banking Archives

Will an Italian Banking Bail-in Boost Bitcoin price over $1,000?

Posted on November 22, 2016 | by [email protected]

The past 7-8 years of study of the Bitcoin market has made one thing very clear to people around the world. Bitcoin and its underlying technology are here to stay and are slowly transforming the technological and financial sector, one step at a time. Interestingly, the digital currency’s adoption was more visible in the face of global crises. Whenever there is a massive event, that impacted a chain of markets pertaining to particular geography or a common asset class, Bitcoin always came to the rescue. Various events like ‘Brexit’ or fears of ‘Grexit’ and other cases that put conventional markets in danger showcased this feature. The adoption manifested in the form of increased volumes, prices and inflow of funds making Bitcoin the new ‘Safe Haven’. With prices now sideways between $700 and $750, let’s look into how Italian Banking Bail-in might send the prices further higher:

Problem with the Italian Banks:

Italy’s banking system is beginning to implode starting with Monte dei Paschi, Italy’s third-largest bank. Italian banks dropped as much as 7.1 percent over the past few quarters according to Bloomberg. UniCredit SpA slipped 0.3 percent in Milan, while Intesa Sanpaolo SpA decreased 0.6 percent, recovering from earlier lows. Monte Paschi’s 379 million euros ($418 million) of 5.6 percent subordinated bonds fell 3 cents to about 20 cents last quarter. Hence the bad debt situation has been a concern for the government and has also become politically sensitive topic.

How Italy plans to counter the situation:

The Banking Bail-in is really sensitive and a lot of things depend upon how this would be handled. Especially because majority of the investors in the banking bonds are retailers or average household members. Any conflicting element would prove detrimental to their interest and would defy the rules laid down by EU when it comes to bail-ins. A complete bail in would hurt all the retail bond holders and savings account holders. As such Italy can’t turn away from this crisis without a Bail-in, how they would strike a middle ground is now left to speculation.

What this means for Bitcoin:

As Monte Paschi tries to recapitalize, the Italian market will surely react. If the restructuring ends up in the same way as Cyprus and Greece, the resulting volatility might last through a year. In the case of Cyprus, Bitcoin values grew tenfold as an economic panic set in making it the newest of virtual safety nets. Due to the looming fears of Grexit, Bitcoin peaked to an annual high last summer. In June, the “Brexit” vote forced the British Pound to drop over 10 percent, and this market value quickly captured by Bitcoin, with the spike ranging over $100. Hence people should lookout for news pertaining to the bail-in while investing in Bitcoin markets for the coming weeks.

Traditional Banking model turning obsolete, can Bitcoin and Blockchain turn it around? [Part 2]

Posted on October 22, 2016 | by [email protected]

As discussed in the Part 1 of this article, the banking sector is designed with two major sources of income. Owing to the detrimental fiscal policies employed by central banks, these methods are slowly turning to be obsolete. This implies that traditional banking has to undergo a transformation that would shield it from negative effects of bad monetary policies. First let’s look into how banks have tried to shield themselves from the said threats. Then we can assess how Bitcoin and Blockchain can provide a viable solution.

Counter Strategies by the bank:

Due to the deteriorating conditions, banks had experienced a significant profit cut in their margins. So as to level the ground, banks have responded to profit pressure with cost cutting. Though this is not a positive strategy, it has helped many banks to weather the conditions in 2015. But in 2016, with increased number of countries in crisis, the cost cutting was hardly helpful.

Banks even resorted to restructuring to surmount these obstacles but that too in vain. Hence it was evident that with the traditional set up, there isn’t much lucrative for the customers. Even private investors in equity and forex markets have been facing their own set of problems which are effecting the investments.

How Bitcoin and Blockchain might help:

The most efficient way to increase customer base is to improvise over the existing services. That is exactly the kind of solution Blockchain offers. If the transactions are carried out in Bitcoin then it would further add to the beauty of this solution.

Bitcoin:

One of the major ways in which Bitcoin can support banking would be through transactions. If all the customer related transactions are put on a framework that utilize Bitcoin, then banks can cut down on transaction charges that are generally undesirable. This way it would attract customers and would help banks in revolutionizing transaction speeds. First set of banks to take this step would come out as major market holders in the current scenario.

Blockchain:

The ledger based technology has multitude of applications and the Fintech market is already trying to capitalize on it. Banking can be revolutionized through Blockchain as this would bring speed and ease to the traditional set up. With the help of Blockchain many standing problems like cross border payments can be done at ease and lightning pace. Apart from payments, settlements pertaining to credit card market, which is the backbone of the credit structuring system for modern day banks can be revolutionized.

Part 1: Traditional Banking model turning obsolete, can Bitcoin and Blockchain turn it around?

Posted on October 21, 2016 | by [email protected]

Traditionally commercial and custodian banking have been heavily dependent on monetary policies of the country they are operating in. The main source of income for the existing system is majorly vested in investments and services provided to customers. Implementation of these strategies can be through various channels, but majorly sum up to a common end game: generate revenues. But with the economic landscape shifting drastically, the existing banking system has slowly started to transform into a loss stricken one. Let’s look into what has been plaguing the banking system and how can we avert the impending disaster:

Bank routines for revenues:

As already stated, banks have various channels to earn revenues. Major categories include:

Investments:

Major Banks (both commercial and custodian) acquire money from their customers by operating savings account. As a part of one of the services they offer, they store the money of customers and ensure its safety. Idle money over a period of time leads to devaluation as it means loss of investment opportunities. Hence banks go for viable investments for reaping profits out of the stored money. These investments are dependent on a multiple conditions and at times might not result in profits in a receeding economy.

Services:

Banks offer a host of services to customers for which they levy a service charge that would generate revenue. Few of these services include storing money, transfer of money to other stake holders, fixed deposits and storage boxes. For the stored money, banks are able to provide fixed amount of interest in exchange for the right to invest the money in a better way. For transfer and handling of money, they levy service fee and transaction fee that would generate revenue. Fixed deposits and storage boxes also generate revenue in a manner similar to savings accounts. Hence this range of services provides significant revenue for commercial banks.

Monetary policies hampering this model:

The economic dynamics of the world has slowly been shifting towards a detrimental equilibrium that enforces negative monetary policies. Owing to heavy recession and other obstacles, central banks are enforcing negative interest rates that are further hampering the economy of the country. While the negative interest rates would deprive the banks of the investments they earn, it would also halt the commercial banking services.

Even in the long run, these policies would cripple the economy. Irrespective of the time frame, the banking system would take an irreparable hit that would lead to economic downfall.

In the next segment, we see how banks try to combat these adverse conditions and how can disruptive technologies help to reinforce/transform the existing sytem.

Fiat currencies and Banking technology slowly leading to centralization: Is Bitcoin the savior?

Posted on September 29, 2016 | by [email protected]

Paper currency is a recent man-made or rather bank made concept to facilitate exchange of goods and services. Historically mankind has opted for outright bartering, gold, coins, beads, feathers and finally paper currency for goods and services. Currently, new means of exchange based on technological solutions are slowly replacing fiat currencies. While this might seem positive on the outset, it may lead to a centralized future with central banks in authority. Let’s dive deep into this to see how this is a misleading notion:

How cash is devalued:

When the economy is facing inflation, Government brings in more money into circulation. This leads to devaluation of the currency but control over the levels of inflation. This process of bringing more money into circulation is ‘Quantitative easing’. The opposite process where the central banks offer high interest rates for storing money is ‘Quantitative Tightening’. This tactic increases the value and purchasing power of money for a healthy economy. Alternating these tactics, the central banks try to keep a check on inflation levels.

However most of the times, imbalances of these strategies end up hampering the value of the currency and economy. During high levels of inflation, when the state has generated the maximum amount of money, it might not be adequate. While the currency is anyways devalued, the central banks cannot offer interest for money stored with them and hence interest rates go negative. That means public has to pay for keeping their money with the bank which is highly undesirable. This is the current state of affairs with most of the European Union central banks.

Technology is a solution?

At this point, it might appeal that a technological solution to replace paper currency might be an apt solution. But the paper currency we use for various transactions is a drop in the ocean compared to other channels. Over 90% of all economic transfers done are digital and not in common “cash” currency. Generally wire transfer, debit cards, credit cards, Paypal are used for vast majority of your bill payment and daily purchases.

The problem owing to technology and various mediums of transfers, we are paving way for centralization. By totally relying on technology we are bidding good bye to our privacy. Our card issuing banks have complete access to our personal deals, purchase patterns, history of personal finance. These details can be made available for third parties for marketing and promotions. Banks/the government get complete control over privacy, accounts and access. Everything becomes centralized onto banking/government servers. Tie this together with government monitoring of emails, phone calls, social media and it becomes a web of centralized control. This is undesirable and this motions us for a decentralized solution.

How Bitcoin Fits:

While we are looking at technological solutions to overcome the nightmares of banking strategies, it has to be decentralized. Right from its inception that has been the selling point for Bitcoin. A digital currency that can be transferred over a decentralized network without the presence of a third party. Hence considering how the central banks are slowly edging towards a centralized future for banking, Bitcoin might be our solution to achieve total financial freedom and anonymity.