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What is the rationale for existence of payment companies like BitPay? If I want to start accepting Bitcoin at my store I can simply set up my own Bitcoin wallet for free and then a simple script which counts Bitcoin price after checkout depending on current exchange rate. So what is the extra value these guys bring to the system?

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Currently still, most companies want to receive in fiat currency. Most of these merchant payment companies function as a man-in-the-middle, so that you don't have to be concerned about anything Bitcoin-related.

They provide functionality with which your customers can purchase goods using Bitcoin and you will receive all payments in your fiat currency of choice (as long as it's supported by the merchant service).

Like with PayPal, when a users wants to pay with Bitcoin in your site, they will get forwarded to a page from, f.e., BitPay. The user will pay in Bitcoins to BitPay and be forwarded back to your site while you will be notified that the users did indeed pay. Meanwhile, BitPay adds the payment amount to your merchant account, in fiat currency, using the exchange rate of that moment.

Given the high volatility of the Bitcoin exchange rate, this is the best solution for most merchants for now. It's easy and safe.

  • So the companies basically carry the risk of volatility during the payment. Do we know how they handle it? In a bullish market this does not mind since you get more in the end, but bearish one is worse probably... – Kozuch Dec 11 '13 at 23:28
  • I guess most of them just sell the coins immediately at some exchange. I think I once read that BitPay keeps a large chunk of the Bitcoins they receive. If they did so the last few months, they were all millionaires by now. (Which I think they are anyway.) – Steven Roose Dec 11 '13 at 23:35
  • Yes but are they able to sell coins fast? They'd have to run their own exchange to be able to do this. Maybe they have an agreement with one of the big exchanges so they do not need many confirmations when transfering funds there for selling. Of course they could use an exchange as a wallet directly too. – Kozuch Dec 11 '13 at 23:42
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    I think they might have special agreements with exchanges indeed. Otherwise it would be unfeasible. They will probably also always have a bitcoin balance at the exchange, trading instantly while the new coins are being transferred into the exchange. – Steven Roose Dec 11 '13 at 23:47
  • Also, they are free to charge their clients just the trading fee they can get at their exchange partners. – Steven Roose Dec 11 '13 at 23:47
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Further to @StevenRoose's answer, if you price your goods or services in a non-Bitcoin currency (eg USD), then it's not necessarily a simple matter of looking at a single exchange's best Buy offer to obtain the exchange rate for a transaction.

For example, let's say the customer wants to purchase a US$1000 item, and the best Buy offer on the MtGox exchange is $980 and the best Sell offer is $1010. If the customer became aware the retailer was using the $980 exchange rate, then they could put a $1000 Buy offer on MtGox to improve the exchange rate they get for the transaction, then (perhaps using an automated script to reduce time delay) make their Bitcoin payment to the retailer and immediately withdraw the Buy offer from MtGox, thus saving themselves $20.

BitPay uses a number of exchanges to calculate its exchange rate, and it's possible (I don't know) that they may also apply a safety factor to avoid manipulation, or factor in the cost of withdrawals (for exchanges that charge a fee).

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