Bitcoin's Biggest Problem: It's a Den of Thieves

I've had a curious eye on Bitcoin for a few years now.  Through various posts on HN I've followed its ups and downs including the big hoopla over the exchange rate for a Bitcoin reaching parity with the dollar, a figure that is now eclipsed by today's going rate of $12/BC.

For those that haven't paid similar attention, here's how Wikipedia describes Bitcoin:

Bitcoin is a peer-to-peer electronic currency .. which can be sent, received and managed through various independent websites, PC clients and mobile device software.

At its roots, Bitcoin is based on some rather clever mathematics, ironically the same primitives that keep our credit cards secure when buying things online.  But while credit cards are centralized systems, with Visa, Mastercard and friends acting as the managers of who has what, Bitcoin is more clever.  It is a truly distributed system, everybody knows everything, all the Bitcoin clients forming a congress of sorts on what the state of the world's Bitcoin economy actually is.

This has some very neat advantages, the largest being that no one entity controls Bitcoin, instead it is a community all agreeing to use a currency with particular rules, with some clever algorithms keeping everybody honest.  No single government, much less corporation, can dictate what happens to Bitcoins.

Another great advantage is that it also allows for almost complete anonymity, while your Bitcoin 'wallet address' is public, as are the transactions that go in and out of it, nobody really knows who that address belongs to.  Since it is incredibly easy to set up digital bitcoin wallets, it is easy to launder bitcoins as well, masking the sources and destinations of transactions.

These two great strengths: no central authority, and complete anonimity, unfortunately also create the perfect environment for fraud.  Since there is no central authority able to reverse transactions, and since there is no way to track down someone you send Bitcoins to, the Bitcoin community sometimes seeems like a den of thieves.

One need only look at the long list of failed attempts to allow the purchase of Bitcoins through PayPal or credit cards to have this point driven home.  Since both credit cards and PayPal allow reversal of charges, it is easy for crooks to buy Bitcoins, have them deposited to their anonymous wallet, then have the charges reversed.

This fact makes acquiring Bitcoins a rather obnoxious affair, with one party or the other having to give tremendous trust to the other.  I recently tried to buy a moderate number of Bitcoins on one of the trading facilitators, Bitcoinary, and ran into this head on.  After agreeing on a price, I sent over the money for the Bitcoins over PayPal and was immediately faced with a seller getting cold feet, nervous that I would reverse the charges after he sent the Bitcoins over.  No amount of convincing worked to assuage his fears, offers to call, online reputation, etc.. Despite offering to forego far more privacy than any consumer ever would, he refused to complete the transaction, the deal finally falling through.

This is not a good sign for Bitcoin.

Though Bitcoin is a fine digital currency, it is hard seeing it take off for consumers the same way credit cards have.  While centralized payment systems like credit cards have their disadvantages, they offer one very large advantage as well: they act as an arbiter in the case of disputes.  The buyer and seller both agree that "Papa Visa" knows best and with that confidence consumers open their wallets.

Bitcoin has none of that.  Yes it is decentralized, yes it is amazing to see payments go through so quickly and so cheaply, but what happens when it goes wrong?  I can trust tiny merchants with my credit card because I know if something goes wrong I have a recourse, there is no such recourse with Bitcoin.

So we are back to the same trust issue I ran into on Bitcoinary, a chicken and egg problem. Customers will be leery to spend with new merchants without a reputation, and new merchants will find it hard to build that reputation without customers.

Note that I did eventually find a seller on Bitcoinary who would trust me, so it isn't completely hopeless, just a lot lot harder than it should be.

As has been pointed out numerous times, "trust enables people to do business with one another". Trust creates an environment where everybody can stop worrying about being ripped off and get on with business.  A currency that allows complete anonymity yet has no central authority to manage disputes fails this trust test. That single fact is why I don't see Bitcoin taking off long term in its current form.

It might not be completely hopeless. One way to manage situations where neither party trusts the other is to have a third party in between which is trusted by both: escrow. There is no reason Bitcoin couldn't support such a party in its ecosystem, built on Bitcoin, but adding trust to the equation. With that will come overhead however, and I'd be surprised if we didn't find ourselves back to the 3% transaction fees so common in the credit card world.

In short, while Bitcoin is irresistable crack to software geeks for its sheer cleverness, I just don't see it having the right attributes to break out into a larger world of consumer spending.  Either way it will be an amazing thing to watch grow and evolve.  Who knows, maybe, just maybe I'll someday be able to find someone willing to give me dollars back for my Bitcoins without losing my shirt in the process.

11 responses
"So we are back to the same trust issue I ran into on Bitcoinary, a chicken and egg problem. Customers will be leery to spend with new merchants without a reputation, and new merchants will find it hard to build that reputation without customers."

Ironically, it has been the SilkRoad that best solved this problem. I don't use the site or approve it of it, but their community solved this issue pretty creatively. When a new seller begins selling their wares on the SilkRoad, you have two issues, 1: will they send the product, and 2: will that product be legitimate and pure. They solved this by giving out samples. You show that you do mean to do business in the long-run by giving huge discounts or freebies. Your first customers leave good reviews, and you can slowly increase the price.

It's an interesting problem solved by an, uh, interesting site.

I know when Coinabul first started, we had no sales for a couple weeks. It was painful. Now that we have community trust it's a whole different story.

Ya, obviously the problem is solvable for individuals who can and will go through the trouble of being vetted, but that's friction to the economy there. And just as physical economies that don't have trust are less efficient, so will the digital economy of Bitcoin, because it requires that extra step of vetting for each new merchant.
"Ya, obviously the problem is solvable for individuals who can and will go through the trouble of being vetted, but that's friction to the economy there."

Visa and Mastercard spend ages vetting new business customers.

"Visa and Mastercard spend ages vetting new business customers."

Exactly, because they are the arbiter. So in the Bitcoin world this vetting is done by who? Eventually by customers, but then you are back to the chicken and egg problem.

>>"because it requires that extra step of vetting for each new merchant."
Yes, but that extra 3-10% merchants eliminate in costs from chargeback fees is pure profit. Merchants love profit.
The story of your troubles in purchasing Bitcoins actually shows that PayPal, not Bitcoin, has a problem with trust. While that does not negate your broader point of problems in purchasing Bitcoins, you should think about it more carefully. With Bitcoin, you can have multi-signature transactions and the seller and buyer can pick anyone they want as an arbiter, if they choose so. With VISA/PayPal, you're stuck with one mandatory arbiter.

M-PESA solved the problem of trust by having agents handle cash deposits/withdrawals. The fees are comparably higher than with electronic payments we in the west are used to, but a cash transaction is fundamentally irreversible and requires a physical interaction, which mitigates the trust problem somewhat.

Compared to M-PESA, Bitcoin has the advantage that a potential agent does not need to register with anyone (also, Bitcoin is international and can't force anyone into an exclusive contract, and so on and so on). While it might help a potential Bitcoin-cash-agent to have an account with a big exchange (e.g. for hedging), he can outsource that.

This article makes the same mistakes that other pieces have in the past; it conflates Bitcoin services with Bitcoin itself. Its analogous to saying that cash is inherently bad because some people get mugged.

Bitcoin services are evolving, and this takes time. Eventually getting Bitcoin will become as easy as falling off a log, or making bad analogies.

Calling Bitcoin, "a den of thieves" doesn't make any sense. Bitcoin is a protocol, not a place or a group of people. Its important (not that this piece is going to change anything or influence anyone, but just for one's own personal standards) to characterise topics correctly. Bitcoin is not a personality; it cannot care what you think or take any action on its own. Like a hammer or cash, it can be dealt in by bad people; this alone cannot discredit it.

Bitcoin is going to find its place eventually, and it or its sucessor(s) are going to change everything. People who do not understand what money is, how software and businesses are developed, 'base leve consumers', don't care about philosophy or the problems involved in creating a business; they just want their stuff NOW. These people will be catered for eventually, just as it was in the beginning of the spread of internet access. AOL sold itself on being the easy way to get on the net, without being particularly easy or being on the net. Now, its a tiny fraction of all users world-wide, everyone understands email and web access and its as natural as moonlight. In order to understand how the example of AOL maps perfectly onto Bitcoin services, you need to have some historical perspective and an understanding of how services are developed and how markets evolve.

Let me be perfectly clear; articles like this are important and shouldn't be dismissed too callously because they allow us to gauge how much work needs to be done and point unambiguously to what needs to be fixed in the public facing interfaces that touch the Bitcoin network.

Say Nic, any idea how I can buy gold coins with Paypal?

http://www.screw-paypal.com/buy_gold_bullion_coins_bars.html

Thought so.

You are correct that Bitcoin is popular with criminals, scam artists, and thieves alike. But not popular enough to overtake cash by any means:

http://articles.cnn.com/2009-08-14/health/cocaine.traces.money_1_cocaine-doll...:HEALTH

I like the idea of having a currency system so basic that any average person can transact in it at the bare metal without asking permission from a government or from a multi-national payment processor. I say this as a web application designer who wrote my first working Credit Card processor in Perl fifteen years ago. Back then, websites stealing your credit card details were a big deal so now writing a processor is a lot more complicated, and your entire business has to jump through tons of regulatory hurdles just to accept payments online.

Innovation happens when a world full of garage tinkerers have access to existing tech. Look at 3d printing or arduino or Linux, or the internet itself. Every one of them could have been written off by naysayers early on just because of how inconvenient they were to use, or how easily the young technologies could be abused.

I think such disdain is short-sighted, and I am disappointed you're having difficulty seeing past your own toes on the matter. :P

liberty!
Honestly I think that in fact it's all the same credit card ot bitcoins. In both way you don't see and don't touch the money. You just transfer some points from place to another, from account to another. The difference is only in the spelling, the options are the same, the possibilities are the same. No dofference!
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