The Federal Reserve is closely watching the development of Bitcoin, and researchers say it has significant friction

Researchers from the Federal Reserve Bank of New York published a research report on Bitcoin. In this report, titled "Is Bitcoin Really Frictionless?", the authors believe that there are large price differences between Bitcoin exchanges, and therefore conclude that Bitcoin, a digital currency, is not truly frictionless.

Fed study highlights 'unnatural phenomena'

The latest Federal Reserve research paper points out that Bitcoin, the world's most popular cryptocurrency, can eliminate some of the friction in the settlement process. According to the authors, although these digital currencies are traded on exchanges, they still encounter "significant friction", but this trading environment has removed the need for certain intermediaries.

“The research shows that there are still significant frictions in trading Bitcoin on exchanges, which leads to persistent price differences between Bitcoin exchanges. These trading frictions reduce the incentive for market participants to use Bitcoin as a payment option.”

The research blog post notes that wallet-to-wallet transactions are relatively free in terms of friction resolution. However, when the currency enters the exchange ecosystem, it suffers from “significant exchange rate volatility.”

In the researchers' view, this is problematic, which is why many large companies that accept Bitcoin will immediately convert the Bitcoin they receive into fiat currency. The authors mentioned Dell, Microsoft, and Expedia as examples, because these companies all hand over the Bitcoin they receive to a third party for processing, which also leads to more fees and counterparty risks.

The report also describes the risks of Bitcoin, such as the bankruptcy of Mt. Gox, which caused serious losses, and mentions the price difference between the three major exchanges Bitfinex, Bitstamp and BTC-e.

“Any price differentials between major Bitcoin exchanges should be rapidly eliminated by arbitrageurs (known as arbitrageurs), thus forcing the price of Bitcoin to be close across exchanges,” the authors explain.

However, the price records of the coins on these three major exchanges are actually not the case. The chart below shows the huge price difference between the three major exchanges.

While the report notes that price deviations between exchanges are interesting, it may not be attractive to the traditional banking system. In the author’s opinion, most users need to convert Bitcoin into fiat currency to avoid greater friction, making it unsuitable as a unit of account.

The New York Fed's research shows that the institution is studying the development of Bitcoin, but it believes that the current arbitrage of Bitcoin is an unnatural phenomenon. However, Bitcoin users can also interpret it as a positive signal, because one of the world's largest currency issuers is paying close attention to virtual currencies, which is a sign of progress.

Original article: https://news.bitcoin.com/federal-reserve-says-bitcoin-significant-friction/
Author: jamieredman
Translator: Overnight porridge
Source (translation): Babbitt Information (http://www.8btc.com/federal-reserve-says-bitcoin)