Bitcoin performed better than Stocks, Commodities & Bond Yields.
The stock and bond markets have had an excellent run over the past 6 years since stocks bottomed out in 2009. However, the honeymoon may now be over. China’s decrease in GDP and various economic metrics caused a domino effect on many other economies worldwide.
We first started seeing the effects of a financial meltdown in China last August when the Shanghai Stock Index lost 20% in the space of four trading sessions, dragging the S&P 500 down with it by more than 10%. Since the beginning of the year, we witnessed constant reminders of how sensitive global stock markets are when faced with a possible bear market in China.
This ties in with a general concern for the health of trade worldwide, with Europe as a whole not able to recover from the recession of 2008. Even countries like Russia, and developing countries such as Brazil are also falling into negative territory in GDP growth.
Worries are arising about deflation and the general price of commodities. There have been forecasts for the price of crude oil that expect its downward trend to continue, with some calling a bottom at $20 and more recently RBS calling it at $16. There can be no doubt many companies will benefit from reduced energy costs, but many others in the oil business will pay a dear price.
As a result, the general macro narrative for 2016 does not have a rosy outlook. We can also expect various geopolitical events that play out over the course of next year and exert their respective influence. If the power play around the world continues to veer out of control, then a $10 a barrel is also a possibility. But this is among fears of deflationary pressures and weak global economies, which are sparking more turmoil than in 2008.
A Neutral Alternative that Works
While all major currencies lost against the U.S. dollar, Canada suffered the worst hit and lost nearly 16%. Most developing country currencies have also been hard hit, with the Russian ruble losing nearly 21% and Brazilian real losing 30%. Bitcoin, a borderless currency that is governed by mathematics, outperformed any other currency in 2015.
A study by Magister Advisors shows that Bitcoin could be the 6th largest currency by 2030 for volumes traded. Estimates show that banks and financial institutions are set to spend at least $1 billion in the cryptocurrency in its development and for its underlying technologies. Bitcoin is attracting the sharp attention span of Wall Street, and we can therefore conclude that bitcoin is undergoing substantial development and progress, and contrary to the recent media opinion, is quite definitely alive.
Market capitalisation aside, Bitcoin was overall the best performing asset in 2015 as shown in the chart below.
Why Bitcoin?
Bitcoin is an un-censorable public ledger that relies on distributed security with built-in financial incentives. This offers an excellent foundation for currency and asset transfers, as well as notarisation.
A major competitive advantage of bitcoin for merchants and consumers alike is its low transaction fees, which are far lower than other available payment processors. More than a third of workers in the U.S are freelancers, and in Britain there were 1.4 million freelancers in 2015. Bitcoin is quickly becoming the preferred currency for these users, as it allows near-instant value transfer at fractional costs. Only a few cents will get a bitcoin transaction confirmed, and sent to any country in the entire world.
This freedom is essential to many freelancers, especially those in developing countries, whose livelihood may depend entirely on the ability to receive international transactions.
Bitcoin’s ability to complete cross-border payments without limitations is a key contributing factor for attracting freelancers and entrepreneurs. The demand to spend bitcoin instantly will increase in the coming years, however, delayed merchant adoption will create barriers for everyday use. If the current trend persists then the geometric progression shows that there will be over 100 million bitcoin wallets by 2020.
The measurable financial benefits are a solid argument for the increased adoption of the digital currency in the future. Once usage by consumers is more widespread, or nearly equivalent with other payment methods, merchants should naturally veer towards the most cost-effective strategy.
The table below shows the fees for domestic and international transactions to merchants, with and without credit cards.
While international card and domestic card purchases create costs of 13.14% to 38.5% of sales for the merchant, Bitcoin remains steadily at 2%. This is an advantage that cannot be ignored, however, the issue here is that merchant adoption and consumer usage are relatively gridlocked. Merchants are hesitant to accept bitcoin, and few consumers are actively spending it due to lack of options.
Proposed solutions have emerged which allow merchants to accept bitcoin while the payment is converted to fiat immediately, as well as customer-side solutions which allow consumers to purchase a debit or credit card balance with bitcoin, in both physical format and as mobile apps akin to Android Pay and Apple Pay. Eventually these projects may draw the attention of merchants, and as user adoption rises, merchants will be incentivized to accept Bitcoin without intermediaries.
Conclusion
While the current financial system is in dire shape, turbulence in the Chinese markets, and negative interest rates on the horizon, Bitcoin has been experiencing unforeseen growth and investment from influential players in finance and banking. Perhaps without irony, the same industry that has sought to vilify, discredit and replace Bitcoin, is simultaneously investing hundreds of millions into the budding internet currency. Whether this is as a result of cognitive dissonance or a carefully planned strategy is an opaque issue.
As both a digital currency and a public ledger, Bitcoin creates substantial convenience benefits for freelancers, merchants, entrepreneurs, remittances, and more. Very low transaction fees, an un-censorable ledger, and its availability to anyone with an internet connection regardless of sociopolitical factors render Bitcoin a promising instrument for progress in commerce, remittance, trading, notarisation and banking. Furthermore, it can be argued that these circumstances provide a fertile substrate for a potential black swan event in global commerce and free trade.
Image Credit: Duru Eksioglu
