Bitcoin Fees and Confirmation Time
Bitcoin is really starting to prove itself as a new method for people to send and receive money or pay for things over the internet. The recent announcement by Overstock.com that they would accept the digital currency as payment on their site sent their sales - and the company's value - soaring. This will almost certainly mean that this is now likely to be followed by other major retailers following suit.
There are loads of advantages to owning Bitcoins, and to using them for receiving money and for making payments. Firstly, this new currency is deflationary rather than inflationary. What this means is that whilst each your the dollars or pounds in your pocket will buy you less and less over time, because prices go up in dollars and other fiat currencies every year, your Bitcoins will buy you more and more each year because prices go down. This is due to the scarcity principle, because fewer Bitcoins are created each month and year, and there is a fixed limit after which no more will be created, whereas dollars are issued every year based on government debt - and in massive quantities recently as well, as a result of the financial crisis. Another reason is because they are digital, so payments can be made to people in another country without expensive fees. Thirdly, it is an international currency so pricing makes more sense - a person in Europe may not have a very clear idea of a price in dollars, for example, and this may put them off, but if they use Bitcoins and the price is given in this currency it will make much more sense for them.
But there are problems with Bitcoins. One of these problems which really annoys a lot of people is the fees. Fees are charges, and are given to the (already spectacularly wealthy) 'miners' of Bitcoin whenever you send a payment. They are supposedly optional, but your payment might not be processed if you don't pay them, and even if it is it will take a very long time due to its low priority. In any case a lot of users aren't technically proficient enough to know how to prevent the fees being automatically added to any payment they send. Another annoying thing about the fees is that there is no real way to know how much they are going to be in advance. This is because it depends on the size of the transaction - not in money but in the amount of computer power it takes to process (in the amount of data the transaction contains, actually). So if you take a lot of small payments into your wallet, these are held as separate balances - if you then make a payment which needs to take coins from all these small balances it has a large data size so you will pay ridiculously large fees. Many people do not know what separate balances they have and how they will be used to make a payment, so can't know in advance what the fees will be. You can find more information about the transaction fees here.
The time it takes to process a transaction is also a problem. When you send a payment it needs to be confirmed by many different computers. This means that it often takes an hour, and sometimes a day, between sending a payment and it being available to spend in the wallet of the person you sent it to. Because retailers require a certain number of confirmations before they feel safe that the payment isn't some kind of fraud, this means that you can't buy things instantly. With digital goods that people want to pay for and access immediately this is a big problem.
Sending Bitcoins Without Paying Transaction Fees
It is possible to get around these problems, however, using the Ripple protocol. Ripple actually have their own digital currency called XRP which they hope will be a successor to Bitcoin's trailblazing success. This currency offers instant payments with no fees and an innovative peer to peer currency exchange system built in. But for the moment, whilst most people are using Bitcoin and there are not so many merchants accepting payment in XRP, they are also proving the value of their system by enabling people to send Bitcoins to anyone with no fees (actually you can be charged a flat transaction fee, but this is hundredths of a cent in USD for a transaction of any size, which can theoretically be raised to a maximum of 1% if the system is under DDOS attack) or excessive delays using their Bitcoin bridge technology. You can even send money to a Bitcoin address using another currency, and the system will find the best possible exchange rate for you, convert the currency, and deposit Bitcoins with the person you are sending to!
Here is how to send Bitcoins to any address without paying fees:
- Go to Ripple.com and register a new wallet.
- Choose a gateway which you will use for paying money into your wallet in any currency (Bitcoin, USD, GBP - pretty much anything) or for withdrawing your money in any currency. If you already have Bitcoins which you want to send then most gateways will accept Bitcoin deposits and withdrawals into a Ripple wallet without charging fees. One of the simplest is BTC2Ripple.com. You can also make use of other gateways to buy Bitcoins in another currency, and then transfer them into your Ripple wallet for free.
- Go to the send page in your Ripple wallet and send your Bitcoins to anyone who accepts Bitcoins!
Easy as 1,2,3 heh?
How Ripple Works
Ripple combines its own digital currency (XRP) with an innovative peer to peer currency exchange and trading system. So if you want to use your USD to send Bitcoins to someone, then rather than having to buy Bitcoins for a premium from an exchange and then send them, paying a fee, the system automatically looks at all of the people wanting to sell their Bitcoins for USD, chooses the best one, and makes the trade.
In actual fact, anything can be traded and exchanged through Ripple. For example, one new start up called NoFiatCoin is using the Ripple protocol to issue a gold-backed digital currency.Through ripple this can be traded for any currency or other commodity, or you can redeem it for real gold or silver from the issuer's vaults. In a similar way people can trade rewards points, air miles, or any commodity with a trusted issuer or gateway.
FlourishAnyway from USA on January 18, 2014:
It's amazing that such a major retailer is now accepting Bitcoins as payment. Especially if other retailers follow suit, this could become much more mainstream. I like avoiding transaction fees on anything, so that will be helpful to folks, Excellent expertise expressed here, Dean. You're a tech guru.