Understanding Bitcoin: Cryptography, Engineering and Economics

CHAPTER 4Business Applications

The first application of Bitcoin is as a cost-effective payment system. This section will present some business models that are being created around this application. The business models introduced in this chapter can be considered the first round of applications in the cryptocurrencies ecosystem. As with every new technology, Bitcoin might spawn innovative ideas which are difficult to foresee, giving rise to newer generations of business models.

An analysis of Bitcoin’s impact in the e-commerce payment and money transfer markets can be found in Woo et al. (2013).

4.1 MONEY TRANSFER

The average fee in the remittance market is reported to be in the range of 8% to 9% (World Bank, 2014; Normand, 2014). As of the time of writing, Bitcoin transaction fees are in the order of 0.01% to 0.05% (most of the miners’ revenue is due to block rewards). In principle, Bitcoin has a cost advantage compared to current money transmitters. However, there are several factors limiting this theoretical cost advantage:

• A very large portion of the costs of established money transmitters are due to regulatory and compliance costs. These costs are then passed on to consumers, which helps to explain the relatively high fees. New companies offering remittance services using Bitcoin would presumably also have to incur these regulatory and compliance costs eventually.
• Barriers to entry to the remittance market. There might be significant barriers to entry to the remittance ...