Are bitcoin transactions really frictionless compared to traditional currency? Alexander Kroeger, a research analyst at the Federal Reserve Bank of New York’s Research and Startup Group, and Asani Sarkar, an assistant vice president at the bank’s Integrated Policy Analysis Group, analyzed bitcoin transactions and concluded that price differences across bitcoin exchanges and other factors create frictions that can impact market participants’ incentive to use bitcoin as a payment method.
The researchers presented their analysis on the Liberty Street Economics blog of the Federal Reserve Bank of New York.
While bitcoin transfers are relatively frictionless for the user, frictions do occur when bitcoins trade in exchange markets resulting in meaningful and persistent price differences across bitcoin exchanges. Such exchange-related frictions reduce market participants’ incentive to use bitcoin as a payments alternative. What Bitcoin Proponents Claim
Unlike traditional fiat currencies, there is no central authority governing bitcoin. Instead, bitcoin uses a mutually-agreed-upon set of code comprising the bitcoin protocol.
Proponents such as the Bitcoin Project claim the bitcoin protocol can reduce the time, fees, and risk associated with transferring value compared to traditional currencies. Payments submitted over the U.S. Automated Clearing House (ACH) network, for example, take as long as two business days to settle compared to 10 minutes typical for bitcoin payments.
Bitcoin has become accepted for payment by a variety of businesses and organizations. In March 2014, Bank of America filed a patent for a system to execute wire transfers using cryptocurrency exchanges to mediate between two sovereign currencies. Bitcoin’s Limitations
Transactions between digital wallets occur at a negligible cost relative to transaction amounts. But unlike traditional currencies, bitcoin does not serve as a widely-accepted unit of account. Hence, most users seeking to pay in bitcoin have to purchase it on exchanges using traditional currency.
After receiving bitcoin in a transaction, the user […]
