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Author Topic: A call to create a new kind of exchange  (Read 1581 times)
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August 11, 2011, 06:47:37 PM

Without going into too much details discussed in other thread, there is a very serious problem with Bitcoins these days and that's the simple fact that it's hard as hell to get a hold of Bitcoins initially.

You can read a discussion I'm having on Reddit in this matter, and I've came to a realization that Bitcoin needs a new type of an exchange, and the current ones are hampering the progress of Bitcoin not because they exist, but rather because they are practically the only gateway to Bitcoin.

The largest exchanges that exists today are operated as Stock Exchange, while we all know that real-life exchanges are either small privately owned brick and mortar shops that you can come in and buy/sell currencies, or banks that people trade currency with the bank and not with other traders.

What I'm proposing is an exchange that will have it's own supply of money, and instead of trading against/with other traders, users will buy coins/dollars directly from the exchange (as long it has the currency in stock). Very much like the brick and mortar exchanges we all have down the street (well, some of us have them down the street, depending where you live).

In order for this exchange to operate, it will need to rely on the exchange rate to provide it with the actual exchange rates that Bitcoin is being traded on those stock markets.

One other thing that is important to understand is that these exchanges are not ment to be used by day traders, but instead to provide an entry for regular users who only want to acquire Bitcoins to use them or to sell Bitcoins that they have in order to get fiat money to pay bills and rent. It could be used by day traders, but in my opinion the exchange would have to protect itself by increasing the cut it takes from users (day traders) in order to stay profitable and avoid an exchange being used as a stock market.

Creating such an exchange (not a stock market) requires the exchange owner having a lot of currency being held in stock for people to buy and sell the currencies he buys and sells.

This looks like a problem because not money people are interested in dropping the necessary funds for such an exchange.

If we consider that there are approximately 7 million coins in existence (neglecting the fact that there are a lot of "lost coins"), and at the current exchange rate that means around $70,000,000 worth of coins out there.

The average amount of coins that a regular user needs is around $100 - $5,000 worth of coins (my own assumption and numbers, they don't mean anything, and are just used for the sake of this explanation), that means that there are at most 14,000 people with $5,000 worth of bitcoins, and at most 70,000 people with $100 worth of bitcoins. In any case this is a worth while business as long as bitcoin does not completely collapses it's has a lot of money in it, and it's clearly needed and used by people around the world.

There are around $500,000 - $1,500,000 bitcoins traded daily on all the stock markets (MtGox, TradeHill, etc'), most of these exchanges are probably day traders who try to profit from the high volatility of Bitcoin.

Let's assume that the day traders are responsible for 60% of all the traffic in the stock markets, and let's assume that the average volume traded is $1,000,000 - a nice round number.

So from those assumptions we conclude that there are $400,000 worth of coins exchanging hands every day by people who are not day traders, and are actually helping the bitcoin economy because they buy stuff and services and sell them.

So if we want to create a true exchange service (not another stock market) we need a lot of money, at least $400,000 to start with in Bitcoins and USD. This is just to buy Bitcoin to keep them for customers when they are interested in buying Bitcoins, and having some USD in order to buy bitcoins from customers who want USD.

On top of that, a good exchange would provide easy ways of getting money to them. Eventually these exchange are for-profit, and the more traffic they have within them the better it's for them, and the more profitable they are. So providing good, easy, and fast methods of converting Bitcoin to USD (and other currencies in the future) will need at least $30,000 - $50,000 (wages, salaries, bank/visa fees, etc') to operate.

$50,000 monthly is not sounding so bad when considering a market that grows at a rate of 577% on average every month for Bitcoin exchanges.

Let's assume that a good, easy, fast Bitcoin exchange will have a daily traffic of $400,000, so monthly it means $12 million. In order for the exchange to be profitable, or at least maintaining a break even stability, it needs $50,000 monthly, that means 0.41666% is needed to be taken by the exchange in order to cover its expenses. Obviously not including rise and fall in bitcoin-to-usd value which can sometimes dramatically change the bottom lines.

So in order to provide a worth while exchange for people to have as a good, fast, reliable gate into and out of bitcoins, we need $400,000 in cash, and initially $200,000 to support 4 months of operation assuming loss, and assuming that by the 4th month the exchange can at least break even.

For this we also need to add the cost of setting up such an operation, that would require to open bank account in at least 4-5 desirable locations (USA, UK, Central Europe, Middle East, far east is not included in this list as I'm not familiar with them or their methods of operations as of now), this would cost an additional $20,000 - $50,000 before the exchange start operations.

All in all, we need around $650,000 in initial investment to create such an exchange. Or 70,000 Bitcoins.

I have a hard time imagining anyone dropping more almost a million dollars in advance in to Bitcoin today, but an investment of $250,000 is something that some investors would take seriously if proposed with the right business idea and plan.

So, we can assume to find an entrepreneur that would be willing to devote his time to such a project, and we can assume to find an investor that will be willing to invest the initial funding needed ($250,000) when there is a sound business plan and the right people behind it.

Where to get the missing $400,000? The users.

As explained earlier, such an exchange would need to have $400,000 in Bitcoins and USD to operate on a daily basis without "currency out of stock" error messages. So that means the exchange will need around $200,000 in USD and $200,000 in Bitcoins, or 10,000 bitcoins.

If such an exchange would rise today, to could take 2-4% from every exchange made on it, creating a profit margin of ~1.5-3.5%. This high % is high indeed, but considering that it suppose to be a business, and considering that it's the only one, it needs that kind of profit margins to be profitable and to exist. I'm paying a lot more when I'm getting a bank check or a wire transfer any way, and PayPal and services like it take those kind of percentages anyway.
An unlike PayPal, once you got Bitcoins, you are no longer paying transaction fees like you have to with fiat currency and services like PayPal and Dwolla, so this fees should not scare anyone or seem outrageous. And when Bitcoin evolves and becomes the next best things as we all hope and dream, than exchanges like that will be a regular business type in the Bitcoin landscape, so you can expect fees to get lower and lower to levels of below 0.41666% as the game progresses.

The users I mentioned earlier - The only way to get the funding the initial funding needed for such an exchange is from us, the early adopters of Bitcoin, people who already have coins lying around in our offline wallets or sitting on a stock exchange like MtGox.

The fact that you have coins in MtGox or your offline wallet means only one thing - it's locked away from the rest of the users, and no one, including yourself is not profiting from the existence of the coins.

In the world we so oftentimes criticize we have banks that pay us interest for any excess money we have. This works pretty good (except that we have a centralized bank...) for all the parties involved - The bank gets to have your money and make even more money by lending or buying stocks with it, and you get to have interest on any excess money (or other types of property/tangibles) that we may have.

So in order for the exchange to operate, and for us the users to have interest in helping it operate, the exchange needs to promise us that it will include us, the bitcoin holders, in the profits it makes. Bitcoins that will be deposited into such an exchange will have interest rate to them, and your money will start working for you, with the help of the exchange.

It may sound like a bank, and it may sound like we are going to trust some unknown entity to safegaurd our cash, and it sounds correct, but it's necessary for Bitcoin to become a widespread tool used by many people around the world, and in general advancing the bitcoin economy. And in any case that's what happens in our real life today, so at least we could opt to move to Bitcoins like Rick Falkvinge did a while ago.

What is really needed for this to become a reality is a few of us that have in total enough bitcoins to create the initial liquidity that such an exchange needs, and we need a trustworthy entity that is willing to take all the necessary regulatory steps to be liable for the cash that people invest in it.

Such an exchange needs to be entirely transparent, all of the code used to manage the exchange and all of the banking information needs to be reviewable by attorneys and people who just want to take a peek into the books.

I would be willing to put $1,000 worth of bitcoins on a very risky business like that that has the potential to get me a high return on investment even if bitcoin remains in $10 or even goes down to $1, I won't really care, because my money will generate interest just because it exists, and not because some speculations are moving the exchange rate up or down.

I'm not a financialist or an attorney, I don't fully understand what is needed to create such an entity, but I do understand that if it's done right, it's something that I will fully support with my hard earned cash in order to push Bitcoin to where it needs to be, even if that investment can very risky.

I'm pledging 16.8295 Bitcoins as an investment (loan for the initial liquidity) for any business that comes along and can stand to the rigorous expectation that I have and will be written if this gets the support it needs from the community.

Let me know if this makes any sense...
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August 11, 2011, 10:21:15 PM

Sorry, too long, couldn't read the whole thing.

But your idea seems to be that we should convince several people (or groups of people) with a quarter million dollars or so that they should speculate on the bitcoin markets, right?  And that instead of following their own discretion for pricing, they should all make trades at exactly the published rate from one/all of the exchanges?

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August 11, 2011, 10:43:26 PM

Seems like a great idea on the surface as we all like to keep things centralized and neat (we've been brainwashed that way).  I would just worry that it would give the exchange too much ability to easily manipulate the market.  I like the idea of bitcoin exchanges as they exist now.  I think the stock exchanges you want to emulate are less free than the current bitcoin exchanges.  Decentralization is the key to bitcoin.  While your idea would probably provide more liquidity, I'm not sure if I'd be for it or against it until I heard more arguments on both sides.

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August 11, 2011, 10:51:07 PM

You're describing Nanaimo Gold. To stay profitable, they charge a massive spread. They're currently selling Bitcoin for $11.85, but buying it for only $6. Your exchange service would have to do the same thing.
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August 12, 2011, 01:37:11 PM

You're describing Nanaimo Gold. To stay profitable, they charge a massive spread. They're currently selling Bitcoin for $11.85, but buying it for only $6. Your exchange service would have to do the same thing.

No, not exactly.
What I'm describing is something that will be fully transparent to get my trust and to win my coins (even as a loan...). Also I'm requiring some trusted 3rd party (large international law firm, for example) that would vouch for the company and the people behind the company.
Nothing like
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August 12, 2011, 05:05:59 PM

Sounds like us in a lot of ways.
We do what nanaimo gold does (+ more) for way way better prices.
And we deal directly with well known financial institutions.
We also allow direct cash deposit at any of our business account bank branches.

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August 12, 2011, 06:26:38 PM

If anyone could make the below a reality, that would be nice. Still rife with design problems though when you get to the 'edges' where money has to change hands.

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August 12, 2011, 06:42:23 PM

Exchange in a Box, coming soon to the Global Bitcoin Stock Exchange (, where all you'll need is a bank account and an internet connection.

PGP key id at 0xA68F4B7C

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August 13, 2011, 07:26:34 AM

No one's mentioned BitPiggy yet. It's AUD only, but I think it uses the model you're referring to. It has a very reasonable spread, and the best thing is that you pay the current price (though you might have to wait a day or two for the transaction to complete).

I highly recommend it for Aussies, and I hope it's model is replicated for other countries.

Preev – simple Bitcoin converter with live exchange rates
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August 13, 2011, 10:36:06 PM

This is the second time I've read this thread because the first time it was way to long to read sensibly.

What you are describing is like the currency exchange kiosks and banks scattered everywhere.  They run by charging a spread.  BITpiggy looks like +/-6% and most currency exchanges work on 3% to 10% depending on the liquidity and volatility.  (I did see an airport two weeks ago with a 30% spread on the yen!!!!! and a few more !!!!)

While anyone has access to the exchanges directly and easily, they can trade there fairly easily.  The reason ordinary people don't do that with GBP or USD or SGD is that they don't have access to the forex directly.  However, with BTC anyone does, and you need to have your cleared funds there in advance.

The problem is with the transaction fees for cross-border transfers of the spendable physical currency. BitPiggy can avoid that by accepting coin and paying direct via internet banking, or you could use a merchant service.  i.e. you trade directly out of you bank account or BTC wallet to the "exchange".  If you agreed to another benchmark price for pricing, and the operator is happy to take the swings to self hedge, then it could work.
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