#transactioncosts

[farademetre]

InvestTalk - 1-12-2024 – What Is the Total Cost of Owning an ETF?

One may generally divide the entire expenses associated with owning an exchange-traded fund into two categories: holding fees and transaction costs.

[traderpulse]

Choose your broker wisely!

[ostrander]

BITCOIN: A Misunderstood Threat

CRYPTOCURRENCIES such as Bitcoin present a fascinating opportunity to revolutionise the concept of money. Though fraught with practical challenges that it may not be able to overcome, from a theoretical standpoint, Bitcoin is a viable concept.

Fees are omnipresent in world of digital commerce. Businesses rarely process their own payments, instead relying on trusted payment gateways such as Verifone, PayPal, or Square. Firms spend inordinate sums to ensure and convince clients that these systems are secure, from offering protection against unauthorised transactions to utilising layers of encryption to protect users while they transmit data. Bitcoin has the potential to substantially reduce transaction costs by cutting out payment processors, card issuers and the fees that they charge. Using an algorithm that verifies the integrity of transactions as they are added to a decentralised public ledger, valid transactions are confirmed quickly for virtually no cost by those seeking to “mine” new Bitcoins.  

The use of Bitcoin is especially promising in developing nations. Currently, areas devoid of financial institutions face high costs of verifying and processing transactions, which has hampered the adoption of electronic payment methods. Because the convenience offered does not outweigh the added cost per transaction to the business, in order to remain competitive, the fees are passed on to the consumer. Verifying the validity of transactions nearly instantly through mobile phones lifts a huge barrier to trade. One need not fear being robbed for their cash nor pay banks to guard it for them. Furthermore, because Bitcoin transactions only require a basic cell phone, residents of developing nations would have access to a global currency, and by extension, global markets--free from unstable local currency and vastly fluctuating exchange rates.

Bitcoin does face challenges. While the value of traditional “fiat” currencies issued by governments can be influenced by monetary policy, the value of Bitcoin is currently largely driven by speculation. Furthermore, the money supply of Bitcoin is capped at 21 million BTC, which make currency deflation inevitable. However, much of the speculation is driven by whether or not governments will allow Bitcoin to be used for transactions, and by extension, whether or not exchanges will continue to operate. Over time, as governments come to consensus on the currency’s legality, the fear derived from the potential loss of legal access to the Bitcoin market will be resolved, insulating the currency from volatility. While some believe deflation condemns Bitcoin to instability, deflation manifests itself differently in fiat currencies. The deflation rate of Bitcoin is predictable and constant, based on knowledge that money supply is fixed, and is thus immune to fluctuations due to price signals from market interactions, unlike the dollar.

The most common misconception about Bitcoin is the perception of anonymity. The only anonymous aspect of Bitcoin is that addresses used to send and receive money cannot theoretically be tied to particular persons unless one chooses to reveal their identity. In reality, Bitcoin doesn’t exist in a vacuum where users solely transact only with one another. To obtain BTC, millions of dollars or euros pass through currency exchanges, where the identity of the user is revealed just as it is when one uses a credit card or cheque. Just as courts can already subpoena credit card issuers and demand they provide details of charges made on accounts, they too could subpoena Bitcoin exchanges, linking the user’s identity through their payment method on the exchange to their Bitcoin wallet. Recall that Bitcoin uses a public ledger by necessity: anyone must be able to verify transactions. By extension, this enables anyone to calculate the balance of a particular Bitcoin wallet or view the entirety its transaction history, including law enforcement.

While it may be difficult to link identities with Bitcoin wallets now, as the currency becomes more popular anonymity will erode. Consider Bitcoin transactions as taking place within a network with hundreds of thousands of nodes where each represents a Bitcoin wallet. Many of these nodes will not be anonymous. For example, a grocery store needs to associate itself with a Bitcoin address in order to receive payments. Because some of the nodes have known identities and all transaction data is public, data aggregation and analysis could easily identify and profile users. Routing money through various overseas accounts to confuse regulators would be impossible due to the public ledger; big data algorithms could easily follow money as it moves from one wallet to another, linking “clean” wallets used to pay for goods at the supermarket with “dirty” wallets used for illegal activities.