Adaptado del blog de Safello.
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Simplifying payments – one bit at a time: On bitcoin and the remittance market
On an increasingly competitive labor market, where some countries and industries are recruiting heavily while others are laying off employees, many workers across the world are searching for jobs abroad. Indian engineers are employed by the US tech sector, Philippino women provide domestic services in Hong Kong, and thousands of migrant workers from central Asia are working construction in Dubai and the United Arab Emirates. For some, migration means better opportunities and a higher wage. For others, a desperate search for sustenance has them work under harsh conditions with little to no security. Either way, working abroad comes with a cost. Many migrant workers have families to provide for, and continuously send money back home in the form of remittances. The cost of such payments, along with the fees associated with converting one currency into another, may creep towards 10%, according to the World Bank (1). While remittance costs is hardly the primary concern of a worker considering going abroad, it is with those- and bitcoin’s potential to alleviate them- that we shall be concerned in this article.
Consider a Thai factory worker facing the choice of staying in Thailand or migrating to China. Ignoring any costs associated with travel, the lost pleasure of spending time with his family and et cetera, his income function could be written as:
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where his income (Y) that he can send his family equals the domestic wage times the weeks he is working domestically, plus the wage abroad times working weeks abroad minus remittance costs; c. Of course, we also have to subtract personal consumption C, which we assume to be the same domestically and abroad. While these somewhat unrealistic assumptions may undermine the practical applicability of this example, it is merely to be considered a useful illustration of the problem, and not a foundation for decision-making. Because there are only so many weeks of paid work anyone can do each year, the maximum income of our Thai factory worker is restricted, subject to:
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where the total weeks worked domestically and abroad cannot exceed T. For this example, I have put T at 50 weeks per year, but it can be adjusted without affecting the outcome. Now, if our Thai worker- let’s call him Tom- can substitute freely between working domestically and abroad, we may maximize the income to his family subject to a restriction of 50 working weeks a year, using a Lagrangian function:
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Using calculus, we can derive an expression for the comparative earnings of hours spent working abroad, x2, versus earnings of working weeks spent domestically, x1:
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For wages and remittance costs such that:
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This kind of production function would normally have a corner solution so that if Tom could substitute freely between x1 and x2, x1 would move towards T as x2 approaches 0. If wages are higher in Thailand and he could spend all his working weeks there, why would Tom, who values the comfort of his own home and family, work elsewhere? However, because Tom is having trouble finding manufacturing jobs in Thailand, he can only work 20 weeks per year domestically. Tom unfortunately has little formal education and has to work minimum wage jobs in either country (2). Therefore, his yearly contribution to his family’s income becomes:
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Without the remittance cost, the contribution would be US$1600. For the children of a poor factory worker, US$115 is a lot of money to lose out on. By comparison, the Thai price of rice is currently at roughly US$0,4 per kilogram. Add these losses together among the world’s migrant workers and you would find the sum quite substantial.
One of bitcoin’s interesting properties is how cheaply it may be transferred across wallets everywhere. In fact, sending coins from a single address typically requires no fee but the reward to miners. Moreover, exchanges from and into fiat currency are cheap and ideally, an extended use of bitcoin as a payment method would remove the need for exchanges altogether. However, several obstacles currently prevent widespread adaptation for these ends. First, there is simply not enough money invested in the bitcoin system.
In 2012, remittances added up to a staggering 500 billion USD (3) while the bitcoin market cap as of June 30th 2014 was merely about 8,1 billion USD. (4) A solution to this problem demands a continuing high growth of the bitcoin market cap. An exponential illustration of the bitcoin price (y) since 2012 shows that:
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If we were to look for a value x, denominated in days, such that the market price y times the money supply (currently in the neighborhood of 13 million bitcoins) equaled 500 billion, we may make a projection as to when this market cap will be reached, assuming the current growth function continues to hold. :
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The factor (1+g)^x represents the average daily growth rate of the money supply. Because of diminishing block rewards evey four years, will be decreasing as x increases. Using normal logarithms and some calculus we get:
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Currently, the number of bitcoins grows by about 0,04% per day. Even using this rate, you can probably see that x will be over 20 000 days, or +50 years.
Second, the volatility of bitcoin prices currently makes it unsuitable for short-term saving and consumption. The price may drop overnight and a person living on the margin cannot afford to wait for its recovery. Third, the necessary technology is not yet available in many parts of the world, at least not among the poor.
The first problem can be solved through a considerable extension in where bitcoin can be used. As long as people would only use bitcoin for cross-country payments, and then exchange into domestic currency for consumption, we would have to rely on outside growth of the market cap as shown above. The price increase from soaring demand would be offset by the subsequent dumping of bitcoin back into national currencies. If, however, bitcoin was to become a widely accepted payment method for goods and services internationally, and wages were paid in bitcoin, these particular restrictions would sieze to apply. Regarding the second problem, more widespread use would gradually stabilize the price to the point where its technological advantages, rather than speculation, determined its value.
In my view, it is possible that for the time being , bitcoin should not be considered a currency at all, but a commodity like gold or an option. Its value would be negatively correlated with the degree of liquidity within the fiat economy, and positively correlated with global inflation levels. Greater functionality and value-added services like those Safello strives to provide are also likely to raise interest. Any projection as to how the price will develop is uncertain, and my estimation may prove to undervalue its rise substantially.
As for the third problem, I have little doubt that technological pogre and cost-effectiveness will eventually have smartphones and other technology reach even the poor. Since 2000, Internet access in Africa has increased by almost 4000%. In South Africa, peine has quadrupled over a three-year period. (5) There are millions of people in these parts of the world whose lives may be made easier through continuing technological pogre. Bitcoin may well prove to be a part of that development.
In my last article, I discussed the potential of bitcoin in hedging inflation risk. To its list of advantages we can now also add money transfers. Next week, I will explore ways in which the bitcoin system may interact with credit markets. What role can a decentralized network play in peer-to-peer lending and crowd funding schemes?
Note: Any subjective views expressed in this post are those of the author, and not necessarily those of Safello AB.
Sources:
(1) Bilateral Remittance Data, The World Bank (2012)
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(2) China Briefing Business Intelligence, Dezan Shira & Associates (2013)
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(4) Government of Thailand
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(3) The World Bank(2012)
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(4) Bitcoin Charts 2014-06-26
(5) World Development Indicators, The World Bank (2013)
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