Did BitPay screw the pooch?
Wednesday 30 September 2015
TL;DR: It’s not looking good. :(
BitPay is - at least at the time of writing - the biggest processor in the bitcoin payment space. They started out in 2011, back when bitcoin was still just the plaything of geeks, hobbyists and the technically-literate drug user. By 2014 they were handling daily volumes of $1 million. They received tens of millions of dollars in VC funding and picked up an impressive list of partners. They were doing so well they even dropped their fees to zero.
In August 2015 BitPay published a blog post stating that some 60 percent of the world’s 100,000+ bitcoin-accepting merchants used BitPay. Transaction volumes continued to increase, and they restated their hope of on-boarding a million merchants by the end of 2016.
BitPay, the industry's largest payment processor, is struggling to maintain its image and profitability. Image: Andy Phillipson.
Then came the news of the hack, or rather social engineering attack, that lost them 5,000 bitcoins. A hacker gained access to the CTO’s email account and used it to ask the CEO to send around $1.8 million in bitcoin to their SecondMarket address. It turned out the address given instead belonged to the hacker. Although this all happened back in December 2014, it was only made public in September, when a filing hit the courts: BitPay’s insurer had refused to pay out and they were taking legal action.
In the wake of the news, BitPay changed its fee structure - going back on their ‘Free, Unlimited, Forever’ commitment. The company will now charge merchants 1 percent after an initial $1,000 of free transactions. Forever, clearly, isn’t as long as it used to be. That alone should be a big red flag.
Then there were reports of staff leaving the building in tears, having been laid off. Clearly, BitPay is hurting. As a relatively new company, their burn rate is likely far higher than their revenues - something the rumoured layoffs and price changes will be intended to address.
What does the future hold? It’s hard to imagine merchants deserting BitPay en-masse, since they are the largest player in the space - though equally, their problems and increased fees give other processing companies the change of a foothold, so losing some clients is only to be expected. If BitPay shuts down, it will cause a lot of merchants a headache and would send a shockwave through bitcoinland. We’re not there yet, but the company is taking drastic measures - so it’s clear the problems they face aren’t trivial.
Ultimately, though, BitPay and companies like it shouldn’t be a major part of the crypto ecosystem anyway - at least not in their current form. They exist to move money out of bitcoin, not into it, partly because exchange risk means it’s unattractive to hold it. What we really need to be doing is facilitating two-way transfers, and keeping money in the system by creating a culture of transacting in crypto itself - as well as organising payments for bills in crypto. That’s some way off, of course, and relies on satisfactorily addressing the problem of volatility in some form or another. In the long run, though, that’s the holy grail.
If you’re interested, in the course of writing this article, I found myself wondering where the expression ‘screw the pooch’ - meaning to make a catastrophic and dumb mistake - came from. A little research suggests it originates in US military slang. ‘Walking the dog’ or ‘feeding the dog’ meant wasting time, which evolved to mean doing something unbelievably stupid. Military vernacular being what it is, the list of activities undertaken with the dog was extended to undertaking carnal relations with it. ‘Screwing the pooch’ became a TV- and radio-friendly way of saying the same thing.
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