Bitcoin replaces Western Union, that’s all

[Eugen Leitl]

http://bitcoinmedia.com/bitcoin-replaces-western-union-thats-all/

Bitcoin replaces Western Union, thatbs all

December 21, 2011

By Amir Taaki (genjix)

Wired has article arguing that bitcoin is nothing more than a replacement for
Western Union. That it is merely a complementary system to incrementally
improve our lives.

Wired could not be more wrong.

After making the usual hand-waving at how bitcoin value dropped 90%, yet
conveniently skimming over how bitcoin value is up 1600% from a year ago, the
article launches into a set of statements without any solid backing.

Bitcoins are volatile in their worth or exchange rate, but that is totally
expected and fine. The author makes the mistake of generalising bitcoins
performance now, to its future. The worth of a bitcoin is determined by how
much people are willing to buy and sell at- its price is set by the market.

If someone decides they want to buy 100 BTC, and there is only 10 BTC being
sold at the current market rate of $4, they will have to bid at the next
highest ask where there is maybe another 8 BTC for $4.1. In this way they
move the market price upwards.

This happens in euros and dollars too. Namely that if a multi-billionaire
suddenly sells a huge amount of euros for dollars, they will move the price
down for euros and up for dollars. For comparatively small amounts that
everyday people buy and sell at, it is not large enough to move the market
exchange rate.

The network effect

Bitcoin is a smaller system with less people. Therefore it is much easier to
move the market price. Everything has an equal and opposite reaction. When
you jump in the air, the earth moves away from you too, but you are so
comparatively small that the force you exerted on the earth is not
noticeable. However something as large as the moon does cause the earth to
wobble in its orbit. A buyer of bitcoins carries far more weight in this
small market with their $10,000 than they do in the usd-eur forex market.

Volatility of bitcoin is a consequence of it being the early days. Of bitcoin
being small. Of bitcoin being undeveloped. Of bitcoin not having reached its
full potential.

The author then goes on to tout that credit card fees are great because they
offer consumer protection against chargebacks and fraud. The author then
explains how such systems could exist alongside bitcoin if you pay for them,
at which point bitcoin has no benefit over credit cards.

What the fuck! How about I get to choose whether I want those services or
not! Let the consumer decide whether they are important benefits worth paying
for; donbt mandate that everyone has to subsidise the service at
over-inflated prices!

Bitcoin v Western Union

The article now reaches its penultimate conclusion: wire-transfers are very
expensive, and bitcoin has low fees. Bitcoin is kick-ass at free
international transfers. Ignoring all the benefits of bitcoin like
decentralised, impossible to shut-down, privacy,
divisibility/microtransactions, security and efficiency the author suddenly
decides that this one aspect of bitcoin is the only dimension of bitcoin.

    Bitcoin as a metacurrency.

This makes no sense. The term is meaningless. One does not hold US dollars
because one loves the beautiful designs on them. No, US dollars are a useful
mechanism of trade for you.

Likewise, if bitcoins are useful for buying foreign currency or buying online
services, then at some point you will need to be holding bitcoins. That
interlude when you have aquired bitcoins will be when you spend them in the
general economy.

I know what the author is trying to get at- that nobody would ever what to
hold bitcoins because the price is volatile and that the only use for bitcoin
ever is as a service for changing money. Thatbs all.

What the author fails to realise is this: market volatility is a consequence
of bitcoin being small, and if the economy booms due to people using bitcoin
as a forex tool then the volatility would disappear suddenly. If market
trading became more professional then we would see arbitrage and professional
speculation.

Arbitrage is where a person sees the price of the USD:BTC to be $4, and the
GBP:BTC price to be 2.7. Because 4 USD = 2.55 GBP, they see that by buying
bitcoins at $4 and selling them for 2.7 GBP, they can make profit. This also
works the other way with selling bitcoins for GBP and buying USD. The net
effect is that the price across all exchanges matches each other.

Professional speculators stabilise the price. If a sudden news story
generates a lot of excitement, then the price may spike upwards. A
professional speculator sees that this is nothing more than irrational
exuberance and sells, driving the price downwards. This also works the other
way; if a sudden scare happens and the price nose-dives, the speculator buys
and brings the price back upwards. Speculators cushion the price movements to
not be so erratic.

Chicken and egg

Right now because bitcoin prices are so volatile, merchants are at risk. If I
price a good in bitcoins at a certain dollar rate, the market can move and my
customers pay less than they would. If there are no limits set, they can
repeat the process and make big profits off the merchant. Therefore a
merchant not only has to pay a mark-up on the price to account for
volatility, but they must also limit their daily bitcoin volume.

With a growth in bitcoin, and a decrease in fluctuating bitcoin prices,
people are more willing to hold bitcoins. Merchants are more likely to price
their goods in bitcoin. With the increased services, bitcoin users are
encouraged further to hold bitcoins and spend them within the system. There
currently exists many traders, but nothing in particular that I need or want.
If more merchants were to exist, then it is conceivable my needs will
eventually be catered to- in bitcoin.

Bitcoin is young. And there is far more to bitcoin than any single one
property. Bitcoin has far reaching effects on a global scale.