Meet the Trader is a weekly interview I have started to help the providers of the Bitcoin economy gain exposure.
Episode 03: Michael Hendrix of CoinPal, Coincard, JJGames, and VGPC.com.
Update: CoinPal has suspended its service as a result of Paypal’s action against his account.
Michael runs CoinPal, which is a way to buy small amounts of Bitcoins with a PayPal account. He also runs CoinCard, which converts Bitcoins into
PayPal payments and pizza. Read the interview to see what’s next for CoinCard.
A software development consultant by day, Michael has 4 young kids and lives way out in the sticks. Be careful guys: this interview bites:
It’s more likely that the last person leaves town and the place blows away in the wind.
Hanna was a busy coal mining town for 100 years but most of the mines closed a decade ago. A few hundred people stayed behind.
I’m originally from the Denver suburbs, but have lived in Wyoming for the last dozen years. I love it here: there’s no income tax, there are guns everywhere, it still fees like frontier and has bred tough, independent people. It’s an isolated, beautiful kind of place.
Spencer: It sounds like your whole family is entreprenurial. Are your kids going to grow up with the “startup bug?”
Michael: I grew up in an entrepreneurial environment. My father started a real estate development company before I was born. My grandfather started one of the largest mortuaries in Denver. My grandmother started a large life insurance company. My kids are all still pretty young, so it’ll be interesting to see if they choose that same path in life.
Spencer: How did you get started with Bitcoin apps? What’s the story behind Coinpal and Coincard?
Michael: My first experiment with Bitcoin was writing a market maker bot for Mt. Gox. I bought about $30 worth of Bitcoins from Bitcoin Gateway (which closed shortly thereafter). The bot chose a mid-point on the bid-ask spread and placed $15 orders on both sides. After a week, my Bitcoins were gone and all I had left was Mt. Gox dollars. Nearly all the market trades were happening on the ask side of the book, so my sell orders cleared quickly but my buy orders lingered for days. That asymmetry made it nearly impossible to be a market maker.
While trying to solve that problem, I noticed dozens of people on #bitcoin-otc asking how they could buy Bitcoins for PayPal. All previous services offering that had been shut down because of fraud. I happened to have been working on some fraud detection ideas for a client and decided that selling Bitcoins for PayPal would be a perfect test for those ideas. It seemed like a more tenable problem than fixing my market maker bot, so I started CoinPal.
A couple weeks later, nanotube on #bitcoin-otc suggested that I offer a “CoinPal opposite service.” That aligned well with my view that Bitcoin will succeed when one can buy useful things with it. During the slashdotting earlier this year, I hit my $1,000 per day Mt. Gox withdrawal limit and realized that I needed a second source for Bitcoins. All three motivations pushed me to create CoinCard.
Spencer: Your service fees are so small, considering that your offering price is the same as MtGox’s lowest asking price. What kind of revenue are you seeing from Coinpal and Coincard?
Michael: The revenue is substantial (around $1,000 per day), but the profit is miniscule. After running the services for about 3 months, I think I’ve produced $30 profit. It probably works out to less than pennies per hour considering the time invested.
Spencer: What, if any, are the risks of running a Bitcoin exchange?
Michael: So far I’d say the biggest risks are fraud and market volatility. Fraud is really rough. As a Bitcoin exchange, the profit margins are tiny. One fraudulent order can wipe out a month’s profit. When I speak of market volatility, I mostly mean fluctuations in volume. Price volatility can be hedged in various ways, but when everybody’s buying, business gets crazy and other responsibilities falter. When nobody’s buying, you wonder whether the business is a good idea after all. I suppose that’s completely psychological, but it’s a real factor for me.
Spencer: With your profit margins being so thin, do you plan on raising fees?
Michael: I don’t plan to raise fees. With CoinPal, that’s partly because high fees select against honest buyers. A scammer doesn’t care how high the fees are because he’s paying with stolen money. An honest buyer is exactly the opposite. If CoinPal ever makes much money, it’ll be through improved automation, better conversion rates and broader Bitcoin popularity. I probably won’t raise CoinCard fees either. That’s partly because having an easy way out of Bitcoins makes the currency more useful. I’ll probably focus on better efficiency with CoinCard too.
Spencer: How long did it take you to get your first customer for each service?
Michael: In both cases, I think I had customers within an hour of announcing the services. I’m awful at marketing, so I think there was a lot of pent up demand in both cases. Fortunately, word gets around quickly in the Bitcoin community. I’ve really appreciated how many people have supported the services by recommending them on the Bitcoin Forum or in the OTC channel and elsewhere. Bitcoiners are a remarkable group of people.
You say you’re terrible at marketing, but hasn’t marketing boiled down to being trustworthy?
Michael: That’s true. Our community is still very close-knit, so word about an honest trader gets around quickly. The Bitcoin wiki doesn’t set the Referer header, so I can’t be sure of the exact numbers, but I suspect that most of my traffic comes from that site. I suppose that’s worked out well for me since I dislike marketing.
Spencer: Are you sticking with CoinPal’s simple, 1994-flashback design?
Michael: Actually, efforts are afoot to improve the design substantially. It may be a couple more weeks before it’s finished as the work is being done by a talented, therefore busy, designer. Incidentally, the design job is being paid for with Bitcoins. I’ve made a few personal purchases with Bitcoin and I have to say that it makes a great currency for the Internet. Maybe it’s just confirmation bias, but I’m routinely reminded in my daily affairs why Bitcoin is such an important project. It’s fun to be a part of that.
Spencer: You have a unique perspective into the Bitcoin economy, being both an exchanger and provider of goods and services. Do you foresee a long term issue with hoarding Bitcoins?
Michael: No. I’ve seen many people spend their Bitcoins for valuable goods and services when they’re offered at a reasonable price. There may be slightly more hoarding in the Bitcoin community, but I suspect that’s selection bias as much as anything. People interested in a deflationary currency like Bitcoin are probably savers by their nature. Spendthrifts don’t care about inflation because they don’t have any savings to begin with. Anyway, I see a lot of coins being sold and flowing around the economy as trade for goods and services. As more services become available, I only see this increasing.
Do you have plans for offering more (goods) through CoinCard?
Michael: Yes. The most common request is to add Amazon.com gift cards. I plan to add those next. At the moment, CoinCard volumes exceed CoinPal volumes. I want to try and keep them in balance because it makes my life easier that way. So I’ll probably focus on increasing CoinPal sales before I add more CoinCard options.
Spencer: What have been some of the unforeseen challenges in starting these businesses?
Michael: The biggest challenge has been PayPal fraud, but I can’t say that was unforseen. The biggest unforseen challenge has been how many people don’t follow instructions. You’d be amazed how many emais I send to people who filled out a form wrong or forgot to press a checkout button. I thought I had made the steps clear, but I’ve obviously I failed. I don’t blame the customers, but I definitely didn’t expect it. Now that I’ve seen how prevalent it is, I have plans to improve the site design and clarify some of the checkout process.
Spencer: Thanks for your time Michael!
Michael: I think this series of posts is a great way to strengthen the Bitcoin community. Thanks for doing it.
-End of interview.
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