Why Bitcoin Matters
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 percentAs 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.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.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 on top. It's a pretty clever business.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.