Bitcoin & Cryptocurrencies

For those of you who I had the opportunity to meet and talk in the past one year, you would have known that I have been completely obsessed over cryptocurrencies such as Bitcoin. If you do not know much about Bitcoin, you should learn about it here, here and here and also watch this video.

I first heard and bought my first Bitcoin in 2013 after the Cyprus financial crisis. Still fresh out of university with an Economics degree and actively teaching myself web development, I started taking Bitcoin seriously when Bitcoin-related articles started appearing more frequently on HackerNews, a news board for programmers.

Like many other people who first found out about Bitcoin, I was skeptical of the idea at first but decided to look deeper into the underlying technology to understand why other technologists are excited about this concept.

The following weeks saw me spending hundreds of hours devouring literature, videos and lessons on Bitcoin and its potential for the future. I have to admit the learning curve is quite steep but the investment in understanding this technology is definitely worth it.

Let me sum up some of the reasons why I am very bullish of the potential of cryptocurrencies in the coming decades.

1. Existing money transfer procedure is cumbersome

Bitcoin is a digital asset that cannot be counterfeited and can be transferred from one account to another account. There is no limit to the amount that can be transferred and almost zero transaction fee. Recipients can be anywhere in the world and can receive the money almost instantly anytime of the day.

A simple illustration of the potential of Bitcoin would be two guys halfway across the globe, say in Canada and South Africa transferring money to each other on a Sunday afternoon. Guy A has 10,000 BTC (roughly US$6 million at time of writing) in his Bitcoin mobile wallet. Using the Send functionality, he sent 10,000 BTC to Guy B’s Bitcoin address. Guy B received the roughly US$6 million almost instantly. Guy A paid about 0.0001BTC (roughly US$0.06) as transaction fee.

Can you see why Bitcoin is awesome? Here are few of the things not possible with traditional banking.

  • Not possible to send money halfway across the globe on a Sunday afternoon as banks are not open for business
  • Not possible to receive money almost instantly
  • Not possible to pay almost zero transaction fee
  • Not possible to transfer huge sums of money without much scrutiny
  • Not possible for transfer to be hassle-less

Don’t believe me why interbank money transfer is a big hassle? Read this article on how money moves around in the banking system and you will see the beauty of this analogy.

Transferring money across borders is costly and is a pain. Millions of low wage earners pay fat fees to Western Union to send their hard-earned cash to their families. Bitcoin has the potential to reduce these remittance fees.

2. There is demand for Bitcoin by people who do not trust the government

One of major subjects that I studied in university is the concept of bank runs. Because of fractional reserve banking, banks do not actually have all the deposits of savers in their vault. So if all the savers were to go to the bank at the same time to withdraw their money, the bank will definitely go bust.

To prevent such an outcome from ever happening, governments can increase trust by introducing deposit insurance where depositors below a certain threshold (say US$100,000) can rest well knowing that the government will act as an insurer for their deposits.

The Cyprus financial crisis set a huge precedent in the world because it showed the world that regardless of whether there is a deposit insurance scheme or not, the government can at the stroke of a pen decide that this deposit insurance will not apply fully. Even though the end result did not result in a haircut for depositors below €100,000, talks about a 6.75% haircut for small-time depositors is bad enough for this trust to be lost forever. Large depositors took a big hit with a 40% haircut.

There will be people in this world who does not completely trust the government because of all the financial risks present and will be looking for alternative ways to safeguard their assets from being seized. Bitcoin offers one such liquid cash-like alternative.

3. Lower fraud rates for payment processing

One of the features of Bitcoin is that transactions are non-reversible. This means that transactions only go one-way from sender to receiver. This feature is good because it allows merchants to reduce fraud. You may be very used to paying for goods and services online using credit cards and believe that this system works very well, right?

Let me tell you that e-commerce credit card fraud is a very real problem and merchants employ various costly strategies to reduce this. In 2012, e-retailers suffered US$3.5 billion in losses due to fraud. About 1% of all transactions are made using stolen credit cards causing merchants to not receive payment on their sales.

Since Bitcoin transactions are actually a transfer of digital assets and this transfer is non-reversible, merchants can be 100% certain that the money will be theirs once it is confirmed.

4. Lower fees for payment processing

Since Bitcoin transaction fees are only 0.0001BTC, payment processing fees as a percentage of purchase price is very low. Take Stripe, a top payment processing company in the US. They charge 2.9% + US$0.30 per successful transaction. Coinbase, a payment processor for Bitcoin does not charge any fee for Bitcoin payment processing but only 1% fee for Bitcoin to USD conversions for transaction volume about US$1 million per month. You may be aware of Bitcoin price volatilty and may argue that merchants do not want to take on this extra pricing risk. Coinbase allows merchants instant exchange payout from Bitcoin to USD so the merchant do not take on any price volatility risk.

With the lower fees for payment processing, lower cost due to fraud and lower cost to invest in fraud-prevention technology, can you see how much money e-commerce merchants tend to save with the use of Bitcoin as a payment gateway? Low-cost retailers like Amazon and budget airlines would pass on these cost-savings to consumers through cheaper prices and this is a gain for consumers.

dogecoin cryptocurrency

5. Cryptocurrencies make microtransactions possible

The smallest unit of account for Bitcoin is 1 satoshi (0.00000001 BTC). This means that technically I can send someone 1 satoshi to do something for me. Maybe this is too difficult to explain. Let me try to illustrate this example using US$0.01. Say I watched a video on YouTube and I really like the work of the producer. If I was on the street and watched the performance of some street performer, to show appreciation, I am able to tip some coins at the end of the show. However in the virtual world, it is impossible to do so.

Can I pay by credit card? It is impossible because of the transaction fee – minimum transaction is US$0.50 for Stripe. With cryptocurrencies, this is now possible with a tipping app such as Cryptiv. Here is their explanation of how their YouTube tipping solution works. Dogecoin is the most popular tipping currency on the Internet now and you can see all the tipping happening on Reddit and Twitter.

Another example of micropayment use case would be pay-walls behind content such as this very blog post. It is now impossible for me to charge you US$0.10 to read this article of mine. This is the same problem that pay-walled news sites such as New York Times is facing. It is impossible to charge me only US$0.30 per article beyond my free reading limit. BitWall and Chicago Sun Times demonstrated that Bitcoin can solve this microtransaction problem.

6. Some of the smartest guys in Silicon Valley are involved

Marc Andreessen from the top Silicon Valley VC firm Andreessen Horowitz thinks that Bitcoin now is at roughly the same state of growth as personal computers in 1975 and the Internet in 1993.

A lot of money is flowing from top Silicon Valley VC firms into Bitcoin companies such as the US$25 million raised by Coinbase. When top VCs invest in Bitcoin companies, I infer that they believe that the industry will have a huge potential for growth. These VCs in turn invest in Bitcoin companies because they do not want to bet against some of the smartest engineers from Google who are willing to quit their jobs to start Bitcoin companies.

There are various other reasons why I am very interested in Bitcoin and I can go on for hours explaining this to you but I will stop here since this post is already getting very long. If you are still not convinced on the potential of Bitcoin, this excellent article offers you 22 reasons why Bitcoin has intrinsic value.

If you have read this far, you should subscribe to my mailing list and check out my side project with TM Lee – a cryptocurrency ranking website named CoinGecko.