Bitcoin's comeback: should Western Union be afraid?

[lodewijk andré de la porte]

"Metacurrency"?
I don't understand this so I made up a word to go with it.

Seriously. How hard is it to understand that currency's are worth what
everyone thinks they're worth. Nothing more, nothing less.

Stating things like "You money can get physically stolen", "bitcoin went
through a bubble" like that never happens with other currency's!

How can something be good enough for buying money, but not good enough for
buying bread?

I predicted (literally told a friend with 300euro's worth of bitcoins at
the time) "Bitcoin is going though an enormous bubble right now, you should
sell." after which we discussed whether or not it was a bubble, he didn't
really know, and whether or not the bubble would bubble up even more. Now I
predict the people's refound trust in Bitcoins will cause a new bubble, a
(relatively?) much smaller one though, and that overall the value of
bitcoins will rise quite steadily.

2011/12/22 Eugen Leitl <eugen at leitl.org>

>
> http://arstechnica.com/tech-policy/news/2011/12/bitcoins-comeback-should-western-union-be-afraid.ars
>
> Bitcoin's comeback: should Western Union be afraid?
>
> By Timothy B. Lee | Published December 21, 2011 12:40 PM
>
> Bitcoin's comeback: should Western Union be afraid?
>
> A sign advertising the acceptance of Bitcoin at Neil's Bodega in British
> Columbia
>
> The last time we wrote about Bitcoin, in October, the currency's future
> looked grim. A series of security incidents had created an avalanche of bad
> press, which in turn undermined public confidence in the currency. Its
> value
> fell by more than 90 percent against the dollar.
>
> We thought Bitcoin's value would continue to collapse, but so far that
> hasn't
> happened. Instead, after hitting a low of $2, it rose back above $3 in
> early
> December, and on Monday it rose above $4 for the first time in two months.
> It's impossible to predict where the currency will go next, but at a
> minimum
> it looks like the currency will still be around in 2012.
>
> This presents a bit of a puzzle for Bitcoin skeptics. The original run-up
> in
> prices could easily be explained as a speculative bubble, and the
> subsequent
> decline as the popping of that bubble. But if that were the whole story,
> then
> the value of Bitcoins should have continued to decline as more and more
> people lost confidence in the currency. That hasn't been happening.
> bitcoincharts.com
>
> Of course, the value of Bitcoin could resume falling at any time, but the
> currency's apparent stability over the last month has inspired us to give
> it
> a second look. How can an ephemeral currency without the backing of any
> large
> institution be worth $30 million, as the world's Bitcoins currently are? In
> the short run, a currency's value can be pumped up by a speculative bubble,
> but in the long run it must be backed up by "fundamentals"b properties that
> make holding it objectively valuable.
>
> Dollars are valuable because they're the official medium of exchange for
> the
> $14 trillion US economy; euros and yen are valuable for similar reasons.
> Bitcoin boosters have traditionally suggested that Bitcoin is an
> alternative
> to these currencies. But we'll suggest an alternative explanation: that
> Bitcoin is not so much an alternative currency as a "metacurrency" that
> allows low-cost and regulation-free transfer of wealth between nations. In
> other words, Bitcoin's major competitors aren't national currencies, but
> wire-transfer services like Western Union.  Bitcoin is a bad currency
>
>    While Bitcoin isn't a very good currency, it has the potential to serve
> as a "metacurrency": a medium of exchange among the world's currencies.
>
> The traditional argument for Bitcoins has positioned the peer-to-peer
> currency as an alternative to conventional currencies like dollars, euros,
> and yen. Bitcoin boosters point to two major advantages Bitcoins have over
> dollars: price stability and lower transaction costs. As we'll see, neither
> of these advantages is compelling for ordinary consumers.
>
> The argument from stability mirrors the traditional argument for a gold
> standard. The dollar has lost about 95 percent of its value over the last
> century. The Bitcoin protocol is designed to never allow more than 21
> million
> Bitcoins to enter circulation, and supporters argue that this guarantees
> the
> currency maintains its value over time.
>
> The obvious problem with this argument is that Bitcoins have lost more than
> 90 percent of their value in five months. It would be pretty foolish for
> someone worried about the dollar's 3 percent inflation rate to put their
> life
> savings into a currency with that kind of volatility.
>
> Bitcoin boosters forget that the value of a currency is determined by
> supply
> and demand. Demand for dollars is driven by the size of the US economy,
> which
> doesn't change very much from year to year. But the demand for Bitcoins is
> primarily driven by speculative forces, causing its value to fluctuate
> wildly.
>
> Another oft-touted benefit of Bitcoin is lower transaction fees. Banks
> make a
> tidy profit charging merchants to complete credit- and debit-card
> transactions, and these fees raise the price consumers pay for goods and
> services. Fans tout Bitcoin payments as a low-cost alternative to
> traditional
> credit card transactions.
>
> But this argument ignores the fact that credit cards provide important
> benefits in exchange for those transaction fees. If you buy something with
> a
> credit card and get ripped off, you can dispute the charge and get your
> money
> back. In contrast, Bitcoin transactions are irreversible. If you pay a
> merchant in Bitcoins and he rips you off, (or someone hacks into your
> computer and makes a fraudulent payment), you're out of luck.
>
> Of course, third parties may offer Bitcoin-based payment services that
> offer
> features such as chargebacks and fraud protection. But such services don't
> come free; consumers or merchants would have to pay fees to use them. And
> there's no reason to think Bitcoin-based banking services would be any
> cheaper than traditional ones in the long run.
>
> Paying with Bitcoins also introduces the inconvenience of fluctuating
> prices.
> When people buy things with cash or credit cards, their purchases are
> denominated in the local currency. Dealing in Bitcoins means customers and
> businesses must regularly convert between dollars and Bitcoins, and must
> therefore worry about the fluctuating exchange rate between them. That's a
> headache few people want.
>
> So Bitcoins are not a compelling alternative to conventional currencies.
> Although there are a few isolated examples of traditional businesses
> accepting Bitcoins as payment, these seem to be driven more by the novelty
> of
> the concept than by compelling economic or technical advantages.  Bitcoin
> as
> a metacurrency
>
> While Bitcoin isn't a very good currency, it has the potential to serve as
> a
> "metacurrency": a medium of exchange among the world's currencies. In this
> role, it has the potential to be a powerful competitor to wire transfer
> services like Western Union.
>
>    The longer Bitcoins continue to exist, the more confidence people will
> have in its continued existence.
>
> The wire transfer industry is much less consumer-friendly than the credit
> card industry. Wire transfer fees can be much higher than credit card fees,
> and wire-transfer networks offer much less robust fraud protection services
> than do credit card networks.
>
> Moreover, the flow of funds across national borders is heavily regulated.
> Governments monitor the flow of funds in an effort to stop a variety of
> activities they don't like. In the US, the focus is on terrorism, tax
> evasion, gambling, and drug trafficking. (Carrying cash across borders in a
> suitcase invites similar government scrutiny.)
>
> Bitcoin allows wealth to be transferred across international borders
> without
> the expense or government scrutiny that comes with traditional wire
> transfers. An American immigrant wanting to send cash to his family in
> India
> needs only to find someone in the United States to trade his dollars for
> Bitcoins. He can then transfer the Bitcoins to his relatives in India, who
> then need to find someone willing to take Bitcoins in exchange for rupees.
>
> This decentralized money-transfer process will be much harder for
> governments
> to control than a centralized money-transfer company like Western Union.
> And
> that will make the world's governments upset, since the same technology can
> be used by an American drug dealer to send profits back to his partners in
> Latin America.
>
> But there may be little governments can do about this. They can attempt to
> mandate the reporting of Bitcoin transactions, but there's no obvious way
> to
> enforce such a regulation, since Bitcoin transactions are easy to
> obfuscate.
> At most, governments could prohibit the conversion of funds between local
> currencies and Bitcoins, but this will merely push the currency
> underground,
> not eliminate it altogether.
>
> If Bitcoin's value stabilizes, it will also become a way to store wealth
> beyond the reach of any government. Cash and gold are bulky, hard to move,
> and subject to confiscation. In contrast, the encrypted credentials of a
> Bitcoin wallet can be stored securely on a server anywhere in the world.
> This
> could make the currency appealing to anyone wanting to place his wealth
> beyond the reach of the lawb a corrupt government official wanting to hide
> ill-gotten gains, a political dissident who fears his life savings will be
> taken, or an ordinary citizen worried about the solvency of traditional
> banks.
>
> Bitcoin's role as a way to move and store wealth does not depend on
> Bitcoins
> being widely used for commerce. For Bitcoin to work as a viable
> "metacurrency" only requires that there be a liquid market between Bitcoins
> and national currencies. Such a market already exists for several major
> currencies.  Chicken and egg
>
> Of course, there's a circularity to this argument. Bitcoin's value as a way
> to move and store wealth depends on the value of Bitcoins being relatively
> stable against conventional currencies. And the continued value of Bitcoins
> depends on people finding nonspeculative uses for it. But if the currency
> continues to retain its value in the coming months (a big if, admittedly)
> this would be a sign that the chicken-and-egg problem has been solved. And
> the longer Bitcoins continue to exist, the more confidence people will have
> in its continued existence.
>
> Western Union moved $70 billion across borders in 2010, earning about $1
> billion in profits. There's no Bitcoin Inc. to compete directly with
> Western
> Union, but the owners of Bitcoins can be thought of as shareholders in a
> decentralized Western Union alternative. If the Bitcoin network captures a
> small fraction of Western Union's money-transfer business, the currency's
> current "market capitalization" of around $30 million could wind up looking
> downright puny.