Can Bitcoins Make Things Cheaper?
Bitso is a Mexican Bitcoin exchange that is using the cryptocurrency to offer its customers cheaper and faster international money transfers. Money transfers involving “conventional” currencies (Dollars, Euros, …) require intermediaries at both the sending and receiving ends and, more often than not, involve additional players to handle the transactions. This makes the process slow: it can take several days for money to be transferred from one country to another. It also makes it expensive: not only do intermediaries apply fees for their services, but they also charge extra to users who want quicker disposal of their money. Understanding how Bitso is vying to change this model requires getting to grips with the fundamental workings of the Bitcoin economy.
Bitcoin is generally associated with sketchy websites, gambling and other unsavory activities [1]. It is often regarded as a peculiar internet proto-currency used mainly by speculators. However, it is seldom considered a fully-fledged currency equivalent to the Dollar or the Euro. But is this characterization correct? Bitcoin shares several of the basic characteristics of “conventional” currencies: durability, portability, divisibility, recognizability, scarcity and fungibility [2]. More importantly, since the 1970’s, “conventional” currencies have no longer been backed any tangible asset: the “gold standard” (system in which the domestic money supply was directly tied to each country’s stock of gold) was replaced by a fiat money system [3] (currency that a government has declared to be legal tender, but that is not backed by tangible assets [4]). This means that, in practice, the existence of these currencies is based on trust. Sounds familiar?
So, if Bitcoin shares so many properties with “normal” currencies, why is there so much skepticism around it? This is because it differs from “normal” currencies in one fundamental aspect: Bitcoin is decentralized. That is, no single centralized institution controls the bitcoin network (in the way the Federal Reserve controls the Dollar), and thus Bitcoin is not subject to the authority of monetary policy setters [5]. The supply of “normal currencies” is determined by Central Banks that increase or reduce the supply of these currencies to meet a set of economic objectives [3]. The supply of Bitcoins is increased through a process in which users who give up some of their computing power to track and validate transactions are rewarded with newly generated currency [6] (the supply is never decreased). If the idea of a non-centralized currency issuer seems far-fetched, it is worth considering that during the second half of the 19th century, the Federal Reserve did not exist and commercial banks emitted their own currencies [7]. Thus, giving Bitcoin the status of conventional currency no longer seems unreasonable.
Bitcoin’s decentralized nature rests on a technology called blockchain. A blockchain is a data structure that makes it possible to create a secure digital ledger of transactions and share it among a distributed network of computers without need for a central authority [8]. This feature is what allows Bitcoin transactions to be much faster and efficient than those made in traditional currencies: Bitcoins can be transferred from one individual to another in a matter of minutes with minimal or no intervention from intermediaries. This is the technology Bitso uses to creates value for its customers: Bitso receives fiat money in the origin country, converts it into Bitcoins, and then uses those Bitcoins to buy fiat money in the destination country, all through Bitso-owned exchanges [9]. Efficient, fast, and at no point did the user have to learn about the intricacies of the Bitcoin ecosystem.
Bitso has centered its strategy on the Mexico – United Stated remittances market. In 2015, remittances reached 26 billion dollars or 2.8% of Mexico’s GDP [10], making Mexico the fourth largest recipient of remittances. In the third quarter of 2016, sending money from the United States to Mexico through “traditional” currency intermediaries cost users an average of 4.49% of money transferred with delivery times that ranged from less than an hour to up to five days [11]. Sky-high rates in such a large market puts Bitso, which already runs Mexico’s largest Bitcoin exchange, in a prime position to disrupt the money transfer industry. What could go wrong? A lot. Governments could regulate and even prohibit Bitcoin transactions. Bitcoin usage could diminish, thus making Bitcoin less liquid and more expensive to transact with. New cryptocurrencies that challenge Bitcoin could emerge. However daunting the task, Bitso has already offered an alternative to the millions of individuals who pay abusive rates for a subpar service.
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1 Jeremy Rubin, “What the #?!* is Bitcoin?” September 30, 2014, video file, TEDX Beacon Street, http://www.tedxbeaconstreet.com/2014-videos/, accessed November 2016
2 Bitso, “FAQ”, https://bitso.freshdesk.com/support/solutions/articles/11000001155-respuesta-por-qu%C3%A9-tienen-valor-los-bitcoins-, accessed November 2016
3 Mark Harrison, “Is the Gold Standard as Good as it Sounds?”, Financial Times, June 15, 2013, https://www.ft.com/content/ccf928b8-bbef-11e2-a4b4-00144feab7de, accessed November 2016
4 “The Origins of Money”, The Economist, February 16, 2015, http://www.economist.com/news/books-and-arts/21643036-monetary-systems-have-always-been-imposed-sovereign-means-exchange, accessed November 2016
5 CoinDesk, “What is Bitcoin?”, http://www.coindesk.com/information/what-is-bitcoin/, accessed November 2016
6 “Bits and Bob”, The Economist, June 16, 2011, http://www.economist.com/node/18836780, accessed November 2016
7 Federal Reserve Education.Org, “History of the Federal Reserve”, https://www.federalreserveeducation.org/about-the-fed/history, accessed November 2016
8 Steven Norton, “CIO Explainer: What is Blockchain?”, The Wall Street Journal, February 2, 2016, http://blogs.wsj.com/cio/2016/02/02/cio-explainer-what-is-blockchain/, accessed November 2016
9 Daniel Cawrey, “Ripple Network Expands to Mexico With Addition of First Peso Issuer”, CoinDesk, May 12, 2014, http://www.coindesk.com/ripple-network-expands-addition-first-peso-issuer/, accessed November 2016
10 World Bank, “Personal Remittances, Received (% of GDP)”, http://data.worldbank.org/indicator/BX.TRF.PWKR.DT.GD.ZS?year_high_desc=true, accessed November 2016
11 World Bank, “Remittance Prices Worldwide”, https://remittanceprices.worldbank.org/en/corridor/United-States/Mexico, accessed November 2016
This is really fascinating Camille. I’d be curious to understand how the bitcoin exchange rate moves in relation to global events. For example, does a Donald Trump presidency cause bitcoin to appreciate because people are concerned about increasing US debt and a less reliable dollar, or does bitcoin depreciate as Trump hints at enacting more protectionist (less global) trade policies. Your analysis of the differences (or lack thereof) between bitcoin and the USD is illuminating and the two do seem more similar than the public would think. Now I’m off to buy some bitcoin!
While Bitcoin may seem like a clear solution to the problem of expensive money transfers, I believe there is far too much risk in using this system. While it is true that the world’s major economies use the fiat system, where the value of money is not tied to a physical asset, I would argue that there is much behind the value of those currencies. Currencies fluctuate based on the ability of a nation to raise taxes and pay back its debt, whereas bitcoin has no underlying asset whatsoever to derive its value. I fundamentally question why bitcoin needs to fluctuate in value at all. If bitcoin is purely used to circumvent the traditional financial system, avoid regulation and lower transaction costs, why allow the value to fluctuate at all? Or, why allow individuals to own bitcoin? A central system could “own” the bitcoin and instantaneously allow for a transaction once two users agree to a transaction at a specified price. Allowing bitcoin to fluctuate in value only creates risk for its users and creates the illusion of owning an asset.
Bitcoin has also shown itself to be vulnerable to theft. In one major incident in 2014, an exchange (similar to BItso) was hacked, resulting in the theft of $450 million of bitcoin. With little government oversight or accountability, bitcoin simply does not offer a better alternative to using traditional currencies.
Camille – this is a great article, thank you! What I have found most fascinating about bitcoin is understanding how blockchain technology allows it to disintermediate regulators and how this same technology could disintermediate market makers across a variety of other industries. Most obviously this applies to financial services whereby other financial assets can be (1) traded with minimal friction and transaction costs but we are also already seeing its applications in other industries too, namely in the form of La’Zooz (2), a competitor to Uber which is completely decentralised using the blockchain and therefore circumvents national regulators, which have repeatedly tried to hamper Uber’s expansion. Instead of investing resources to establish how cryptocurrencies can add value, national regulators are still falling over themselves to slow bitcoin’s growth sufficiently to give them time to catch up legislatively with an inevitable market move. What would make significantly more sense is for a supranational body to come together to think positively about how to manage rather than stymie this development and not to focus disproportionately on the nefarious impact this could have at the margin.
(1) http://www.whitecase.com/publications/insight/beyond-bitcoin-blockchain-revolution-financial-services
(2) http://lazooz.net/