Are bitcoin transactions really frictionless compared to traditional currency? Alexander Kroeger, a research analyst at the Federal Reserve Bank of New York’s Research and Startup Group, and Asani Sarkar, an assistant vice president at the bank’s Integrated Policy Analysis Group, analyzed bitcoin transactions and concluded that price differences across bitcoin exchanges and other factors create frictions that can impact market participants’ incentive to use bitcoin as a payment method.
The researchers presented their analysis on the Liberty Street Economics blog of the Federal Reserve Bank of New York.
While bitcoin transfers are relatively frictionless for the user, frictions do occur when bitcoins trade in exchange markets resulting in meaningful and persistent price differences across bitcoin exchanges. Such exchange-related frictions reduce market participants’ incentive to use bitcoin as a payments alternative.
What Bitcoin Proponents Claim
Unlike traditional fiat currencies, there is no central authority governing bitcoin. Instead, bitcoin uses a mutually-agreed-upon set of code comprising the bitcoin protocol.
Proponents such as the Bitcoin Project claim the bitcoin protocol can reduce the time, fees, and