One non-obvious but very strong potential driver for Bitcoin is international trade. Today, that area suffers from monopolization and stagnation in the financial sector, despite huge turnovers.
The annual turnover from international trade is about 12 trillion US dollars. It is hard to translate this to a specific portion of the world’s money supply, but a lot of money is being kept in USD for the purpose of international trade, particularly intercontinental trade.
This is an article in a series on what Falkvinge identifies as Bitcoin’s four drivers. This is the second article, on international trade. The others are unlawful trade, merchant trade, and investment (coming July 5).
To understand why Bitcoin is a major potential driver here, one needs to understand how international trade works today.
Businesspeople in different countries don’t generally trust each other, at least not to the tune of millions of euros that aren’t theirs but their employer’s. Therefore, they used a trusted and well-established intermediary to buy a so-called Letter of Credit. Essentially, it’s a check on steroids that needs an additional call from the issuer to clear it.
This check costs from $100k and upwards in normal container-level trade. Businesspeople at all levels are frustrated at how badly they are treated by the banks who take their business for granted, so it’s personal, too.
So the order of events is roughly like this:
- An order is placed
- A Letter of Credit is bought and presented
- The goods are manufactured and shipped
- On unloading at docks, the Letter of Credit is cleared
- The manufacturer is paid
The people in the factories in Asia are angry more or less every single day over how long it takes to get paid. Eight weeks for a payment to clear is not uncommon, so they need to deal with all sorts of currency fluctuation insurances as part of daily business. Additionally, the transaction is usually in USD, which is neither the buyer’s nor the seller’s native currency.
Do you see what would happen with Bitcoin as a drop-in replacement for USD here?
These traders are already used to dealing with the volatility of a non-native currency. Their frustration comes from the long waits (months!), from the cost of the Letter of Credit, and from the way they are treated by the banks that issue the LoCs.
Bitcoin has the potential to just do away with all of this, with the high reason for switching being the business advantage of fast payment and much lower escrow costs, and the low reason being the bad treatment by LoC issuers and frustration from payment delays. With both high and low reasons being perfect-storm-grade, it’s just a matter of clearing the obstacles for conversion.
A “high reason” is the officially presented reason for something, a rational reason, whereas a “low reason” is what causes us to actually energize and pursue the objective given in the high reason — an emotional reason, if you will, which is what really matters but needs an external justification. This pattern is frequently seen in politics.
The obstacle that must be cleared for this growth to materialize is the large-trade escrow scenario. Also, since we’re dealing with something as wishywashy as trust, it takes time to transition in large scale, but some pilots could be expected as soon as people inside international trading get to understand this advantage.
Again, it is hard to estimate the growth potential from this uptake driver. International trade is 12 terabucks annually. But how much of this would lie constantly in the transactional money supply? It is very hard to guess. Let us assume 5%, which is very cautious and conservative given the months-long payment escrows today. That gives a figure of 600 gigabucks that would have compelling high and low reasons to convert into Bitcoin.
Observers note that this number is tenfold that of unlawful trade which I covered the day before yesterday. Thus, unlawful trade may be a driver, but it is an insignificantly small one compared to international trade and the potential efficiency gains in the worldwide merchandise economy.
Today’s bitcoin economy is worth about 100 megabucks. Thus, once the escrow hurdle is cleared, international trade is very likely to increase the value of the Bitcoin ecosystem by a factor of about 6,000 over the course of a decade or so. Again, this doesn’t mean that the value of one bitcoin will rise by a corresponding 6,000x, as the market is more complex than that — but it does show the potential of the bitcoin ecosystem and the market direction.
This series continues in two days with merchant trade.