A loyal reader, Merv, sent an email on Sunday. He wanted me to check out a YouTube video he’d seen about Bitcoin.
He was eager to hear what I had to say.
To give you some context, the video is of two young guys trying to buy and subsequently use one Bitcoin in the real world.
They go to one of the world’s first Bitcoin ATM’s in Handlebar, a bar in Austin, Texas, to get their Bitcoin.
The ATM at Handlebar was built by Robocoin. Robocoin has built perhaps the most extensive network of Bitcoin machines in the world. However, Robocoin sells the machines; they don’t necessarily operate them.
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One of the men registers his account at the Robocoin ATM. He gives a valid email, palm scan, photo, and mobile number. Soon enough he’s purchased a Bitcoin.
He scans the QR code for his Bitcoin, and the Bitcoin transfers to his Bitcoin wallet, on his phone.
Buying a Bitcoin from this particular ATM was straightforward, especially for an experimental technology. The transaction took place at South by Southwest (SXSW),a large tech and lifestyle event, so you’d assume a number of merchants would be available to accept Bitcoin Or so it seemed…
After a couple of failed attempts to buy something with Bitcoin, the two men found a taco stand that accepted the digital currency. They ordered and received a taco, which cost them $7, or about 0.01BTC (at the time of conversion).
In the time between buying the Bitcoin and the taco, the price of Bitcoin actually went up about $7. In effect, the taco was free thanks to the short term fluctuation in the Bitcoin price (this is actually a problem, which I’ll get to shortly).
After carrying the Bitcoin around in their ‘wallet’ for the day, the men went back to Handlebar to cash out their Bitcoin back into US dollars.
And that’s when things went wrong. After about an hour trying to exchange their Bitcoin, they had effectively got nowhere. Calls to the ATM operator yielded little result.
With an imminent flight back to San Francisco, the men had little option but to keep their BTC in the wallet and head home. Some 24 hours later, the Bitcoin transfer still hadn’t happened. Still no cash.
Now this isn’t exactly an ideal advertisement for Bitcoin in the real world. But that’ll always be a problem with early stage, disruptive technology.
One way to look at it is that Bitcoin is still in its beta testing phase.
The mechanics of the problem the men faced was the way the Bitcoin network processed transactions.
Let’s say I transfer 1BTC from A to B. This transaction appears in the blockchain. Now in order for this transaction to verify, typically it must have at least six confirmations before the transfer completes.
Now with millions of dollars worth of transactions and transfers happening every day, miners (who confirm these transactions) have a lot of work to confirm. As such, part of the Bitcoin network involves a competitive transaction fee reward system.
This means that to have your transaction processed according to average times, you pay a minute transaction fee to the network. This is a part of the Bitcoin design.
This makes the system financially viable as a miner when all 21 million Bitcoins are in circulation. As a miner, you receive ongoing transaction fees to keep the system running.
Back to our story: when the men tried to process their Bitcoin sell order, they didn’t pay the miner’s fee, putting their transaction below a pile of orders that did pay the transaction fee. And instead of the standard 15 minute transaction time, it ballooned to over a day.
Again, this isn’t a very effective way to move Bitcoin around. And that is one of the flaws in the system currently: It’s nowhere near fast enough for day to day transactions.
In a world where we want everything faster, easier, and more efficient, this is a complex and convoluted process. In its current form, it’s simply not functional.
But that doesn’t mean it won’t be.
The Bitcoin system is still in the earliest development phase. Comparing Bitcoin now to current payment systems is like comparing an abacus to a TI-84 Calculator.
But the system will evolve, becoming faster and more reliable, making it easier for the average person on the street to get involved. It’s always going to be a hard slog for such an early stage, disruptive technology. There will be ongoing difficulties as the technology catches up with the ideology.
When you take on an entire financial system, there are going to be speed bumps. But the concept, and the growing ecosystem, is nothing to shy away from. The Bitcoin community is large, and growing. And with investment, resources, and further backing from innovative entrepreneurs, Bitcoin will become the financial system we trust in the coming years.
For now, though, Bitcoin is still out of reach for the average person. But that is changing. And the speed at which it will change will astonish you.
At this stage, you might be worried about the risks associated with Bitcoin, and you should be. But you shouldn’t ignore it. We still have time to learn about Bitcoin, about how it works and its true potential.
And with a greater understanding of this potential you’ll get an idea of the direction the world is moving. When it comes to our right to a fair and efficient financial system, no alternative would be as good as Bitcoin.
The best advice I can give you right now is to get involved in it. Start off with a small slice of a Bitcoin, maybe $50 worth; make it an amount you’re prepared to lose.
Then find somewhere to transfer it, or somewhere to spend it, and slowly but surely you’ll begin to understand what it really is. And in the meantime you might make a few percent in Bitcoin appreciation…but you might also lose a few percent. That’s the risk right now.
And it’s that instability that underpins the cautiousness in Bitcoin right now. People continuously reflect the price of Bitcoin back to a fiat currency. That’s a mistake. Bitcoin should stand alone. It’s a parallel financial system, not a complementary one.
Over time as people realise this and integrate into the Bitcoin system, then it will really take off.
If you drop the idea of Bitcoin linked to the price of a fiat currency, it makes more sense. You might get paid in Bitcoin, buy groceries in Bitcoin, transfer Bitcoins to relatives across borders with (relative) anonymity, or spread your Bitcoin assets away from prying government eyes… These are just a few of the concepts of the Bitcoin system.
There’s no doubt that although Bitcoin is still in its infancy, it will become something far more important than we now realise. I wouldn’t necessarily try to buy and sell Bitcoin through an ATM at this point, but I’d certainly get familiar with the system now, if you haven’t already.
Next Thursday, I’ll show you how to get Bitcoins, how and where to store them, and, importantly, what you can do with them.
Sam Volkering+
Technology Analyst, Money Morning
Ed Note: The above article was originally published in Tech Insider.
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