Phote Source: www.engadget.com By Nicole Dugan
When bitcoin made its debut, many investors hailed it as an answer to their prayers. Bitcoin made it possible to transact digitally at a lower cost. Now, The NYSE is producing an index to benchmark Bitcoin and add transparency to this emerging investment class. What are the broader implications of the NYSE’s creation of the new bitcoin index?
First, let’s take a quick look at the pros and cons of investing and transacting in Bitcoins.
Why would people want to transact in Bitcoins?
Many investors have embraced bitcoin as an asset class and some companies, such as Forbes, even offer their employees the option to be compensated in bitcoins. What’s so great about it? For one thing, as a payment mechanism, transaction costs are lower. The costs of more traditional payment options, such as credit cards or PayPal, is about 2-4%. The average transaction costs incurred using Bitcoin is 1%. This lower cost could potentially make it easier and cheaper for people to make international transactions, where using traditional methods of moving money, such as wire transfers, could set you back as much as $40. From an international perspective, the added bonus to using Bitcoin is that it, theoretically, has lower currency risk than many countries- such as those that are in political turmoil.
In some countries outside the US, people still keep their savings under their mattresses, literally. Even domestically, the cost associated with opening a checking account can be a deterrent. Bitcoin is perhaps a viable solution for this “unbanked population.”
What are the critics saying about Bitcoin?
Up to this point, Bitcoin has been accepted by a very small population of online merchants – which could change due to the attention the cryptocurrency is receiving from large institutions like NYSE, NASDAQ, and Goldman Sachs. One of the biggest knocks on Bitcoin is its potential to be highly volatile. While it’s true that other investment classes, such as stocks, fluctuate, those fluctuations are attributable to many definable factors, like individual company earnings and projections as well as the current state of the economy, for example. Fluctuations in Bitcoin, by contrast, are attributable merely to public opinion and demand.
Many investors are concerned about regulation surrounding this new currency- and with good reason. In early 2014, Mt. Gox, a once prominent Bitcoin exchange, collapsed and lost millions of dollars in Bitcoins. According to reports, the Bitcoins simply disappeared from Mt. Cox’s digital accounts, which is understandably worrisome to many prospective investors.
So the NYSE is making an index- what does that mean?
The NYSE is creating an index which will track the performance of Bitcoin and set a definitive benchmark for investors to gauge price movements and value. The Bitcoin index will operate in the same way as any other index, such as LIBOR (which is a benchmark for global interest rates). Having an index to look to will give Bitcoin a more reliable value, which could help to assuage investor’s fears.
If the NYSE’s Bitcoin index is able to provide the intended transparency and some level of trust in the value of Bitcoin, the currency may become more appealing to global consumers and investors. A currency like Bitcoin has the potential to facilitate international commerce- if more merchants begin to accept Bitcoin due to the transparency and credibility provided by the NYSE, people can purchase consumer goods from other countries much more easily and at a much lower transaction cost than they do today. To take the idea of global commerce one step further, widespread use of Bitcoins could make it more cost effective for individuals to invest not only in their own stock markets, but in the stock markets of other countries.
Keith Bliss, Senior Vice President and Director of Sales and Marketing of Cuttone & co., Inc, a floor- broker on the NYSE, believes that Bitcoin has the potential to globalize the economy. “Without question, Bitcoin was already well on its way to becoming that [a legitimate currency that will globalize the economy], but with the world’s leading financial institutions now getting behind the concept it adds credibility,” says Bliss. “As long as the regulatory and compliance apparatus is in place to control the exchange mechanisms between the world’s fiat currencies and the bitcoin exchanges, then it does have the potential to accelerate the interconnected global economic ecosystem. Bitcoin will ameliorate the current systems in place for cross border retail commerce.”
We are, of course, a long way away from such widespread, accepted use of Bitcoin as a trusted international currency. The attention that NYSE and other large institutions are paying to the crypto currency is, however, a step in that direction.