Want to buy two pizzas with bitcoin? Transaction costs: 23 euros

NRC
Erasmus School of Economics

Bitcoin is known to be a volatile but promising investment. Many consider it to be the payment method of the future. Are they right? In an article from NRC, Professor of Monetary Economics at Erasmus School of Economics Ivo Arnold gives his opinion on the credibility of bitcoin as a payment method. 

At the beginning of October 2020, one bitcoin cost 9,000 euros. The people who bought bitcoin and held them, struck gold: bitcoin is now worth more than 50,000 euros. However, other stories are rather horrifying, looking back on some decisions: when American software developer Laszlo Hanyecz bought two pizzas in 2010 for 10,000 bitcoins, he could have never expected that this amount would have made him worth more than 500 million euros.

Volatile

These examples lead to the following conclusion: bitcoin could make you rich but is too capricious to really serve as a stable currency. Arnold goes a step further: ‘I wouldn’t even want to call it a coin. It’s a speculative investment. Its volatility is an undesirable specification for a currency. Because of the high risk that comes with bitcoin, it is not worth it to pay with it for groceries. Its value will already have changed since the moment that you have decided to pay for something and the moment that you actually make the payment’.

One of the big issues with bitcoin, is the transaction costs that accompany a transaction. When you make a payment, the transaction will have to be registered in the blockchain. This network is improving, but still dependent upon humans on many platforms which allow you to trade other currencies with bitcoin. Since the popularity of bitcoin is only increasing, the frequency of transactions has increased as well. At times when lots of transactions have to be registered, these humans are a bottleneck; people who are willing to pay more to have their transaction registered earlier, will be served earlier. These humans, called miners, will register payments with the highest transaction costs first, since the costs are revenue to the miners. Whether you as a customer incur these costs, is dependent on the platform that you use. For instance, Coinbase, one of the most popular platforms, has reached an agreement with a company called BitPay. This means that customers don’t pay for making transactions, because these parties have made arrangements to prevent this from happening.

Concluding thoughts

Arnold: ‘If bitcoin really would be worth it to prefer over other methods of payment, it would have already been more widespread by now. Look at alternatives such as Apple Pay or Tikkie. If something adds value, the public will endorse it very quickly. Bitcoin has missed that train’. It can be easy to lose sight of the real significance of a hype, especially with bitcoin. Worldwide transactions in January and February of this year add up to 1.6 billion dollars, which indeed is a record. However, this is still nothing in comparison with other cash flows. For instance, regular sales by stores in the US alone in January are worth 568.2 billion dollars.

More information

You can download the full article from NRC, 20 March 2021, above.