Scrutinizing the Real Threat of Virtual Money

Scrutinizing the Real Threat of Virtual Money

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After peaking at around $240, Bitcoin last traded at around $120.50. Investors may view the Bitcoin as a case study for being in a bubble, but there is real need for the currency in some circumstances. Bitcoin does not have a store of value like gold, but it may be used to exchange for goods, real currency, and is in limited supply. Conversely, some world currencies are becoming endlessly available, hurting their worth. For example, Japan announced a quantitative easing program that aims to depreciate its currency.

mtgox

Chart Source: Mtgox

The possibility that Bitcoin is a threat to the credit card was asked by Discover Financial Services (DFS). Wall Street Journal reported the CEO said:

“I guess I would be a little surprised if Bitcoins actually had an effect…on us over time.”

Discover is partnering with EBay’s (EBAY) PayPal, which will allow PayPal users to use their phone number to make payments to stores that accept Discover cards.

For now, Bitcoin is in the early phase of attracting online merchants. Its competitive edge over traditional financial houses is that it helps users avoid transaction fees charged by credit card companies.

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MasterCard (MA), Visa (V), and American Express (AXP) would be hurt if Bitcoin were to gain traction. The card companies would need to lower transaction fees or provide additional incentive as a response. Traction would only rise if demand and supply dynamics were to favor the use of Bitcoins. More merchants would need to embrace Bitcoins, while more consumers would need to accept the risks of using the “currency” in favor of avoiding fees.

In the chart below, the card companies are valued with a price of profit (or “POP”) of between 14 and 21. Investors do not expect Bitcoin to be much of a threat:

American Express recently reported earnings of $1.15, beating estimates by $0.02 on revenue of $7.9 billion. An analyst at Nomura securities set a $73 target price for American Express, citing lower operating expenses and provisions as reasons for reiterating a “buy” call.

Visa and MasterCard thought of charging a digital wallet fee, but Visa denied this would happen any time soon.

Conclusion

The rapid rise and fall in the price of Bitcoins drew attention to the need for online currencies. Its threat to card companies is minimal at this time. Bitcoin’s operations are too small to handle the massive exchange volumes required to grow. This does not mean Bitcoin will stop developing its systems. In the meantime, card companies have plenty of time to develop and improve virtual exchange services to discourage users from migrating to another service.

Written by Chris Lau

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4 Responses to “Scrutinizing the Real Threat of Virtual Money”

  1. This whole theory assumes that the investment is a good one…but good investments don’t just fall out of the sky into your lap. It takes some serious work to uncover gems, and that is something that I think most people just don’t realize. People like Warren Buffet have ability and skill. Thanks for sharing this informative post.

  2. Frank says:

    Realistic information suggested regarding Bitcoin proper value in stock market and investors prospects!! It's good to learn the value of such coin is increasing. Though it's not similar with gold but someday soon Bitcoin value will increase certainly. Thanks.
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  3. Great read!
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  4. Buy Dinar says:

    For now, Bitcoin is in the early phase of attracting online merchants. Its competitive edge over traditional financial houses is that it helps users avoid transaction fees charged by credit card companies.

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