Growing a Bitcoin Economy (by )

Currently, there's lots of interest in Bitcoin as a speculative investment, driven by the meteoritic rise in its value this year.

However, to make Bitcoin actually do what it's capable of - working as an international Internet currency for free trade - we need to back that up with a vibrant economy in Bitcoin itself, rather than just trading it to and from ordinary currencies on exchanges.

This economy should be composed of many kinds of activity, all reinforcing each other and together making bitcoins more and more useful.

Bitcoins are great for the kinds of transactions where taking an hour to pay a bill isn't a problem. Indeed, compared to direct debits, standing orders, bank transfers, and cheques in the post, bitcoin transfers are blindingly fast!

So I think there's a few obvious economic sectors where Bitcoin can start to take off:

Mail Order

Most mail order companies these days have a Web site to place orders on, usually with a debit or credit card. It's quite easy to add Bitcoin as a payment option at checkout; many e-commerce platforms have Bitcoin modules available, and companies such as BitPay make it easy to add bitcoin payments to bespoke sites. For the merchant, the main benefit is reduced costs; card payment processors take a hefty cut of several percent, and may "charge back" transactions that seemed to have been paid.

Even if only a tiny market of bitcoin-holding customers exists, the low cost of adding bitcoin as a payment option makes it attractive; the bitcoin community are quite enthusiastic about spending their coins, so the first company in any given market sector to accept bitcoin will probably get a lot of interest. And driving more sales through bitcoin rather than card payments will reduce the cost of doing business.

Online services

Similarly, online services such as Web hosting, domain names, VoIP call forwarding, VPNs, and the like tend to be billed over periods of months, so taking an hour to confirm payment isn't a problem; and the same arguments apply as for mail order.

Freelance contracting

As more companies start to hold bitcoins - particularly companies that have Web sites, and therefore need to hire the kinds of bleeding-edge-technology types who are likely to be interested in bitcoins - it will become more attractive for them to pay freelance contractors in bitcoins.

I call these folks out especially, as opposed to traditional employees, as people paid on a short contract basis are more likely to be financially flexible; they're used to being paid odd lump sums at odd times, and will have the financial buffers to deal with irregular payments. So the risks involved in having to shuffle their bitcoins through exchanges to get them turned back into fiat currency to pay things like mortgages is less of a concern for them than people paid monthly who have all their standing orders set to pay out the day after they get paid.

People who are enthusiastic about bitcoin would prefer to be paid at least partly in them if they can, rather than having to go to the effort of buying their bitcoin at an exchange. For now, the ideal would be to receive a mixture of bitcoin and traditional payments, so that you have supplies of both bitcoins and your local currency, in order to minimise the amount of exchange trading you need to do.

In this day and age, an increasing amount of freelance technical work is being done across national borders; people whose work can be done from anywhere they can get a good Internet connection to their laptop will often opt to work from places that are pleasant and convenient for them, while shopping around for work in a global market. Bitcoin is particularly convenient in comparison to international bank transfers!


I suspect that employees who are interested in bitcoin would prefer to receive a small portion of their salary in them, rather than having to buy them on an exchange. So if their employer is receiving bitcoins on account of being paid in them by some of their customers, then taking a portion of their salary in bitcoin would probably be a good deal for both them and their employer, cutting out the currency exchanges.

However, I suspect that the portion taken as bitcoin will probably largely be "pocket money"; things like mortgages, insurance, utility bills and supermarket shopping will need to be in local currency, and in many jurisdictions it's more awkward to account for tax if you are paid in unconventional ways. I suspect this won't change, except in a hypothetical future where Bitcoin is a national currency somewhere.

Breaking news: Expensify has added Bitcoin as an option for companies to pay employee expenses, which seems a step in this direction.


Currently, only a tiny minority of people are interested in Bitcoin; but as this increases, the chances of a landlord and a tenant both being bitcoin users might start to become distinguishable from the chance of being struck by a meteorite. In which case, a situation largely similar to the employment situation might arise, where the landlord is delighted to accept some fraction of the rent in bitcoins. However, if the tenant is just having to buy them on exchanges with local currency to pay the rent, this is less likely to be attractive to them - so it will probably only happen if they are able to earn bitcoins directly.

Financial services

Conventional banks aren't likely to be enthusiastic about offering mortgages in the near future, so the sizeable fraction of the average family's outgoings taken up by mortgages, loan repayments, and insurance is likely to be stuck in local currency for the time being. However, the international nature of Bitcoin opens up some potential for financial services companies to establish themselves and reach a global market, which may compensate for the fact that the Bitcoin community is still small to begin with, and the potential legal challenges of enforcing loan repayments across national borders. If the latter can be overcome, then it might start to become attractive to take out loans, savings accounts and insurance in bitcoins from trans-national bitcoin banks. Mortgages would be harder, as they are more intimately tied into the local property laws in each country, and because the money paid by the mortgage company to buy a house generally has to be provided in local currency.

High street shopping and leisure

This will be a hard one for Bitcoin to penetrate. Mechanisms for allowing instant bitcoin payments, rather than waiting an hour, are still largely on the drawing board; and far from the convenience of inserting a credit card and entering a PIN.

For the time being, I think this will remain dominated by cash and the existing card industry. However, given time, the technical problems will probably be overcome. But not yet.


The international nature of Bitcoin makes it attractive for frequent flyers. I can imagine paying for hotels and flights with bitcoins being a small niche that can grow, much like mail order businesses.

Weekly groceries

This is a slightly different case from high street retail; many already have their supermarket shopping delivered from an online ordering service, which would be a natural fit for Bitcoin, like any other mail-order business.

However, supermarket chains are already branching out into banking, so perhaps this is a sneaky route by which Bitcoin financial services could become available. Supermarkets start to accept bitcoin on their web sites because it's cheap and easy and cuts out card payment fees, then as that bitcoin customer base slowly grows, it becomes worth their while to offer bitcoin deposit accounts (otherwise known as e-wallets) that can be used to pay for stuff in their shops, ranging from the big supermarkets down through the little "mini" ones that are cannibalising corners shops and petrol stations, using your loyalty card. Which might then be extended to be accepted in high street shops...

Now, supermarkets tend to focus very heavily on their mainstream customer base, so they're probably not very likely to be interested in accepting Bitcoin at all until it's quite widespread with lots of people eager to spend it. But once they do, I suspect that it will have a tremendous accelerating effect on the adoption of Bitcoin and provide lots of innovative and convenient services!


At the time of writing, Bitcoins are getting quite popular in the online services sector, probably because the kinds of people who are into it tend to consume a lot of online services, and/or work for online services companies; there's some mail order businesses, either US-based or the kind of mail order business that does a lot of international shipping anyway (such as geek novelties).

There's growing talk of contractors being paid in them and employees being partly paid in them, when they work for companies that are into accepting bitcoins, or voluntary organisations for whom accepting bitcoin donations is easy, and bitcoin's philosophy aligns with theirs.

So I'm hoping that we are seeing the start of a slowly growing tide of people (especially affluent people) being paid in bitcoins, which will in turn drive the growth of merchants accepting them, in a virtuous circle that will bring us to the tipping point where supermarkets and financial services companies get interested! There is slow, steady, progress in the form of more and more organisations accepting or paying in bitcoins, which individually don't count for much, but if the trend continues it will achieve critical mass within a decade or so.


  • By @ndy, Tue 2nd Apr 2013 @ 11:52 am

    How do you propose that the early adopters manage pricing? The value of a bitcoin varies wildly on short time scales so any checkout integration will have to have a pricing feed that is much more important than with other currencies that the vendor may accept.

  • By alaric, Tue 2nd Apr 2013 @ 12:36 pm

    Well, with one major exception, the price changes have generally been upwards on a daily basis, so that's a boon for the vendor!

    Generally, the trend so far is to price things in US dollars, and accept BTC at the current exchange rate, calculated anything from daily to the "current spot price", and to accept a small risk of a crash against the likely gain of rising BTC prices.

    The volatility will drop as the economy grows, however, and more options traders and arbitrators and so on join up, and the occasional "big cash out" transactions that drive the price down become lost amongst the noise.

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