If you listen to the bitcoin enthusiasts, what they will tell you is that it is supposed to make everything go seamlessly. You can transfer money quickly and without fees. Awesome, right? Not quite.
Have you ever traveled to a foreign country? You know how there are these exchange rates between currencies that you look up, that differ from what you actually pay? Yeah, it's a thing. You see, if you are in, say, Italy, and you need euros to buy some trinket on the Rialto, and all you have are dollars, then those currency exchanges can charge you a small fee to exchange your dollars for euros. You don't actually get the formal exchange rate. You lose a bit of money in the deal. The exchange keeps something. It's a business. They make money because they have something you need-- euros. So, you give them dollars, they give you euros, and in exchange for the trade, you give them a bit of extra money, above the formal exchange rate because you need that cash to buy the shit you are trying to buy on vacation. Whether it is a cash-for-cash thing, pulling money out of an ATM... it doesn't matter. You lose a bit of money in the deal.
Yup, that's what happens. The process of exchanging currency has a cost. It can be a really tiny cost, depending on circumstances and who is involved, and how, but it is a cost.
I get paid in dollars. If you work in the US, so do you. If you want to conduct your economic transactions in bitcoin, you need to convert your dollars to bitcoin. That exchange is a transaction, separate from any purchase you make, and creates a cost. You want bitcoin. Someone else has bitcoin. That means, regardless of the formal exchange rate anyone sees on any market, whoever has bitcoin can charge you just a tiny bit to sell it to you to subsidize the cost of operation. Why? 'Cuz you want it. Markets. That's how markets work. Right now, bitcoin is increasing in price, so people are trading based on speculation, but as I wrote on Saturday, that is precisely what makes bitcoin useless as currency. Eventually, it should, theoretically, stabilize in price, at which point you just have to suck up that fee to exchange your money. Now, maybe you can set up some peer-to-peer commie fuckin' thing, but seriously, people, we're talking about MONEY! Yes, I'm calling bitcoin "money." You want it to be money? Sure, let's go with that. Once it becomes that, you gotta deal with all the shit that comes along with being money.
So, fine. You decide you want to buy shit in bitcoin. But, you get paid in dollars. You pay a fee, either to someone who has bitcoin to make the exchange, or to someone who runs an exchange to supervise an exchange, but either way, you pay a fee. Transaction cost. Why aren't you paying a fee now? So that you can run the risk of Mt. Gox, of course! Doesn't that sound awesome?!
(Me, I like my FDIC insurance, thank you very much...)
Anyway, you pay a fee, if in terms of risk of nothing else. Then, whoever takes your money just made income. If they are operating legally, they need to pay taxes on it.
Remember yesterday's post? They absolutely need dollars now. (Assuming they are operating in the US. For another country, substitute the appropriate currency.) That means they have to convert back to whatever currency you chose to convert away from. And, since there is now a legal requirement, someone can really jack up the price on them. Transaction cost!
So, two questions:
1) Why the fuck are you converting to bitcoin to do this, and 2) why the fuck are they accepting bitcoin when they just have to convert back to dollars to pay their fucking taxes?
This is intrinsically inefficient. You've got transaction costs on both ends for no fucking reason whatsoever.
This is the point where bitcoin-bugs make some claim like, "if everyone used bitcoin, there would be no conversion," but there are two points here. First, you can't have a system where everyone uses bitcoin precisely because of yesterday's post. As long as the government requires that taxes be paid in their own currency, pays their employees and contractors in their own currency, etc., you can't have a pure bitcoin system, and governments that function and wish to continue functioning will never convert to bitcoin. Second, "you can't get there from here." Why not? Because as long as governments refuse to accept tax payments in bitcoin, it is intrinsically irrational for people to use bitcoin for normal economic transactions. Whenever they do so, they are volunteering to pay transaction costs. The process of switching would involve massive numbers of people volunteering to pay transaction costs. For no fucking reason at all.
The transaction costs of conducting business in bitcoin make the concept of bitcoin completely hypocritical. It is constructed to be efficient, yet it is the opposite of efficient. The idea is that you can transfer money instantaneously, freely and frictionlessly. Economics are not free of thermodynamics, though. At some point, every legal entity has to pay their taxes, and they will only ever be able to do so in currency issued by the government of the country in which they operate. Moving bitcoin around may be easy (although even that isn't risk-free), but converting currency will always have costs. That means conducting business in bitcoin rather than the currency of the country will always be intrinsically inefficient. Ain't no gettin' around that. That's the main reason that bitcoin is bullshit.
What does this mean for the use of bitcoin, bitcoin prices, and so forth? Coming soon, in Part IV...