transfer the bitcoin to the vendor, who then does the reverse transaction. He recieves $820.875 (fees included). The cost for transaction was $13.275 (834.15 - 820.875) which comes out to 1.59%. That is cheaper than the oft quoted 2.5% rate for credit cards but is very much in the same ballpark. If you factor in that some credit cards give you 1% cash back then bitcoin and credit cards are back at basically even in terms of net transaction costs.<p>With bitcoin as a payment technology, the transaction costs flow to the bitcoin exchanges, market makers, and dealers. A dealer is sort of like an exchange combined with a market maker. The dealer quotes you a price to buy or sell bitcoins and you transact directly (not on an exchange). The dealer, like a market maker, makes money on the bid/ask spread. The only reason I'm going on about this is because one of a16z's big bitcoin investments is in a company called Coinbase, which is a bitcoin dealer. When you buy or sell bitcoins with Coinbase, Coinbase always takes the other side of the transaction. They make money on the bid/ask spread, and in some cases ("instant exchange") they charge you a 1% fee <i>on top</i>. It's a pretty clever business.<p>Just putting this out here so that everyone understands how the guys out there touting bitcoin for payments plan to make money from the people using bitcoin for payments.