Is Bitcoin Really A Threat To Western Union? – ValueWalk Premium

Is Bitcoin Really A Threat To Western Union?

A recent report from BTIG highlights the fascinating issues that crop up when upstart cryptocurrency Bitcoin interacts with the rest of the world as it moves to center stage.  Some have speculated that Bitcoin could move into the space traditionally occupied by Western Union.  BTIG explores the issue in their report:

As digital currency Bitcoin captured headlines in late November after the value of a single bitcoin rose to above $1,000 – it subsequently reached a record of $1,238 on December 4 – one of the angles the media seized upon was the notion that it posed a serious threat to traditional money-transfer platforms such as that of buy-rated Western Union (WU).

Is Bitcoin Really A Threat To Western Union?

Bitcoin narrative helped push down WU

While there were plenty of reasons why WU shares swooned during the last couple of months of 2013 – the company’s surprising announcement that it would experience a 40%-80% increase in compliance costs being at the top of the list – we think one of the elements weighing on the stock was the Bitcoin-displacing-WU narrative. Those pushing this storyline argued that it would be much less expensive to transfer money using bitcoins than to pay about $8 to move $100 through WU, and that this differential would doom the company.

We appreciate why the Bitcoin story would be compelling to some – particularly those prone to be attracted to shiny objects – but for several reasons we very much doubt that the digital currency will seriously threaten WU any time soon. Insofar as the stock’s recent weakness was attributable to the ballyhoo about Bitcoin, we think such selling was simply unwarranted. And as WU has not rebounded significantly from its late-2013.

We are not arguing that the money-transfer space is immune to technological disruption. WU has acknowledged the need to adapt to changes in technology – “Western Union proactively leverages macro trends to help shape our approach to product and service development,” a WU spokesman said last month – and it has been investing heavily in its digital offerings. Digital, which currently represents approximately 5% of WU’s revenues, has become the company’s fastest-growing segment.

And let’s put aside for now the fact that Bitcoin is accepted by very few businesses such that in most cases it would need to be converted into traditional currency to be used. While we believe most of the businesses that have announced they would accept bitcoins –, Zynga, and Richard Branson’s space travel outlet Virgin Galactic, among others – did so primarily for the free media attention their adoption of the currency would bring, we acknowledge the possibility that bitcoins could be accepted by a more significant number of businesses in the future. (Of course, like the businesses that currently accept bitcoins, those firms would need to severely limit their exposure to its extreme volatility.)

Our doubts about Bitcoin’s ability to make any kind of dent in WU come more from a practical standpoint. One of the characteristics of Bitcoin that make it attractive to its proponents is that transfer of the currency is not regulated. Given the lack of central control, the government can’t stop you from giving out bitcoins.

However, as the People’s Bank of China (PBOC) demonstrated last month when it restricted merchants from accepting bitcoins (China’s top search engine, Baidu, and its top e-commerce website, Alibaba, now refuse to use them) and decreed that banks and payment processors could not convert the digital currency into yuan, the conversion of bitcoins into other currencies is subject to regulation. (The PBOC’s action was not unprecedented, as in 2003 the Chinese internet company Tencent created a virtual currency called Q Coin for use in games. After Q Coin began trading on exchanges and its value increased significantly [15-20% per annum], the Chinese government in 2010 banned exchanging it for the yuan and its value in the real world went to zero.)

Financial institutions, governments stress Bitcoin risk

Indeed, while many users of bitcoins appreciate the anonymity afforded by the world’s first completely decentralized digital currency, it has also attracted the attention of regulators concerned that the digital currency could enable tax evasion, money laundering and trade in illicit goods. Moreover, several recent high-profile thefts of bitcoins – hackers stole the contents of 4,000 customers’ digital wallets on Czech exchange, while more than 4,000 bitcoins were stolen from an Australian Bitcoin bank – pointed to the need for consumer protection.

That need was underscored on Tuesday when The Financial Times reported that Germany’s Bundesbank had warned about the risks of Bitcoin “amid rising concerns from regulatory authorities around the world.”

“There is no state guarantee for Bitcoins and investors could lose all their money,” said Carl-Ludwig Thiele, a board member of Germany’s central bank, told Handelsblatt. “The Bundesbank is warning emphatically about these risks.”

Thiele’s views echoed those expressed recently over Bitcoin’s risks by the European Central Bank and European Banking Authority, as well as the central banks of India, France and Malaysia.

The irony here is that while many Bitcoin proponents favor the currency specifically because it runs through a peer-to-peer network and isn’t backed by any government or central bank – CEO Patrick Byrne said he likes Bitcoin insofar as it is a currency that “no government mandarin can create with a stroke of a pen” – it is actually highly leveraged to the whims of various governments and their central banks.

Another irony is that while WU during the last couple of months was proactively addressing regulatory concerns, the currency that some believe will become the instrument of its demise was shown to be highly vulnerable to future regulatory actions. (That is, if those who have been hoarding bitcoins ever want to cash them out for traditional currencies.)

As WU told tech website Gigaom last month, Bitcoin should expect to play on the same regulatory playing field that it and its traditional money-transfer peers do. “We will continue to track the use of virtual currency in the market,” WU stated, “and expect that it should comply with the same regulations and oversight that the rest of the financial services industry must adhere to, to ensure that consumers are protected.”

In addition to the potential for enhanced regulation (or outright government rejection) to curtail Bitcoin’s ultimate impact, we believe the digital currency is also vulnerable to competition due to low barriers to entry. The supply of bitcoins is fixed at 21mm, with 11.5mm in currently in circulation. However, the supply of digital currencies in general is by no means capped and is actually unlimited, and new, technically similar competitors can easily emerge. Until a critical mass of users adopts a single digital currency, thereby providing it with a network effect advantage, the field is open to all comers. Until Bitcoin establishes itself as that single currency – by no means a certainty, as it has not been adopted by enough users to give it a real first-mover advantage – it risks suffering the fate of MySpace.

And while the fact that Bitcoin has no intrinsic value is often pointed out by critics of the digital currency, we think it bears repeating. Unlike the U.S. dollar, which has intrinsic value because the U.S. government that establishes the laws of the country and has the power to enforce them says it has such value, Bitcoin isn’t backed by anything. If users were to lose faith in the currency, it would lose all of its value.
We find it difficult to view a currency (or is it a commodity?) built upon such a fragile foundation as a legitimate threat to WU, a global leader in a growing space with strong brand recognition, a solid reputation, and a network that would be extremely difficult to duplicate.

Bitcoin will fade, not burn out

We agree with the view espoused last Friday by Charles J. Reid, Jr., Professor of Law at the University of St. Thomas in a column about Bitcoin that appeared in The Huffington Post. Unlike the crash that ended the speculative craze for tulip bulbs in Holland in 1637, the frenzy to which the hubbub about Bitcoin is often compared, “bitcoins will die a slow death, their weaknesses steadily revealed,” Reid wrote.
“The inside operators, those with the awareness and sophistication to have staked their bitcoin claims early on, will cash out, leaving more naïve and credulous market participants holding the bag,” he added. “For a while, these small-time investors will buoy one another’s spirits, assuring one another that the bitcoin soufflé will indeed rise again.

“And when the soufflé remains as flat as a pancake, these duped “investors” will recite the time-worn verses of recrimination – it’s a conspiracy, it’s all the government’s fault, bitcoins would have worked but for some duplicitous central bank manipulation. And so the beat goes on.”

Others are less sanguine about Bitcoin’s prospects. One of Blackstone Group Vice Chairman Byron Wien’s annual predictions for 2014 is a collapse of the digital currency.

“Bitcoins lack gold’s position as a store of value over time,” Wien wrote. “During the year Bitcoin’s acceptance collapses as investors realize that it cannot be used as collateral in financial transactions and its principal utility is for illegal dealings where anonymity is important.”

Comments (2)

  • Pablo Rojas

    It is hard to keep news up to date. Overstock already started accepting Bitcoin payments today for all its products.

    January 9, 2014 at 4:36 pm
  • Milly Bitcoin

    The argument that the US dollar has intrinsic value because it is enforced by laws while Bitcoin has no intrinsic value is a flawed argument. Most would say that neither one has intrinsic value because if the underlying system fails there is no value. While the dollar is given value by law, Bitcoin is given value by its users so some using your argument they would both have intrinsic value of a sort.

    Your other arguments identify valid risks but Bitcoin is still in in its experimental stages so trying to make predictions at this point is not really possible. You cannot compare established systems to a new experimental system and expect a one-to-one comparison. As for the endless rants of “its used for illegal stuff” “It is unregulated” “its anonymous”, etc. we heard that all before when the Internet was started and the last time I checked the Internet hasn’t failed yet. Those are just hyperbolic statements that divert attention from the true risks of the system.

    As for investing, Bitcoin is an experimental system and there is no real way to value it except the value placed on it by the free market. The free market is currently filled with people who don’t understand Bitcoin or the fact that it is experimental so the risk is huge. Of course Bitcoin can function as payment system just fine without investing in it.

    January 10, 2014 at 9:53 am


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