The low-transaction-fee argument for Bitcoin is silly

A common argument advanced by Bitcoin proponents is that unlike banks and credit cards, Bitcoin has low (or even zero) transaction fees. The claim is a complete red herring, and in this post I’ll explain why.

Let’s assume for the purposes of argument that Bitcoin transaction fees are, in fact, zero. There are small mining-related transaction fees, but it seems plausible that these fees will always be far smaller than those associated with traditional banking.

Why do banks and credit cards charge those annoying fees? A major reason is fraud. Banks eat the cost of fraudulent transactions, but pass on the cost to the customer by taking a cut of each legitimate transaction. Fraud is not an artifact of a particular system that we can design away — it is inherent to every form of money handled by humans. To compare Bitcoin meaningfully with traditional banking, then, we must ask how big fraud-related losses are for Bitcoin users.

Framed this way, the comparison is not a happy one for Bitcoin. From thefts of wallets to hacks of Bitcoin exchanges, fraud in the Bitcoin ecosystem is rampant. It only gets worse when we add sources of risk other than fraud. A recent study found that 45% of Bitcoin exchanges shut down. Several of the rest have suffered attacks and losses.

Granted, one can’t read too much into the numbers at this point, as Bitcoin is still in its pimply-faced adolescence and might very well grow up to be a responsible adult. But there are two major ways in which fraud and other losses in Bitcoin compare quite unfavorably with traditional banking, in a qualitative sense.

First, in the libertarian tradition of cypherpunk technologies, Bitcoin shifts a lot of responsibility from institutions to users (of course, that’s part of what’s attractive about it). But users are, and will always be, dramatically worse at security than institutions. There’s a reason why most of us don’t keep our money in cash under our pillows, or worse, carry it around in a briefcase.

Second, also in the libertarian tradition of cypherpunk technologies, ownership of bitcoins is defined by crypto and enforced by code. As such, transactions are final, and there is no possibility of recourse to legal or social mechanisms to reverse theft. Put another way, reducing the problem of fraud prevention to that of computer security cannot possibly be an improvement.

Because of these problems, as Bitcoin becomes more mainstream, it looks like users will interact through services like Coinbase (which is like Paypal or an online bank, except Bitcoin-based) instead of owning bitcoins directly. This hybrid model will alleviate the problem somewhat, but not entirely. If and when these services mature enough to offer any kind of fraud protection, they will have to start charging higher fees.

In other words, Bitcoin by itself is not a payment mechanism, but can serve as the foundation for one. Thus, the claim that Bitcoin payments have low transaction fees is a category error due to looking at Source

Source: Freedom To Tinker