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Economics majors say that they're not interested in Bitcoin yet. That's a pity. The battle currently playing out on r/Bitcoin and its affiliated subreddits is the stuff of legend. Say what you like about the gall of programmers teaching themselves economics in a kind of pay-as-you-go fashion or the pitfalls of a gold standard: At the end of the day, economists still pay for their lattes by writing about currency unions rather than building them.

More importantly, the obsessive media focus over the intrinsic value of the currency is overshadowing an uncomfortable truth, namely, that the much vaunted moats of major money transmission services are no more immune to technological disruption than any other service-oriented market.

Exhibit A is a recent research paper from the Berenberg Bank, which has the distinction to be both Germany's oldest bank and the second oldest bank in the world after Monte dei Paschi di Siena.

The consensus view backs the incumbents and the incumbents typically give two lines of defense against these disruptive alternative solution providers: trust and scale. Bitcoin's success suggests that maybe both of these are overrated.

Wait, it gets better -

Greater adoption of virtual currencies like bitcoin can bring about transformative improvement for remittances flows and have a significant social impact. Not only can it improve the frictions in the market and uplift the flows by around 10% due to the removal of fees, it can also help lift inter-regional flows by making it more convenient. Using the statistics above, the direct impact is an increase of $51.4bn.

Berenberg's abrupt volte-face may strike some as a bizarre turn of events, to say the least, but it's really very much in character. Banks issue stock, too. A share of common stock tends to be a strong claim on the future profitability of a company and a relatively weak claim on the company's assets, and incentive structures tend to be aligned accordingly. In other words, there's not nearly as much money to be made in defending a well established and saturated market as there is in creating and nurturing new ones. For this reason, banks have shown little appetite for defending the status quo when insurgency pays better.

How Disruptive Technology Shifts The Demand Curve

Innovative technologies that reduce the per unit or per transaction costs within well-established industries are by their very nature disruptive due to their impact on the demand curve. Initially, these technologies fail to satisfy either low or high end demand and are ignored by the market until they become more profitable. However, note the incline of the curve.

(Source: Clayton M. Christensen, Innovator's Dilemma)

As these technologies mature, they eventually surpass sustaining technologies due to lower costs. The result is excess demand, as consumers will tend to use the same service much more frequently at a lower cost than at a higher cost.

For example, consider candy. In 1914, candy of any kind was a luxury. Sweets became much more common from the 1920s-30s, largely from cheaper production costs. Low-cost availability radically shifted the demand curve and altered consumption patterns. Today, the average American eats 3.4 pounds of candy on Halloween alone. In a similar way, Western Union (WU) wire transfers tend to be reserved for either sending money back home (remittance), special occasions, or emergencies, and the size of the transfer is often in proportion to the fee incurred. (See the fee schedule below.)

Western Union Online Transaction Fee To 10004 Zip Code (Lower Manhattan)

(click to enlarge)

(Source: Western Union Price Estimator)

However, no one sends $0.49 via Western Union. What would be the point? PayPal (EBAY) works reasonably well for countries like the U.S. and the Philippines, but it's less so for others, Russia and Africa. PayPal also charges a significant premium for currency conversion, a fact that may have little impact on most individuals but tends to add up in aggregate. Else equal, a payment solution that circumvents these gatekeepers will expand the rate of transactions, which makes it very difficult to call a market top.

If we can't call a top, how about a bottom? Many products have what can be thought of as a prophylactic utility, meaning that their promise is not so much in what they can do, but in what they prevent, circumvent and replace. Security systems, Swiss bank accounts, pesticides and prophylactics come readily to mind, as well as hundreds of other services. It's reasonable to assume that a floor (but not a ceiling) for such services can be established by assigning a dollar value to the price that the average person would pay for the privilege of prevention.

The global remittance market was valued at $406 billion in 2012. Assuming static levels of global remittance transfers, it's reasonable to assume that a rational individual would pay a considerable fraction of this total in order to receive more prompt service at a discount of 99% (ex confirmation fees). That amounts to slightly over $4 billion a year.

Alt-Coins

Additional protocol layers allow for additional capabilities. For example, by "coloring" a set of coins by distinguishing it from the rest, it is possible to add additional value to the underlying Bitcoin independent of the face value. In short, you can theoretically trade anything with it, from Smart Property to stock options.

The latter is especially interesting to anyone who's ever had the shirt ripped off their back entering or exiting a trade. If I can transfer you a share of stock for a negligible fee in a thoroughly liquid market, why would anyone pay such high fees? The Ripple exchange, still in beta, allows FOREX trading for little to no cost.

However, alt-Coins present their own dilemmas. Despite the fact that some of these coins have a marketable utility (Namecoin and Peercoin spring to mind), most possess little or no utility apart from being competitor blockchains to Bitcoin, and yet are entirely dependent upon the Bitcoin ecosystem for their value.

The Bitcoin community is currently divided on whether such tagalong coins represent diversification opportunities or not. They do not. Diversification implies that the underlying assets are negatively correlated; spurious alt-coins amplify market booms and busts by introducing unnecessary speculation into the market and confuse potential early adopters. While network externalities may ultimately guarantee the victory of the Bitcoin network over such pretenders, but the resulting loss of time and the misallocation of capital will conspire to make it a more painful affair than it strictly has to be.

Conclusion

Bitcoin's stratospheric rise presents a potentially existential crisis-in-the-making for Western Union. Established incumbents rarely respond with agility to disruptive innovation. Many of my fellow Contributors on Seeking Alpha see Western Union as a deep value play, preferring to emphasize the ubiquitous nature of its services at the expense of the potential impact of technological disruption.

While this view may make sense from a balance-sheet point-of-view, but from a long-term perspective, it's precisely wrong. Cryptocurrency is now a multi-billion dollar working proof-of-concept. What was once a stroke of genius has devolved into a textbook engineering problem. One cannot simply "un-exist" such knowledge.

In the immortal words of Tyrion Lannister: "The song is sung, the wine is spilt, the wench is pregnant."

Source: Is Bitcoin A Threat To Western Union?

Additional disclosure: I own Bitcoin.