Bitcoin Series 10: Why the $7M pizza does not matter (aka how to transact in bitcoin)

One of the central fallacies in the media about bitcoin is that volatility will hinder transactions.   This is usually expressed in one of two ways:

(1)    Bitcoin is going to soar to the moon so why should anyone spend their bitcoins? 

This is usually illustrated with the story of how Laszlo Hanyecz paid 10,000 for 2 pizzas in the first documented bitcoin transaction.    The theory being that if Laszlo had kept his 10,000 bitcoins they would be worth $7M today and makes those pizzas the priciest pizzas in world history.

While a great story, the conclusions drawn from it are usually dead-wrong.    After those pizzas were eaten, 10,000 bitcoins were still worth $30.    Laszlo could have trivially replenished his 10,000 bitcoins for $30, not $7M dollars.

This is a more general principle.   Whether or not you want to maintain a ‘long’ position in bitcoin (for investment purposes) is completely irrelevant to whether you want make a purchase in bitcoin (for convenience’s sake).

Imagine I have 10 bitcoins worth $7,200 as of this afternoon because I have decided that is how much investment exposure I want to bitcoin.   And I want to order 6 pizzas for $72 because football is on, my buddies are drinking all my beer and if we don’t get some food in us bad things are likely to happen.

I can either: (a) pay $72 with my credit card in US dollars and still have 10 bitcoins and 72 fewer dollars or (b) buy the pizzas with 0.01 bitcoins and then press one more button and replenish those 0.01 bitcoins with $72 from my bank account.    At which point I would have 10 bitcoins and 72 fewer dollars.

If I instead buy the pizza with bitcoins and do not replace them, then I have made two decisions: (a) to spend $72 for pizza and (b) to reduce my long exposure to bitcoin by 1% (0.01 bitcoins).   But decision (b) has nothing to do with decision (a).

(2)    The volatility of bitcoin creates uncertainty for merchants.    This is just factually inaccurate.   Both major US payment processors (Coinbase and Bitpay) offer vendors the option to convert  bitcoins received back to US dollars as they receive them and take on no bitcoin ‘currency’ risk.  When I read articles in serious publications worrying about this, then I know who hasn’t done their basic homework.

I tested this whole concept in practice a couple of weeks ago when I paid our IT consultant’s latest invoice with 4 bitcoins or so.   I paid him 4 bitcoins, bought 4 more bitcoins 3 seconds later and he made a decision later about when he wanted dollars for his bitcoins.    It was trivially easy and no different than any business that transacts cross-borders deciding to accept money in a second currency.  The only difference I could note is that it took a few seconds to deal with instead of several days.

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Posted on December 28, 2013 and filed under Bitcoin.