When you hold a €1 coin, you usually think of a commodity that can be acquired worth it or a service equivalent to its value. Have you ever thought of the cost of a euro in its physical from or in a digital transaction? For understanding this, you don’t need to have a PhD in Finance. All you have to know is simple economics that you studied in school and you must have noticed the transaction charges that are eating up the money you hold.
Cost : Income
It is astounding to know the fact that minting Euro cents is four times its face value and the cost of production of banknotes is far less than its face value. Post production, the costs are involved in circulation of money. We don’t get money directly from the government, but are circulated by European Central Bank and NCBs. Banks provide us services for which there are expenses like operational costs (employee salaries), capital costs (buying equipment or buildings) and finance costs (interest expense for loans and bonds). Bank efficiency is the ratio of expenses (not including interest expense) to revenue. This ratio is also called cost to income ratio.
Bank Efficiency Ratio = Expenses /Revenue
For example, if ABC’s bank costs is €4,000,000 and its revenue €10,000,000, then the efficiency ratio would be 40%. This implies that it costs €0.4 to generate €1 of revenue. Lower the bank efficiency ratio greater is the ability of bank to generate revenue. In 2017, EU nations had efficiency ratios ranging from 38.66% (Norway) to 80.72% (Germany). It is now quite evident that the expenses of banks turn down the value of euro you hold.
With the implementation of ban on credit card and debit card surcharges, it might seem to be advantageous to payers. But there are still charges on admin fee on flights, restrictions on minimum transaction value and service charge in few sectors. Surcharge is now charged by giving it brand new names. Plus, there is surcharge on international transactions ranging from 0.2% to 0.6% on different cards.
Whereas, the size of a Bitcoin transaction is about 250 bytes and it takes less than an hour for a successful transaction. It currently costs around 0.000625 BTC or less than €4. A typical credit card transaction involves five parties: consumer, merchant, issuer, acquirer and switch. While the transaction through Bitcoin involves only two parties it also is also secured and private as bonus. There are arguably are no middlemen to charge you secretly or under different terms.
A typical check transaction takes 3 to 7 days, credit/debit card takes 2-3 days, wire transfer takes 1 to 5 days and Bitcoin takes 10 to 120 minutes. In finance, time is equivalent to money. For delay of every 30 days in a year, there is considerable loss in interest you would earn on it. Larger the size of transaction, the more competitive Bitcoin transaction becomes than traditional transaction. The size of transaction to be competitive might reduce, when Bitcoin becomes more prevalent and common medium.
It is human tendency to pile up the money they hold then invest that would generate revenue. Not all the money you have is directed into investment. This piled up money which is not in circulation or invested leads to flushing of more money into the country and thus will reduce the purchasing power. The euro you earned a decade ago might not be equivalent to today’s euro value. Even an adroit at finance and economics stumbles when it comes to planning of inflation control of traditional money. The money supply for 2017 to July 2018 was 5% whereas, the money supply rate of Bitcoin is 4% and is predicted to reduce to less than 2% in the next 18 months. This implies that Bitcoin is surely the winner in terms of cost of inflation.
There are other extrinsic factors that affect cost of €1 such as fraud and volatility. To control fraud and improve cyber security of banking system Europe is expected to spend €17bn in the next two years which inevitably increases the cost of €1. It is evident that Bitcoin transactions would surpass traditional transactions and it proves to be the most viable option in contemporary and future scenario.
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An Article by a Guest Author.