Bitcoin: the Black Swan on the Euro Market

The introduction of the Euro was supported by a System of Central Banks that enjoyed a high level of independency. The ECB was, in fact, designed to sustain the stability of the Euro without interferences of policy makers. The idea was that an independent institution would better succeed in building trust in this new currency for the long run.

Unfortunately, the decisions of Eurozone to tax savings accounts on Cyprus soil, was a political decision dictated by politicians, not a technical one. Maybe this choice was made to decrease the value of the Eurocurrency to more acceptable levels for domestic export; maybe it was just an attempt to tax Russian capital for the Euro-crisis. It doesn’t matter. It was a political decision and another broken promise that dropped the confidence of Euro citizens regarding the Eurobank System to the bottom level.

 But there is no such thing as a free lunch in any political decision governments may take. When back in 1992 the Italian government did put a tax on bank deposits, Italian citizens did not have many other possibilities then to keep their money under the mattress for the great joy of thieves. At that time there was no alternative. How different the situation is right now.

The hit searches of Google of last week show that the awareness of Europeans toward the so called alternatives crypto currencies is increasing. Bitcoins are becoming a serious possibility for protecting precious savings, instead of putting them under the mattress. Spanish people and other members of Euro community are now investing in this new storage of value that ensures so much privacy that nobody can tell how wealthy or not you are.

It really seems that Bitcoins may become the Black Swan of the Euro Market and governments did not expect that at all…

The Democratization of Globalization

From Wikipedia we learn that globalization is “the process of international integration arising from the interchange of world views, products, ideas, and other aspects of culture”. Nowadays, from an economical point of view, it means that trade and exchanges in the world, interact and integrate as never before. Goods and services produced in one particular country are now easily found all over the world and multinationals own offices in many regions around our globe.

But multinationals have access to a financial infrastructure that not everyone has. Small and medium businesses have to function in an environment with trade barriers among markets, while the differences in currencies make international trading even more difficult.

That mean that we, ordinary people, can purchase easily a standard Big Mac, no matter where we are on this world, but things change the moment we really would like to buy products with a small regional market. Let’s face it: buying THAT special bottle of Tuscans wine is not quite simple yet. If you don’t live inside the boundaries of Euro countries, such a purchase will mean transferring money over at least 2 continents, 3 banks and a lot of forms that have to be filled in.  Not really an enjoyable activity.

It’s true. The development in communication technologies of the last few years make possible to know within a “mouse click” that such Italian wine producer has really a tasteful wine in his small cellar near Florence, you could even mail him in real time to ask its price, but then life gets really complicated.

Demoralized by the quantity of paper that you have to fill in to transfer your money to Europe, you will probably give up your purchase and start a financial savings program for buying  the flight ticket to Italy for your next holiday.

At the moment, the developments in communication technologies make it possible for information to be accessible for almost everyone in real time. In other words, the increased use of Internet among people supports the democratization of information. E-mail facilitated the communication between economic agents, but we do not have a similar tool for money value yet. Or better, we did not have yet….

Bitcoin made its entry into this world sometime back in 2009 as a digital currency. Many stories are told about its mysterious founder, but one thing is sure: Bitcoin is a concept as revolutionary as the Internet itself. Bitcoin opened the possibility for the last step towards full democratization of the Internet and of money transactions. Bitcoin is a useful vehicle to transfer value. It can move fast and safe, from one side of a continent to another by a simple click. It is easy to understand now that THAT bottle of Tuscan wine gets a lot easier to get. If small and medium firms will make the effort (like some of them already are doing) to accept Bitcoin in their marketing and payment strategies, than the chance to reach markets otherwise too far will become a concrete possibility. Democratization of the Internet will not just mean easy access to information, but also easy access to economical markets for every “man in the street”. 

Tango Argentino... with Bitcoins

While Argentinean policy makers are trying in all ways to stop the dollarization of Argentinean economy and to put an end to the inflation spiral of the last years, the “green banknote” is reaching his highest value on the black market and the people on the street are trying to avoid the pesos as much as they can.

In fact a heavy inflating currency looses easy the trust of people that are meant to use it. In countries with an instable domestic situation people tend to substitute the local currency with currencies thought to keep betters their purchasing value. “Good money” drives “Bad money” away.

But Argentina is not the only one facing problems with its domestic currency. The global financial crisis of 2007-2008 has put governments all over the world in difficulties and brought the trust in economic policies under pressure. The belief that inflating measures would be able helping countries to restore economic strength is fading among people.

In other words, different kinds of markets are looking for alternatives to save and transport value. It is not such a surprise therefore that this is the best economical climate to develop and start to use a currency like “Bitcoin”. A currency that is supposed to follow a deflating pattern, but above all, a currency that can keep and transport value without interferences of policy makers.

Bitcoin runs on the internet with no barriers between its users. It makes it easy for people to transfer value among each other without the necessity of building expensive infrastructures. Bitcoin makes use of a large network: generating exchange barriers or even shut down such a network would be for a government near impossible.

In many countries the use of Bitcoins would even mean gaining a competitive advantage for firms operating in regions with a poor and fragmented bank system. Think for example small and medium firms. The existing payment and exchange barriers means losing efficiency in international business transactions making a competition gain even harder to get. A simple transfer of money between banks can take up to more than 3 days and a lot of paperwork.  No wonder if in the near future emerging economies are going to use Bitcoins for their everyday business.

Market Transparency

Since the early beginning of Bitcoin there have been many initiatives to start online Bitcoin exchanges. These Bitcoins exchanges have been through rough times with legislation, uncooperative financial institutions and computer hackers. Several were forced out of business.

This volatile environment makes it an even greater challenge for the exchanges to be trusted by the people to deposit funds on their trading accounts. As a result the exchanges have become very transparent about their business model, the market depth and clearing price. This suits well with the nature of the Bitcoin system, where the full transaction history is available for everyone and the software is open source.

Because so much data is publicly available for free, it is an interesting source for analysis and visualization. Many of which are not possible, or only with expensive trading data services, in the traditional financial world.

One example of a radical different way of visualizing the ongoing process of reaching the market equilibrium can be seen on the webpage http://www.mtgoxlive.com. This page shows the near real-time development of the bid-ask spread and the last clearing price based on the full bidding ladder of the MtGox exchange. It gives insight on the robustness of the current price levels and the direction the market is moving. At the same time it helps to understand that the market ticker only shows the result of the last trade and the possible delta price that a next trade will create.

An alternative example is the market depth graph on http://www.happycoins.nl/market. This graph also shows the near real-time spread in Euro of the MtGox exchange, with the average Bitcoin price depending on the size of the trade. When trades become larger, also will the spread, as is very visible. Often a series of small trades make a better average price than one big trade, even with a higher commission.

Transparency is the base of a good functioning market, and the Bitcoin markets show a great amount of transparency even without the need of a regulatory body.

Inge

The Renewable Bitcoin Miner

In the arms-race of Bitcoin mining solutions one of the key performance indicators is the amount of Bitcoins per kWh of used electricity. This impacts both the environmental as well as the financial bottom-line. The electricity tariffs in Europe differ per country, but including taxes averages above the 20 Eurocents per kWh for residential consumers.

Last decade several technological and logistic breakthroughs resulted in wind turbines and solar panels that can produce electricity for an ever decreasing price. With the ongoing developments the coming years the renewable electricity price on windy or sunny locations will be lower than any conventional alternative.

The best locations for renewable energy production are generally very remote from the location where energy is consumed. Wind turbines produce most in the middle of the sea and solar panels are preferably deployed in the desert. In such cases the overall costs of the renewable energy is mainly determined by the costs of the physical grid connection.

Maybe the business case can be made for not connecting this remote renewable production to the grid at all, but to use the energy locally in a Bitcoin mining rig! On the one hand it would reduce the use of conventional energy on residential Bitcoin mining and on the other it will enable utilization of top renewable production locations, which are too remote for grid connection.

On another account, the first solar panel retailer is accepting Bitcoins as payment option: http://www.gogreensolar.com

Green Bitcoins?

Inge

(The electricity used by www.HappyCoins.nl is produced by wind and solar power)

How to Get the Bitcoins Moving

The current total market cap of Bitcoins is around 250 million Dollars. This number is relatively meaningless however and a much more important number is the number of times that a currency turns over.

The number of Bitcoins in circulation cannot be altered like with fiat currencies; the growth of the number of Bitcoins is mathematically determined by the mining algorithm. Since the gross domestic product equals the money supply times its rate of turnover — something economists call velocity — this means that if the money supply is unchanged the G.D.P. can only grow with a higher velocity.

Because of the rising value of Bitcoins, without a rising velocity, the risk grows of Bitcoins being treated as an investment object instead of a transaction enabler. If the number of transactions with the real economy doesn’t grow, the G.D.P. of Bitcoins doesn’t either, and does the system indeed represents a pyramid scheme.

In October 2012 the European Central Bank published a report concluding that the true impact of Bitcoins will largely depend on the number of active users, as well as the number of merchants willing to accept the virtual currency for real transactions. Here they are hitting the nail on the head. The breakthrough of Bitcoins will be the day when the mainstream web-shops add Bitcoin as a standard payment option next to the credit and the debit cards.

There are only a limited number of payment service providers that service the web-shops with secure payment solutions. The service costs for the merchant are typically a fixed fee and a percentage of the transaction. These fees are for most part based on the transaction fees the payment service provider has to pay to the banks or to global players like Visa or Mastercard.

In comparison,  Bitcoin transactions have an extremely low cost level combined with a very secure technology. On top of that Bitcoin transactions have a zero risk of chargeback – normally a pain point for the merchants – as with traditional credit card payment methods. This makes Bitcoins a very attractive payment method for web-shops. It also enables the possibility for micro-payments on digital services, which are not possible with the cost level of the traditional payment methods.

The day may come when the first major payment service provider is offering Bitcoins as one of the online payment option – with a much lower fee than the traditional methods – to their clients, the web-shops.  It will be a rather brave move, as there may be resistance from their traditional financial partners. But it could be the start of a game-changing trend. This is how the Bitcoins may get moving. 

After that the use of Bitcoins in the real economy could grow rapidly, increasing the economic velocity of the Bitcoins. With it the G.D.P. of the Bitcoin economy will grow, diminishing the risk of Bitcoins being an investment pyramid, but instead becoming the preferred online transaction currency.

Inge

http://www.ecb.int/pub/pdf/other/virtualcurrencyschemes201210en.pdf