Readers have probably noticed that we have been putting more focus on covering bitcoins, and added a dedicated thread for it. Similar to the Executive Moves column, not every article is deserving of being a front page post as it may not be concerning the greater FX industry, but they are readily accessible in the bitcoin section.
So why are we focusing on bitcoins?
At Forex Magnates we have been discussing bitcoins internally for a while now, and included them in our Payment Solutions article that was part of our Q4 Forex Industry Report. To understand their importance, we need to take a quick look at modern payment processing beginning with PayPal.
During the peak of the dot com bubble, PayPal was launched and provided an easy solution for internet money transfers. As a result, overnight it allowed individuals and small companies to start receiving payments for their goods without the costs and infrastructure involved in opening a credit card merchant account. Seeing the widespread use of PayPal on its site, eBay acquired PayPal in 2002. With PayPal in house, eBay then went on to promote the payment option to increase its usage; thereby leveraging its account base and matching it with the payment solution. What PayPal proved was that with the internet connecting buyers/sellers from around the world, there was a massive demand for a cheap and efficient way to process online payments.
Following on the path of PayPal, there has been a massive drive of innovation within the payment space. This includes technology for mobile payments (Square, Intuit, SAIL), secure transactions (SSL), simple Twitter/Facebook transaction links (Ribbon, Chirpify), real time bank transfers (Giropay, iDEAL), and industry specific solution providers (such as SafeCharge, NetPay and AlgoCharge in the forex and gaming sector).
With bitcoin, we get our first real taste of P2P payments. Using the currency, users can quickly send payments to each other for free. Similar to PayPal which provided easy access to accepting internet based payments, bitcoin is becoming a test case for P2P transactions. The beauty of bitcoin isn’t that it is an anonymous and non-government controlled currency, but a free way to easily transfer money around the world.
One of the knocks against the currency is that the volatility is problematic for merchants. What’s the use of accepting $1000 worth of bitcoins for a new laptop if the USD/BTC price drops 25% tomorrow. Providing a solution, companies like BitPay provide merchants the ability to accept bitcoins and have their transactions immediately converted into leading major currencies for 0.99%. Comparing that to other internet vendors where 2.5% and more are normal, the economics of P2P makes sense. Therefore, for a firm like WordPress, which became one of the more notable firms to accept bitcoin payments, they can receive the currency with none of the risks of price volatility.
Beyond the P2P advantage, there are also fundamental reasons interest in bitcoins is taking place. It may sound a little strange to point to fundamentals when speaking about a digital currency with no intrinsic value that isn’t backed by any government. But, the value isn’t in what it is as much as what it isn’t. What it’s not is a currency controlled by quantitative easing or any country.
For example, of all people in the world, Peter Schiff, CEO of Euro Pacific Capital, and big time gold bug spoke on CNBC about the precious metal provided a quick synopsis of the interest in bitcoins. When asked for his take about bitcoins, he explained that people are searching for alternatives to fiat money as central banks are on over drive printing new ones. As such, while Schiff said that he prefers gold, he stated that there is this growing demand for alternatives, and bitcoin was filling part of this need. In addition, with the recent events in Cyprus, along with countries like China and South Africa setting limits on funds allowed to leave their borders, an uncontrolled currency has its appeal. Therefore, much of the value of bitcoins aren’t how they compare to existing assets and currencies, as much as the gap in society it aims to fill.
Filling the Gap Between Brokers, LPs, and ClientsGo to article >>
Going back to our Q4 2012 report about payment processing. At the time we had this to say:
E-currencies are digital forms of money that are stored either in one’s computer drives or at a third party facility. Of the many e-currencies available, bitcoin has become the most reputable due to its base code that it was formed with. Bitcoins are a pure digital currency as it isn’t backed by any country or physical asset, but is simply a product of complex programming code that limits the amount of bit-coins created to limit inflation and cause scarcity. Like credit cards, a broker can use a third party provider to facilitate receiving, and converting bitcoins to the their currency of choice. Alternatively, brokers can create their own wallet to receive coins directly through the P2P network. Advantages of bitcoin are that payments from the system become irreversible after an hour, thus limiting fraud risk. They can also be received from clients around the world. The downside of bitcoins is that as a digital currency, the money doesn’t have any regulatory body supervising transactions and there are money laundering concerns. As such, as the form of payment becomes more prevalent, financial regulators may impose a limitation on whether brokers within their jurisdictions can receive bit-coins as payments. Although the idea of an unbacked and universal currency may sound risky to brokers, the fact is that users of the system are growing. Therefore, as adoption of the product rises, client demand for bitcoin deposits will increase.
Basically, the theories behind a digital currency are sound. The question is whether bitcoins will become the de-facto digital currency remains to be seen, and we may not know that answer for at least another five years.
In the forex world, there are two main angles of bitcoins; as a payment currency and trading. In regards to payments, the product provides brokers the ability to target traders from countries with high fees attached to cross border transfers. There is the real concern tough about regulation. However, with regulators being more concerned about client safety then money laundering, a proactive broker could prove that its KYC and compliance policies remove that risk. In terms of trading, bitcoin prices bring a level of volatility that doesn’t exist in even the most exotic forex pairs. This activity provides a certain appeal to a large segment of forex traders which presumably would be interested in trading a USD/BTC instrument. Due to this common attribute, it is natural that we are monitoring the migration of bitcoins from an exchange traded product to one available on broker’s platforms.
As written about earlier, bitcoin trading moving off-exchange could have a positive effect on the currency as it could transfer the speculative volumes taking place and normalize prices to match its usage’s supply/demand.
With bitcoin proving that P2P transfers are a viable solution, this opens up the payments sector to additional innovation, and it is where things get exciting. As mentioned above, 2.5% and more fees for online payments are the norm. But, for most consumers these costs are often taken by the merchant; thereby the ticket price for a purchase is unaffected by their choice of payment. However, when it comes to the merchants, these are serious expenses that eat at their margins. With this problem, there is a massive opportunity for payment firms to disrupt the status quo if they can deliver more cost effective solutions. As such, with the profit potentials there, the payment industry has become a hot sector for venture funding, which has led to the forming of numerous firms and solutions being created. One method, which is utilized by OzForex and TechnoCash is the creation of low cost transfers between account holders. Users pay for wiring money in and out of their accounts. But, once funded, transfers are available to other account holders at market beating rates.
Taking the account to account model further, we probably aren’t far away from seeing a major company with a widespread internet presence launching some sort of P2P transfers. Recently, Amazon announced the creation of Amazon Coins, which are valued at 100 coins per dollar. The yet to be launched product is basically a replacement for gift certificates and a way to increase app sales. But, in the future it won’t be surprising to see Amazon promote the product as an easy way for account holders and merchants to send each other money. Similarly, we could see a bank, or group of banks launching a low cost P2P network for their clients.
Overall, regardless of what you think about bitcoins, the fact of the matter is that they represent a greater trend taking place within currencies and payments. On one hand they hold elements of what attracts people to gold. But on the other hand, unlike gold, the digital currency is easily transferable. For an industry that depends on seamless payments from clients as well as interesting products to trade, many of trends involved with bitcoin overlap that of the forex industry. As such, watching the bitcoin story unfold provides a look at the future of online commerce.