In my final post about Bitcoin’s four hurdles, I will be covering exchanges. This may be the most visible point of Bitcoin’s growth pains.
Today, MtGox is not just the major Bitcoin exchange. For all intents and purposes, it is the only Bitcoin exchange, having one-hundredfold the trade volume of the second-largest US dollar exchange.
This is an article in a series on what Falkvinge identifies as Bitcoin’s four hurdles, which will be followed by a series on Bitcoin’s four drivers. This is the fourth article, on exchanges. The others are usability, transactions, and escrow.
I would argue that nowhere is the Bitcoin growth pains more apparent than at MtGox. It appears to be a quick hack site, entirely robust and quite functional, but with a strong touch of “let’s build a prototype” over it (which ties back to my first hurdle post about usability).
But disregarding the appearance, everything about MtGox says Bitcoin is in growth pains. I am sure that it is quite profitable by now, taking a 0.65% cut of a monthly six-million-dollar trade. Congratulations are certainly in order.
But when entertaining that kind of trade, I have different expectations. When seeing bitcoin prices rise in seconds-fresh updates, I want to react on that within minutes. Instead, the best I can do is to transfer legacy-currency funds to MtGox using an intra-European SEPA wire transfer, which takes two to five days.
This isn’t even funny. It files under “are you kidding me?“.
Given that the Bitcoin economy is valued at USD 200 million by now, the largest exchange should be holding its own accounts in all major banks and monitor them on automatic to enable immediate transfers. And I do mean immediate. This is just a source of frustration at present. If not having own accounts, it should have an affiliate program for that so that immediate transfers are possible.
It gets worse.
Despite the banner on MtGox saying that anyone can withdraw their funds at any time, this turns out not to be true when you try. You’re not allowed to withdraw more than $1,000 of worth per day or $10k per month, unless going through bureaucratic hoops, in which case the limit may — may — be raised. Apparently, this is due to a regulatory requirement if MtGox wants to stay as a low-volume something.
This, too, files under “are you kidding me?“.
The demand for moving millions of dollars or euros in minutes without interference is one of Bitcoin’s key drivers. In this huge opportunity to change the world forever, the largest exchange takes up to five days to move USD 1,000 worth because of legacy-banking regulatory bullshit? This inertia is the single largest obstacle for Bitcoin growth and uptake at the moment.
I would expect the largest exchanges to either be based in jurisdictions where no such regulatory requirements apply, or to have met the demands to not have any ridiculous roadblocks. I expect nothing less than total by-the-second liquidity between Bitcoin and other currencies.
Now, this article may look like a lot of MtGox bashing. It is important that MtGox does not deserve any criticism at all for being worse than everyone else. Not at all. And that’s a major part of the problem. MtGox is dominant for a reason, being the currently best exchange, despite these showstopper-grade shortcomings.
I chose to highlight MtGox because it gave me an opportunity to describe the best exchange by two magnitudes of volume and why it isn’t nearly good enough. And that’s why I’m saying that the Bitcoin ecosystem badly need exchanges. Many of them.
MtGox is totally dominant in Bitcoin today, just like MySpace once was in social networking. It remains to be seen whether it becomes the MySpace of Bitcoin. MtGox has huge momentum and networking effects speaking for it, but is not at the level where it needs to be to meet demand. We’ll all soon know whether it can innovate fast enough to keep its networking effects, or whether new, aggressive and polished-facade exchanges like TradeHill can compete for the top spot.
In any case, we don’t need one good king-of-the-hill exchange: we need many exchanges. And we need interoperability between them to further augment the networking effects. History shows us that Walled Gardens lose every time; the first two exchanges to link up their buy-and-sell orders through an open protocol are going to get an immediate headstart over everybody else due to fourfolding the networking drive. That will, hopefully, drive an interexchange protocol.
This article ends my series on the four key hurdles of Bitcoin. In two days, I will publish the first article on Bitcoin’s four drivers (and a surprise opportunity). That’s going to be much more fun writing and reading.