Bitcoin is still an anomaly in many people’s minds. It has risen to the forefront of many business platforms such as investment and cashless or cardless payment for goods and services. For the first question, I will discuss firstly the business case for bitcoin through its main competitive advantages to conventional currency and then show how these fit into current strategic management concepts that have been discussed in class. One of the main advantages which bitcoin possesses is that it is not linked to any main bank, financial institution or country unlike usual conventional payment methods such as cash or card payment. This provides multiple advantages for not only the consumer but businesses that choose to adopt bitcoin.
Because bitcoin is not bound by a currency international trading is much easier. In a conventional situation, you would have to convert Euros into USD either in cash at an exchange office or through a bank online, this usually comes with multiple attached fees. With bitcoin, these costs are much lower. Given bitcoin is not bound by currency you can easily use it whilst overseas at any business that accepts it, it is as simple as paying with bitcoin through your phone, and your bitcoin account will then be charged according to the conversion rate of bitcoin to the seller’s currency without an extra conversion transaction costi.
This is in comparison to using a credit card, where if used in a foreign currency will most likely be charged a foreign currency fee as well as not using the current foreign exchange rate for the currencies. It has been suggested that this advantage to bitcoin could be used in countries like Venezuelaii where over-inflation of local currency has made using it impossible, linking bitcoin to its value will allow quicker payments and less reliance on large amounts of cash. It can also be an advantage for businesses that are paying foreign workers in a non-local currency, as bitcoin will lower their transaction costs normally associated with paying overseas workersiii.
Another advantage linked to bitcoins freedom from institutions is its reduction in the costs associated with payment processing. As bitcoin is not bound to a bank it does not incur the normal costs with making a transaction via credit or debit card, nor do you have to pay a monthly fee for keeping an account open. This is because the transfer happens solely between the two individuals making the transaction without third party involvementiv. Bitcoin has been shown to reduce the processing fee of 2% to 4% on credit cards to less than 1% in the USv; this can lead to low-cost remittance payments for businesses. For businesses adopting bitcoin this has the possibility to save them thousands of dollars and is definitely a huge competitive advantage when comparing against other cashless methods such as credit cards.
Bitcoin also has a unique feature that will give a further advantage to businesses adopting it. Bitcoin does not allow chargebacks in most situationsvi, this means that fraudulent consumers who use bitcoin have zero chance of retrieving any bitcoin back from a business. Bitcoin can also be used to avoid capital controls in countries like Chinavii, where transferring money out of the country can be very difficult. As mentioned before because bitcoin isn’t linked to any government, it can be extremely easy to transfer money overseas and the benefits are being realized in markets with tight capital controls. In fact due to this advantage many commentators have said that China could sabotage bitcoin due to its heavy use throughout the countryviii, this goes against what was originally planned to be the initial advantage of bitcoin.
This advantage was that bitcoin cannot be manipulated by any government or financial institution. Because of the way bitcoin is produced through the blockchain system it is extremely hard for anyone to influence the value quicklyix, bitcoins anonymous creator has been speculated to have created the currency in 2009 solely for this advantage after the financial crisis. Whilst traditional money has the possibility of its value being tampered with by governments printing money, changing interest rates and influencing exchange rates or by banks manipulating markets; bitcoin is separate to all this. Consumers and businesses using bitcoin can therefore use bitcoin knowing that its value is free from manipulation from another party and can sustain its value.
Furthermore bitcoin is regulated by a set of governing principles. The main ones being that only a set amount of bitcoins can ever exist at one time and once a bitcoin is produced the method or algorithm to produce new ones becomes more complex. The limit on the amount of bitcoin allowed in circulation (currently capped at 21million units) further protects it from manipulation as the market cannot be easily flooded with new units quickly and be devalued. This is in comparison to traditional currency where governments can print new money and cause large amounts of inflation to manipulate the currency’s value. Looking at the way bitcoin is produced we can see more advantages.
Unlike cash a bitcoin can be produced by anyone given they have the means to do so. A bitcoin miner can be set up to eventually produce some bitcoin and earn from transaction costs however it takes a large amount of computing power to do so. Unlike traditional methods of earning cash like working for hourly pay, bitcoin provides an alternative with being able to produce the currency yourself at home. This creation process leads to benefits in security. A bitcoin cannot be duplicated unlike cash, as each bitcoin has its own unique number which cannot be replicated. Using bitcoin gives the user partial anonymity as when a transaction is processed it doesn’t link back to a bank account which has the persons details linked to it. This anonymity may only be a benefit to illegal practices in places like India where demonetization is being forced. However for a normal individual it means their privacy cannot be violated if someone takes a closer look at their transactions when they were using bitcoin.
Bitcoin transactions are public and whilst not revealing the user’s identity it can provide good tracking of payment in comparison to cash only payments. The use of the blockchain creates further security as the creation of bitcoins must be verified by other usersx as a legitimate creation. Once created bitcoin doesn’t require a card to use, in most cases a phone is only needed. Unlike traditional methods of payment like cash or cards, bitcoin cannot be stolen and used easily without your permission. Bitcoin almost always uses contactless payment which is easier than using cash. Many commentators have said that because bitcoin is solely stored online it’s vulnerable to hacking attempts which have been seen in the past. However you can also print out your bitcoin with a QR code for use which although puts it at risk of being stolen in real life, protects it from being hacked online.
The final few advantages are opening a bitcoin account is easier than opening a traditional banking account. Setting up an account only takes a few minutes with no complicated questions or upfront fees, this is unlike traditional banking where in some countries proof of address and other documents are needed which lead to long set up times sometimes even months. Taxability of bitcoin is also an advantage in some countries where it is treated differently to normal assets; in the US it is classified as a capital asset and is subject to a lower rate after one year whereas in Germany it is classified under income taxxi. This can be a positive or negative depending on whether you are using bitcoin as an investment or as currency. This is its final advantage, that whilst being a currency it can also be an investment that gains or loses value over time, it is also very easy to transition between the two formats using bitcoin.
Now that I’ve covered the main competitive advantages we can apply these to the concepts learnt in class showing the business case for bitcoin. Bitcoin itself is not a company it is just the currency however we can still apply many concepts to it. Bitcoin creates its competitive advantage through firstly differentiation creating greater value for both consumers and businesses. However unlike in normal business cases the differentiation it shows from conventional currencies also leads to lower costs for the end consumer. This is because the method of using/creating bitcoin is so vastly different to normal currencies it is almost in a different category.
We can classify bitcoin as having high operational effectiveness. This is because whilst bitcoin provides a platform to do many of the same activities as conventional currency like paying for goods/services, investment and savings it does it much better in many circumstances as I have explained in the previously. Bitcoin can sustain its competitive advantages against normal currencies as it is performing similar activities in a different way and given most banks are very sceptical to adopt bitcoin on their platforms this advantage against conventional currencies may last for a while. Bitcoin has indeed put itself in a unique and valuable position with being the first crypto-currency. This provides a unique value proposition compared to competitors with their increased security, better overseas exchange, no links to banks or countries and many other different activities.
Of course we know that a sustainable competitive advantage is not possible without some trade-offs. One of bitcoins main trade-offs is that in most cases an internet connection and a phone are required for use (unless you have printed your bitcoin as discussed before). This limits their potential market significantly as many countries especially those in third world areas do not have access to the internet nor have phones to use bitcoin, this shows how bitcoins scope is limited. The positive to this trade-off is in countries that have internet coverage and wide phone use bitcoin is much easier and cheaper to use than many conventional currencies as pointed out in previous points. Bitcoin has also created an activity system where the currency is allowed on other platforms like bitfinex, coinsbank and other systems that allow easy storage and use of bitcoin. It has fit into many investment platforms online meaning wider adoption by consumers already taking part in online trading.
There are now some cryptocurrency substitutes to bitcoin arising in the market like dash and litecoin (which is said to have faster transaction times) however these are less developed and much more volatile to market changes then bitcoin is. Bitcoin also doesn’t have one of the traditional characteristics that can hinder or help with competitiveness of having a base location. This leads to multiple advantages already discussed but can also be a disadvantage as they are not competing in a centralised area with others who may be innovating quicker than them. This freedom of location is really the base of bitcoins competitive advantages, it is their key attribute for customers and is in line with the original vision from the creator to make a currency that is free from manipulation of governments and institutions. Although this vision will have to be achieved through a crafting direction due to the changing environment of cryptocurrency, especially now since China has some influence over bitcoins price.
Now we can look at how bitcoin creates, captures and allocates value. These are very interesting questions since bitcoin is free and open source meaning anyone can use it, this means that although value is created, captured and allocated by the persons using bitcoin, in some situations there is no other firm capturing or allocating the value as a third party to the transaction. Therefore I will concentrate on how bitcoin creates value for those who are using it then briefly give examples of how platforms that use bitcoin alongside other cryptocurrencies can capture and allocate value from such transactions.
Firstly looking at when is bitcoins value created. Well we can repeat many of the competitive advantages already mentioned. The base of bitcoins value creation is from radical innovation in technology development, bitcoin was able to create a completely new platform that had not existed, this lead to many of the value-added activities. The real monetary value of bitcoin is determined as soon as its created, the first value creation is that bitcoins value is reliant on supply/demand of bitcoin given there is always a limited amount in circulation. This is valuable as prices are determined independently of any third party and consumers can trust that governments or institutions will not get involved.
Value is created through the security of bitcoin; each coin has its own code which can only be seen by the holder and not duplicated easily. It can be printed and kept offline for extra safety or stored online for easy accessibility. The blockchain system ensures that bitcoins are not created illegally by letting other users monitor if the creation was legitimate and demanding that at least 51% of users believe the transaction was legal before it is confirmed. The partial anonymity that comes with using bitcoin also adds value whilst the public record of all bitcoin transactions (which doesn’t reveal identity) provides immaculate tracking of the amount of bitcoins in circulation and where they are being spent, this could apply in a sense to outbound and inbound logistics value creation.
Value is added because of bitcoins transaction operation process and its decentralization. The worldwide scope of bitcoin means that international transactions can be quickly delivered with little to no fees accompanying them. Due to its peer to peer nature businesses and consumers get charged almost no transaction cost when using the currency and will not be charged for keeping an account open or holding onto unused bitcoin. There is value in that it is not linked to any third party that can manipulate the cost and cause bitcoin to lose/gain its value. The procurement of bitcoin itself is also an advantage, that anyone can use a bitcoin miner and possibly create the currency for themselves. This creation process has influenced more and more people to start using bitcoin and try to produce it. The decentralization also creates value through taxation in many countries as the value of bitcoin grows due to a lower tax rate than conventional money.
The final major value creation is in its ease of use which comes under customer service. To use bitcoin you only need a phone and internet connection, in some situations such as when you have printed your bitcoin those are not even needed for the transaction. Now looking at how these values described are captured. This concept is very interesting when applied to bitcoin, given it is not a company and is rather a technology that is completely free and open source you could say the value capture for bitcoin itself is close to or at 0% for each transaction. This means for users of bitcoin the value capture when using the currency is close to 100% as they do not lose anything to transaction fees. The creator of bitcoin is speculated to have mined and still currently holds around 1million bitcoinsxii so do they as the only “owner” of bitcoin gain any value from these transactions? Well no not really, they are open to the same variables as all the other bitcoin holders and do not receive little monetary value from the transactions.
For value allocation there are the main two parties receiving value during the transaction which are the receiver of bitcoin and the supplier. Due to bitcoin being free and open source there is no large third-party that gets any of the allocated value that is realized during the transaction, which is why bitcoin is so unique. The small transaction costs that are associated with bitcoin get allocated to the current miners to incentivise them to keep producing the currency. It’s almost like a salary for bitcoin miners who help keep the bitcoin network safe and secure. Bitcoin has network rules that give miners guides on a required fee that they can attach to the blocks they produce. One of bitcoins main plans is to reduce the reward miners get for producing a block over time whilst replacing this lost value with transaction fees.
It is now worth quickly discussing how some third parties which are adopting the use of bitcoin are benefiting from the original value created by the bitcoin platform. As mentioned beforehand there are some cryptocurrency substitutes to bitcoin like litecoin which have copied and improved upon the algorithms that bitcoin uses in its blockchain mining method. These substitutes are still not as developed as bitcoin but are benefitting greatly from the initial rapid innovation that made bitcoin a popular currency alternative.
Bitcoin has created further value and opportunities for cryptocurrency market trading platforms like bitfnex and gdax who charge transaction or membership fees to trade bitcoin on the international market. There are websites where you can store bitcoin more securely such as blockchain.info, electrum, ledger and coinbase. These companies also charge some fees for further protection of your bitcoins and are allocated some of the value from the creation of bitcoinxiii. There are many more third party players which help with keeping track of and processing bitcoins quickly and securely, however these companies are still reliant on customers adopting them as you can always hold the bitcoin yourself. In my experience it is very complicated to get any bitcoins without the help of these third party systems, their place is the bitcoin system is essential if more people are to adopt the cryptocurrency platform.
In conclusion the business case for the use of bitcoin is strong with numerous competitive advantages against conventional currencies. The base of which can be found in bitcoins method of production and its decentralisation. The creation, capture and allocation of value by bitcoin is very interesting as given bitcoin itself isn’t a company and is open source it leaves itself open to third-party softwares for further innovations and improvement in security. As more competitive substitutes for bitcoin arise and banks slowly adopt bitcoin it will be interesting to see how bitcoins value changes as the first major cryptocurrency.
i Wright, G. (2014). Is bitcoin good for business? Global Finance, 28(6), 16-19. Retrieved from https://search-proquest-com.ezproxy.otago.ac.nz/docview/1542122277?accountid=14700
ii Worstall, T. (2013, November 21). Finally, A Proper Use For Bitcoin, Avoiding Capital Controls. Retrieved January 14, 2018, from https://www.forbes.com/sites/timworstall/2013/11/21/finally-a-proper-use-for-bitcoin-avoiding-capital-controls/#6484f539794a
iii Kim, T. (2017). On the transaction cost of Bitcoin. Finance Research Letters, 23, 300-305. http://dx.doi.org/10.1016/j.frl.2017.07.014
iv Langford, A. M. (2014). INTERNATIONAL REMITTANCE TRANSFERS: A WORLDWIDE EFFORT TO LOWER COSTS. Law and Business Review of the Americas, 20(4), 537-563. Retrieved from https://search-proquest-com.ezproxy.otago.ac.nz/docview/1678628809?accountid=14700
v Wright, G. (2014). Is bitcoin good for business? Global Finance, 28(6), 16-19. Retrieved from https://search-proquest-com.ezproxy.otago.ac.nz/docview/1542122277?accountid=14700
vi Weber, B. (2016); Bitcoin and the legitimacy crisis of money, Cambridge Journal of Economics, 40(1), 17–41, https://doi-org.ezproxy.otago.ac.nz/10.1093/cje/beu067
vii Worstall, T. (2013, November 21). Finally, A Proper Use For Bitcoin, Avoiding Capital Controls. Retrieved January 14, 2018, from https://www.forbes.com/sites/timworstall/2013/11/21/finally-a-proper-use-for-bitcoin-avoiding-capital-controls/#6484f539794a
viii Titcomb, J. (2017, December 24). Bitcoin at risk of Chinese sabotage. Retrieved from http://www.telegraph.co.uk/technology/2017/12/23/bitcoin-risk-chinese-sabotage/
ix Underwood, S. (2016). Blockchain beyond bitcoin. Communications Of The ACM, 59(11), 15-17. http://dx.doi.org/10.1145/2994581
x Khaliq, A. (n.d.). The Good, The Bad And The Ugly Of Bitcoin Security. Retrieved from https://www.hongkiat.com/blog/bitcoin-security/
xi Donna, L. L. (2014, Mar 26). IRS: For tax purposes, bitcoin’s not currency. Usa Today Retrieved from https://search-proquest-com.ezproxy.otago.ac.nz/docview/1510284033?accountid=14700
xii Wile, R. (2017, October 31). Bitcoin’s Mysterious Creator Appears to be Sitting On a $5.8 Billion Fortune. Retrieved from http://time.com/money/5002378/bitcoin-creator-nakamoto-billionaire/
xiii Divine, J. (2017, November 6). What’s the Best Bitcoin Wallet? Retrieved from https://money.usnews.com/investing/investing-101/articles/2017-11-06/best-bitcoin-wallet-of-2018