Bitcoin Money Machines - The advent of the Internet of Things

With advent of new digital currencies such as Bitcoin, their acceptance rate is growing rapidly with each passing day. People are even starting to use bitcoins not only for online purchases, but also in the offline world. For example, in many places you can now pay for a hotel room or cup of coffee in a café with bitcoins. According to coinmap.org, there are currently around 5,000 offline places where you can spend your bitcoins, and that number is quickly growing. Bitcoin software development is also moving forward by leaps and bounds, with many different wallet applications available today. These can be used for both storing bitcoins and making payments with them. Apple has changed its policy and finally allowed bitcoin-related applications in its Appstore, which will only serve to increase widespread adoption of the crypto currency. But many people still do not understand where and how to get bitcoins in order to use them.

How are bitcoins acquired?

There are currently three main ways you can obtain bitcoins:

  • Become a miner and try to mine it on your own. It has become increasingly difficult to mine bitcoins as an individual. Most people now enter one of the available mining pools.
  • Provide goods or services that consumers can purchase with a crypto currency payment method.
  • Buy bitcoins with fiat money through one of the many available exchanges or wallet services such as Bitstamp, Kraken, or Coinbase.

Becoming a successful miner involves understanding many details, as well as having substantial resources at your disposal. Increases in the value of bitcoins prompted many wealthy people to get in on the action. In total they have invested millions or even more than a billion into specialized hardware. This makes it difficult or impossible for most people to become individual miners. As another obstacle, many miners have experienced significant losses due to delays in equipment supplies [1].

The second option of providing a bitcoin payment option when selling products or services involves becoming either a merchant or a freelancer who accepts payments for services rendered in bitcoins. Most people would find it unfeasible to persuade their boss to pay their salary in bitcoins, at least in the current environment.

The only option left for an average user is to purchase bitcoins. There are many services that connect sellers to buyers, providing quality and trustworthiness ratings. But there are also many centralized platforms known as Bitcoin Exchanges. In order to buy bitcoins, you need to open an account with one of these exchanges and provide personal information. After the Mt.Gox collapse, many exchange services shifted to operating in a fully compliant and reliable manner. They also provide periodic voluntary audit reports conducted by third-party entities to prove that the bitcoins they possess really correspond to their customers’ account balances. The results of these developments have included much more thorough customer verification procedures. Nearly everyone has to scan and send at least a passport and address verification, and some exchanges go even further than that. These procedures are real barriers that keep many people across the globe from entering the bitcoin world. It’s also worth remembering that there are millions of unbanked people in emerging markets that have no means whatsoever to make wire transfers to a Bitcoin Exchange, effectively barring them from participation.

Buying bitcoins with cash

The process becomes much simpler when you can exchange cash for bitcoins. This can be done with so-called Bitcoin ATMs. Their development was fast-tracked in the middle of the 2013, with the introduction of the first Bitcoin ATM in Vancouver, Canada occurring on October 29 of that year. The machine was produced by manufacturer Robocoin and attracted much attention in the media. During its first month of operation alone, it processed more than 1 million CAD in transactions.

As of now there are about 25 different Bitcoin ATM manufacturers around the world, with more than 100 Bitcoin machines installed so far. The most prominent players are Lamassu, Robocoin, Genesis1, BitAccess and Skyhook. The locations of Bitcoin machines can be found on the Bitcoin ATM map. The distribution of the machines is very broad, with the greatest concentrations occurring in Northern America, Europe, Asia and Australia. The top four cities by number of Bitcoin machines installed are as follows:

  • Singapore (8 machines)
  • Vancouver, Canada (7 machines)
  • Helsinki (5 machines)
  • London (5 machines)

Types of Bitcoin ATMs

Because all Bitcoin ATMs are different, it is important to differentiate them on several levels. The first is by what operation type the machine supports, which can be either one-way or two-way.

All the Bitcoin machines can be divided into these two groups. Some of them are solid machines that look very similar to traditional bank ATMs, and these almost always allow for two-way transactions. This means you can buy bitcoins with cash as well as sell bitcoins for cash through them. Robocoin and Genesis1 are examples of such two-way Bitcoin ATMs.

However, there are also scaled down versions of two-way machines, such as BitAccess and BTCPoint machines.

Future potential of two-way money machines – Internet of Things (IoT)

Tech enthusiasts believe that Bitcoin will be central to the Internet of Things (IoT). It is assumed that everyone will be IoT-enhanced in the future. Bodies and minds will be connected via the internet to other things and people, and everyone will be enhanced beyond normal human abilities. Google Glass is a good example of an IoT-application already in use. In the context of Bitcoin, the Internet of Things gives machines a digital identity, and financial service offerings give them an economic function as well. Bitcoin technology is deemed necessary to allow money machines to communicate with each other without direct human intervention. In such a scenario, two-way Bitcoin ATMs could support each other by automatically refilling bitcoin deposits from a remote location when the local supply of digital cash is depleted. Such an IoT-process enables machines to become a new type of device participating intelligently in the economy alongside corporations and people.

Because two-way Bitcoin ATMs can handle a wide variety of operations, they are enriched with many compliance features that can easily be turned on or off by the machine’s operator. For example, some Robocoin machines make use of cameras, document scanning, and even palm vein scanning. Many users have criticized Robocoin for adding in such complicated features that might scare off those who are new to using crypto currencies. The following video link serves to illustrate the point:

On the other hand, the additional features are a way for the manufacturer to guarantee that the operator can use the machine in the most restrictive legal environments. It should also be remembered that in less restrictive environments, many of these features can be turned off by the operator.

A new type of Bitcoin ATM is the one-way machine. All you can do with it is purchase bitcoins. Because they tend to be much smaller and lighter than more traditional ATMs, they are typically located in highly secure places. Instead of Bitcoin ATM, they are commonly called Bitcoin vending machines. Examples of these devices include Lamassu (although it later added in two-way functionality through additional stand), the Skyhook project machine, Numoni (Singapore), and General Bytes (Czech manufacturer).

Another differentiation in Bitcoin ATMs is by which crypto currencies they support. All Bitcoin ATMs support Bitcoin because it is the main crypto currency at present. Some machines do support other coins, such as the Genesis1 ATMs that will handle both Litecoin and Dogecoin in addition to Bitcoin.

Regulatory issues

Many existing regulations impede the further development and wider acceptance of Bitcoin. One of the big problems Bitcoin ATM operators have encountered is ordering the equipment only to then find out they are unable to legally operate the machine. Lamassu reports that more than 200 machines have been shipped out, but only a fraction of those are operational at permanent locations (around 50 machines according to the Bitcoin ATM map previously cited). The manufacturers normally ask their customers to sign a disclaimer that they are informed about any legal requirements for running a Bitcoin ATM and do so at their own risk.

Profitability of running a bitcoin ATM

Many people wonder if running a Bitcoin ATM is a profitable venture. On average, existing ATMs charge about 4-6% per transaction compared to the rates provided by Bitcoin Exchanges. This is still considered a high fee, and it is expected to come down over time as the number of Bitcoin ATMs and competing operators both increase. At the moment, the average fee level is 5% per transaction. According to “bitsandmore“ user on Reddit [2], the average monthly volume of Bitcoin ATM operations trends roughly $100K.

This would generate revenue of $5,000 per month in a good location. Additional costs would be any exchange fees if the buying/selling process is organized via a Bitcoin Exchange, cash management services, and equipment maintenance. Assuming these additional costs stay under $1,000 per month, the machine would generate profits of roughly $4,000 per month. It should be noted, however, that in some countries, successfully navigating the legal framework surrounding ATM operation might cost an operator as much as $50,000, which is often the case in the US.

ROI is totally dependent on the machine chosen. The more expensive Robocoin or Genesis1 bitcoin ATMs cost from $15,000-$20,000 per unit, while simpler machines such as Lamassu or Skyhook cost between $1,000-$6,500 per unit. Simpler units might also generate less revenue as they support only one-way transactions and are normally installed inside buildings (café, restaurants, meeting points, etc.), which limits their hours of operation.

Finding a proper location is one of the obstacles facing Bitcoin ATM operators, requiring them to hone their pitches about the benefits to location owners. Hosting a Bitcoin ATM brings indirect benefits to location providers. The main advantage comes from the marketing effect. Since Bitcoin is considered hip, any new site receives a good deal of media attention. This results in additional visitors to the location. That’s why trendy bars, cafes, and restaurants are popular places for Bitcoin ATMs.

Assuming the machine is generating the profits of $4,000 per month with an initial $15,000 investment in the unit and $50,000 into legal costs, it could take 1.5 years to recoup the initial outlay. Of course, if the purchased unit is on the cheaper end of the spectrum and there are no substantial additional costs, the ROI could be achieved in as little as 3 months. In reality, the average is about 6 months to reach a break-even point. The smallest machines are becoming increasingly popular. Skyhook shipped 150 of its machines in the first month [3]. If the cost of its unit is only $1,000 and if there are no additional costs for running the machine, it would require only $20,000 in transactions to reach a break-even point, which could easily happen in one month in a popular location.

Growth opportunity - remittance markets

Bitcoin ATMs open up new possibilities for emerging markets with large populations of unbanked people. Until recently, the unbanked had no other choice when making remittances than using expensive services such as Western Union, MoneyGram and others. It can easily cost 15-20% of the transaction for simply sending a $100 transfer to relatives back home. Bitcoin changes this picture entirely as it can easily enter emerging markets and charge much less in fees.

Assuming that those who have gone abroad to work could manage to buy bitcoins to send home, the problem remains of how the family will make use of them. After all, merchant adoption of Bitcoin is still low, and especially so in developing countries. However, several intermediary services already target this exact situation. For example, BitPesa connects Bitcoin transfers with the widely used M-Pesa mobile money network in Kenya. It costs only 3% (plus additional markups on exchange rates), which is still much lower than traditional remittance methods. With such services, recipient users receive their local cash (in this case on mobile) and don’t even need to know that the transfer was done using Bitcoin protocol.

Bitcoin ATMs could play a helpful role here as well. Assuming that there are two-way Bitcoin ATMs installed in the recipient city, the family could easily convert the digital cash into fiat money almost immediately after the transfer was initiated by the sender. Yes, the rates for Bitcoin ATM transaction are quite high right now (on average around 5%), but they could come down as competition increases. Still, 5% is much lower than traditional wire transfers, and transactions are also nearly instantaneous.

Bitcoin ATM manufacturers are already moving in this direction. Robocoin recently announced that they are transforming all their Bitcoin ATMs into a “Bitcoin’s Global Cash ATM Network” [4]. The basic idea is that users create accounts with Robocoin to not only buy and sell cash easily, but also to send money to others. This essentially means that anybody can easily send cash to the other side of the planet in a matter of seconds, and the recipient can withdraw cash immediately in local currency.

Lamassu, another leading Bitcoin machine manufacturer, also recently announced the introduction of open-source software for their machine [5]. This makes it possible for external developers to create applications that would allow users to send money abroad using the Lamassu machine. It will be fascinating to see if it is the proprietary or open-source technology that gets the upper hand in this competition.

In conclusion, it is clear that crypto currencies are on the cusp of having a very broad impact on the financial services landscape and how transactions occur across the globe. They have the potential to make the world more open and connected financially, just as social media networks have done on the personal level.

About the author

Vladimir Bakhirev works for a Swiss-based payments technology company. He holds an MBF degree from the University of St. Gallen and has broad experience in the banking industry as a project manager. Among his core interests are new technologies in the areas of payment processing and remittances, especially crypto currencies.

Links and sources:

[1] http://cryptome.org/2014/05/bitcoin-suicide.pdf

[2] http://www.reddit.com/r/Bitcoin/comments/29blvj/does_anyone_own_a_bitcoi...

[3] http://www.coindesk.com/skyhook-ships-150th-bitcoin-atm/

[4] http://www.coindesk.com/robocoin-2-0-arrives-bank-like-features-new-hard...

[5] http://www.coindesk.com/lamassu-introduces-open-source-software-bitcoin-...

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