There Bitcoin Price Friction In Bitcoin Exchanger – Based on Research Results Alexander Kroger and Asani Sarkar
Bitcoin Price Friction . Alexander Kroeger, a researcher at the Federal Reserve Bank of the New York Research and Startup Group together with Asani Sarkar, Assistant Vice President of the Bank Integrated Policy Analysis Group Startup conducted research on price differences among Bitcoin Exchangers. These differences result in friction in Bitcoin.Furthermore, the friction affects the incentive for users to use Bitcoin as a means of payment. The results are published on the Fed of New York blog page of March 23, 2016.
The results of this study quite a lot of conversation. Meanwhile, some online cryptocurreny media publish also about the results of this study. Some of these media include CryptocurrencyNews , and also NewsBitcoin .
Bitcoin’s Assumption Can Eliminate Price Friction
Currently it can be seen that Bitcon became one of the most popular digital currency development. Bitcoin supporters often give statements. Bitcoin can remove the Bitcoin price friction that may arise from the payment system and on its payment processing settlement system. The trick, by eliminating the need for financial intermediaries as well as in traditional currencies.
Of course, because Bitcoin is different from conventional currency. In the conventional currency, there is the role of central authority. While Bitcoin does, Bitcoin uses only a set of codes that have been agreed upon in the Bitcoin protocol.
From the results of these studies, it is mentioned that the existence of Bitcoin price friction is not so significant impact on Bitcoin users directly. The tendency, because users often ignore this. Meanwhile, according to the results of the study said that there is a significant friction. Bitcoin’s significant price friction occurs, when Bitcoin is traded on the exchange.The significant price difference that happens continuously in Bitcoin exchanges. The existence of this friction reduces the incentive of market participants to use Bitcoin as an alternative payment.
As mentioned earlier, Bitcoin is not like Fiat Currency, because Bitcoin does not have central authority governing Bitcoin. While Bitcoin uses a set of codes that have been agreed upon in the Bitcoin protocol.
There are several reasons that claim that with Bitcoin will be able to reduce the time, cost, and related risks in the process of transferring the value of the currency. If this compares to the traditional currency. Both researchers cited the reason for a payment made by the US Automated Clearing House (ACH). In the payment process transaction, it takes approximately two business days in the settlement of the transaction. Meanwhile, when compared with the payment using Bitcoin, it takes about 10 minutes.
Bitcoin has been accepted as a means of payment by businesses and organizations. In fact, in March 2014, Bank of America filed a patent for a system that runs a wire transfer system using cryptocurrency exchange as a mediation between two real currencies.
What And How Bitcoin’s Presumption Can Reduce Friction Actually?
Both researchers saw this through Bitcoin transactions conducted between Bitcoin wallets .This transaction occurs can be done by ignoring the existence of transaction costs relative to the number of transactions. This process is not like the traditional currency.
In the Bank of England ‘s published research results , Bitcoin can not serve as wide as its own unit. Therefore, most users looking for ways to make a payment with Bitcoin must first buy Bitcoin in an exchanger that accepts purchase using a traditional currency.
Once the Bitcoin transaction is received, the user can withhold the Bitcoin. The user’s expectation, in order to be used in future transactions. However, the volatility of the Bitcoin exchange rate by ignoring the correlation of compromise over the traditional currency will not be useful as an account unit, nor as a store of value. Therefore, Bitcoin recipients are better to exchange their Bitcoin with a more useful traditional currency in their accounts.
Mentioned that many retailers like Microsoft , Dell and Expedia are receiving payment with Bitcoin. Basically, the big retailers do not actually receive Bitcoin . They use services from third parties that receive Bitcoin from customers. Then redeem the Bitcoin with dollars to retailers. While in transactions from the traditional currency to Bitcoin then back again to the reverse process, it costs money and there are different counterparty risks across the board. The transaction process from this can be seen in the picture below.
Since Bitcoin is homogeneous, the price difference on the Bitcoin exchange must be eliminated by arbitrators to enforce the law of one price. Where they buy bitcoin when it is cheaper, then sell at a more expensive price.
From the results of his research, suggested a large difference in price Bitcoin in the US. The big difference in Bitcoin prices occurs in three major Bitcoin exchanges. As in Bitstamp , BTC-E , and Bitfinex . The percentage of price difference between the three exchanges is never zero. The average difference is positive. When buying in BTC-E is cheaper when compared to the other two exchanges.
Significant deviations between identical pairs of assets are common in the stock market.When that happens, it still can not be considered an arbitrage advantage opportunity. But in the arit of Bitcoin, in theory, buying Bitcoin at BTC-E and then selling it in the short run (like borrowing Bitcoin first and then selling it) to another exchanger can profit. But in reality, this trade actually requires transaction costs, and also at risk.
Bitcoin Transaction Fees
Bitcoin transaction costs occur in two forms. One is trade costs, and second on demand-supply spreads. Arbitrators in this case, they must buy “demand” Bitcoin in BTC-E with higher then, then sell it in the lower “offer”.
Request-supply spreads that reduce profits in trading. However the spread (BTC-E price percentage) in this exchanger is ignored. Due to its relation to the price difference normally.Therefore, it is not likely to significantly impede arbitration.
Delay and Risk
The possibility of arbitration in the Bitcoin trading exchanges in some exchangers may pose an additional risk. The risk may occur due to a delay in the transaction process, as well as the risk of counterparty in the form of an exchange fraud or because of a failure. So it can cause price changes. From unstable Bitcoin prices, intraday volatility of Bitcoin prices in BTC-E also often exceeds the average price, and in Bitfinex as well. This can lead to delays in the execution of the transaction process. That is, the price difference can go down or back again, before the brokers can use it.
Researchers then mentioned that there is the biggest delay that occurs when the transfer of dollars into the stock. According to him, for Arbitrators when buying Bitcoin with dollars in BTC-E by depositing US dollars via Wire transfer will take five to ten days. A trader who hopes to find a way to execute his transactions by transferring dollars to BTC-E will be at risk. Of course the risk is if there are significant price changes as long as the trader is in that period (when it has to wait five to ten days).
In addition, delay also occurs when transferring BItcoin from BTC-E to two other exchangers exchangers, namely Bitstamp or Bitfinex. To be able to deposit Bitcoin in Bitstamp or Bitfinex, the deposit process requires three confirmations on the network .
While at each confirmation lasted approximately 10 minutes. So the total time of approximately 30 minutes delay when buying Bitcoin in BTC-E to then be deposited on Bitfinex or in Bitstamp. This delay can avoid any sales in a short time (short selling). This capat sales can be done only in Bitfinex, but there are additional charges that must be charged.
Another risk is if there is a fraud in the trade or a failure. Exchanger failures occur on a regular basis. In a study in 2013 (see below), 18 out of 40 Bitcoin trade exchanges have been analyzed and failure occurred. The failure of the Mt.Gox Exchanger is the most notable failure.
The existence of Counterparty Risk may help explain until there is a consistent continuous discount on BTC-E. Unlike in Bitstamp and Bitfinex, because BTC-E does not publish the location of their operations. Not much can be known about the owner of BTC-E. While things like this will be able to inhibit Bitcoin users to exchange or trade. They can be afraid of fraud or bankruptcy.
While the Bitcoin price friction between these exchangers also provides an interesting example of a price deviation from the common one price law. The broad implications for Bitcoin’s appeal of other payment alternatives.
Because Bitcoin does not function as an account unit such as an account in banking, the user must convert Bitcoin into the traditional currency via an exchanger. Then get them in the Bitcoin price friction, are in the uncertainty of Bitcoin price between exchangers. This price uncertainty, in turn, will block Bitcoin as a store of value.
Therefore, when Bitcoin continues to evolve as an alternative payment, it competes with traditional transfer methods by providing lower costs, even though it is proportional to the risk of transactions.