Bitcoin’s fundamental problem – omitted by Marc Andreessen

by Simon Murdoch

Marc Andreessen’s post on Bitcoin in NY Times Dealbook has been heralded as “a wonderfully coherent post about why everybody – not just venture capitalists futurists and geeks – should care about the virtual currency known as Bitcoin“.

It is beautifully written and very persuasive but misses a massive problem with the currency.

While I understand and am also intrigued by the potential of a currency not attached to any government, and I also agree with him that the currency has a massive network effect: the more people and organisations the use it, the more useful it becomes – there is a big problem that needs to be solved.

 

Can anyone solve the following issue with Bitcoin?

Marc is intrigued by Bitcoin because it can reduce the friction caused by payment processing fees. These are typically 1-4% of the transaction value depending on the merchant’s size and type of transaction – or a certain amount of pence/cents for debit card transactions which are less risky for the payment processor.

Whether % or pence, this causes friction on all transactions and the latter especially on micro payments. However, if you are a merchant, the big problem with Bitcoin at the moment is the volatility of the currency.

As a merchant I would much rather have a known cost of 1 or 2 % or 10-20p per transaction, than the wildly uncertain cost I might incur because the Bitcoin I receive could go up or down by 10, 20 or even 50% by the time I have used it to change back to a real world currency or to exchange for other real world services which are of course pegged to the dollar, euro or pound.

In his great book, The Undercover Economist Strikes Back, Tim Harford explains what a currency needs to do:

  1. a medium of exchange
  2. a store of value
  3. a unit of account.

Undercover-Economist-Book-76x112

Read the book to get the full picture but the key thing Bitcoin is not achieving today is a reliable store of value because it fluctuates so much in value. Tim Harford quotes the movement on 10th April 2013 when Bitcoin’s value fell by 61%. Yikes – I’ll stick to 1-2% credit card fees thanks.

So, world, how do we solve the problem of Bitcoin’s volatility? Solve that and Marc Andreessen’s post will be prophetic. Don’t solve it and Bitcoin will remain the preserve of speculators and merchants who can’t use normal payment providers because of their questionable goods and services.

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