Why cryptocurrencies don’t add up for Money Mover and its customers

Posted on the 3rd October 2017 by Hamish Anderson in Founders' blog, Business, Finance, Founder Insights

Bitcoin image for cryptocurrency blog

I’ve just returned from a UK FinTech Trade Mission to Japan which coincided with the Tokyo FinTech Summit (Fin/Sum Tokyo).

A topic which came up frequently in formal presentations, panel sessions and discussions with delegates, was cryptocurrencies. No doubt this was because of the news that Japanese banks are setting up their own digital currency - J-Coin. Indeed, one Japanese FSA employee I chatted with was just about to head off to California on a mission to absorb all things cryptocurrency.

I had the chance to consider my position and thoughts on cryptocurrencies, particularly with regards to our business at Money Mover, and I thought I’d share these with you.

The ‘share price’ of a country

The value of fiat currencies (e.g. GBP, USD, EUR, CHF) can be equated to the share price of the country issuing them. In other words, the relative strength (exchange rate) of the British Pound (GBP) is an expression of the financial markets’ belief in the current and future strength of the UK economy. Similarly, the value of the Japanese Yen (JPY) represents the markets’ belief in the prospects for the Japanese economy. Fiat currencies are backed by assets - the balance sheet of the issuing country and the value derived from its trade flows.

Cryptocurrencies benefit from no such support from commercial fundamentals. They have no intrinsic value, and their pricing behavior is much more akin to highly geared derivative instruments (indeed, for tax purposes, the US IRS classifies Bitcoin as property as opposed to currency). By far the biggest influence on their valuation is speculative activity – that a cryptocurrency holder will be able to sell it for more tomorrow than they paid today – which sounds more like the Dutch tulip mania of the 17th Century. As Nout Wellink, former president of the Dutch Central Bank, said, “At least then you got a tulip, now you get nothing.”

Real commercial transactions

Money Mover customers are real businesses doing real things. Whether they’re life sciences companies creating innovative cancer treatments, or engineering companies importing plant and machinery, the international payments they make are all bona fide commercial transactions. It’s far harder to find convincing evidence that cryptocurrencies are in widespread use in commercial transactions.

Managing volatility

The business world struggles to adopt cryptocurrencies for commercial activity because of their excessive levels of volatility.  According to the Bitcoin Volatility Index, Bitcoin's 30-day volatility is 6.16% (as at time of writing). Compare that with major fiat currency volatility of between 0.5% and 1.0% in the same period, and you can see why holding cryptocurrencies as a store of value is a risky proposition. Why would you hold a currency which could be worth 6% less tomorrow than it is today? That’s enough to wipe out a manufacturer’s profit margin in one fell swoop.

Disreputable associations

It’s no secret that the financial establishment views cryptocurrencies as the tools of terrorists, money launderers, fraudsters and hackers and, as a result, keeps its distance. It’s really difficult for businesses dealing in cryptocurrencies to open UK bank accounts and - to my knowledge - no cryptocurrency issuer has yet managed to do this. Even businesses with associations with cryptocurrencies struggle to open accounts, or to keep them open once opened. Why? Banks deal in risk and return, and the risk represented by servicing cryptocurrencies far outweighs the returns they are likely to generate.

Transaction fees

But at least it’s free to send and receive cryptocurrencies – that’s one advantage of a decentralized currency which sits outside the control of the banks and the governments, right? Well, it seems not. Currently it costs about $4 to send 0.01 Bitcoins (roughly $42) from one Bitcoin address to another. That doesn’t sound all that cheap to me. Why is it so expensive? The Bitcoin network can process only a limited number of transactions per second, so Bitcoin transaction fees are a function of free market supply and demand. Therefore, the privateer Bitcoin miners which power the transmission process prioritise transfers for which they’ll earn a higher fee. These costs will reduce as technologies and processing capabilities advance, but there’s no doubt that high fees are a barrier to commercial transactions.

While the above presents a fairly gloomy picture of the cryptocurrency status quo, we must remember that the technology is very new (the bitcoin specification was defined in 2008). As with so much technological innovation, I have no doubt that things will improve over time as it becomes more refined and processing power advances. Furthermore, the blockchain technology that powers cryptocurrency transactions has huge potential in a range of applications. For the moment, however, I feel comfortable saying that cryptocurrencies don't yet have a place in the needs of our customers, or the service we provide.

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