A common argument advanced by Bitcoin proponents is that unlike banks and credit cards, Bitcoin has low (or even zero) transaction fees. The claim is a complete red herring, and in this post I’ll explain why.
Let’s assume for the purposes of argument that Bitcoin transaction fees are, in fact, zero. There are small mining-related transaction fees, but it seems plausible that these fees will always be far smaller than those associated with traditional banking.
Why do banks and credit cards charge those annoying fees? A major reason is fraud. Banks eat the cost of fraudulent transactions, but pass on the cost to the customer by taking a cut of each legitimate transaction. Fraud is not an artifact of a particular system that we can design away — it is inherent to every form of money handled by humans. To compare Bitcoin meaningfully with traditional banking, then, we must ask how big fraud-related losses are for Bitcoin users.
Framed this way, the comparison is not a happy one for Bitcoin. From thefts of wallets to hacks of Bitcoin exchanges, fraud in the Bitcoin ecosystem is rampant. It only gets worse when we add sources of risk other than fraud. A recent study found that 45% of Bitcoin exchanges shut down. Several of the rest have suffered attacks and losses.