In this post I’ll outline the patterns of disruptive technology, why Bitcoin might fit these patters and what it means for Bitcoin adoption.
- Understand Disruptive Innovation
- Why Bitcoin Underperforms in Mainstream Markets
- The Evolution of Disruptive Technologies
- Bitcoin Adoption: Niche and Emergent Markets + List of Use Cases
- Bitcoin and Internet Parallels
- What’s Next in the Adoption of Bitcoin?
Understand Disruptive Innovation
There is a clear similarity between the patterns in Bitcoin adoption and that adoption of disruptive technologies in general. They behave similarly and spark the same responses in people. These patterns of disruptive technology is visible in Bitcoin and the reactions from mainstream influencers.
Disruptive technologies like Bitcoin initially underperforms in mainstream markets, but offers new features valued by niche/emergent markets.
Mainstream firms and thought leaders (hi Paul Krugman and Nouriel Roubini) typically dismiss disruptive technologies such as Bitcoin and the internet. It doesn’t serve their interests, customers or school of thought.
Is it possible that these professors and incumbents got it wrong? This post seeks to explore how Bitcoin fits the characteristics of disruptive technology and what it means for Bitcoin adoption.
Bitcoin Underperforms in Mainstream Markets
Attacks on Bitcoin from mainstream thought leaders such as Nobel winner Paul Krugman, always evolve around mainstream market underperformance.
Bitcoin critique:
- Critique by mainstream leaders exists around the fact that Bitcoin can’t compete in mainstream markets (harder to use than Visa, more costly etc).
- Bitcoin performs better than nation-state fiat currencies on other criteria important to “niche” or emergent markets. These criteria are transparency (money supply, code), ease of exchange and censorship resistance. Niche /emergent markets find the characteristics of BTC valuable. Examples are wealth protection in Venezuela and Remittances.
Bitcoin currently underperforms on most parameters important to mainstream consumers.
Why don’t mainstream consumers use Bitcoin?
Low Volatility
Low volatility is one. This is a big hindrance to mainstream Bitcoin adoption. Consumers generally do not want their savings to experience the wild swings of Bitcoin. As can be seen below, Bitcoin 60-day volatility of 15.25%, even though it’s down trending, is still way higher than USD EUR volatility of 0.6%. Bitcoin as money or currency is not performing on the mainstream parameter of low volatility.
Bitcoin Transaction Fees
There’s a limit to the number of transactions the Bitcoin network can process (on-chain). When the network is overloaded with transactions, the fees soar. In 2017 and early 2018 we saw the fees rise from sub $1 to $55 and back to the sub $1 level. These kind of swings is not suitable for mainstream transactions. You don’t want to pay a $55 fee to spend from your wallet.
Bitcoin as a disruptive technology, is still in its infancy. Looking at Christensen’s theory of disruption technology, Bitcoin should be hard and inconvenient (in its current form) to use, for mainstream consumers. It’s simply the nature of disruptive technology in its infancy.
The following illustrates the failure to recognize the nature of disruptive technologies, by calling out shortcomings on mainstream parameters. Here is the Nobel award-winning economist Paul Krugman on Bitcoin’s shortcomings:
Krugman’s argument is that no one needs Bitcoin, besides drug dealers and assassins. That people should use existing trusted infrastructure and that Bitcoin transactions are “clunky and much less useful”. The last part is partly true. Incumbent technology is still easier to use for mainstream consumers.
By dismissing Cryptocurrencies this way, Krugman ignores the nature and evolution of disruptive technologies.
The Evolution of Disruptive Technologies
1. Technological progress overshoots the demand of consumers. Disruptive technologies evolves technically over time, to become competitive in mainstream markets.
Entrepreneurs and developers are working to scale Bitcoin through developments as the Lightning Network (eliminate “costly”) and improve its user experience through wallet services as Xapo, Abra, Trezor and Ledger (eliminate “clunky”) to the point where Bitcoin (and Bitcoin based products) could become directly competitive in mainstream markets.
2. Disruptive technologies solves problems in niche/emergent markets first. Mainstream markets second.
Bitcoin already solves legitimate problems outside the mainstream financial markets. Bitcoin adoption happens in Venezuela, Argentina and places in need of its current value proposition.
Current Bitcoin Adoption: Niche & Emergent Markets
Bitcoin performs on new criteria as transparency (monetary policy, open-source code), permissionless/ open innovation, immutability and censorship resistance. The core value proposition of Bitcoin sums up to trust minimization.
As mentioned above, this is not something the mainstream consumer cares much about. People in general, trust their government, banks and other central organizations.
There is, however, a large part of the world population who aren’t as fortunate as most westerners.
List: Bitcoin Adoption and Use Cases
- Venezuela: Hedge against inflation and authoritarianism
- Afghanistan: Empowering afghan women
- Wikileaks: Activist Groups and Government Clampdown
- Sovereign Individuals
- Influencer Censorship
You’ll see that the use cases below have a common theme of self-sovereignty and that Bitcoin helps people not served by mainstram institutions
1. Venezuela: Inflation and Authoritarianism
Bitcoin helps people preserve wealth in countries with inflation and out-of-control government. According to the IMF, inflation in Venezuela hit 652% in 2017, with projections around 2350% for 2018 (update: inflation hit 2.69 million percent in early 19′).
Here are three tweets from Venezuelan bitcoiner Eduardo Gómez, illustrating the use of Bitcoin in Venezuela:
Trade on Bitcoin exchange LocalBitcoins, confirms the apparent Venezuelan interest. LocalBitcoins, saw trading VEF volume soar in late 2017 to early 2018.
“Bitcoin performs better than national currencies on new criteria such as: transparency, exchangeability and independence/censorship resistance. These characteristics are not important to the mainstream consumer, but they’re crucial to several niche markets.
One niche market is wealth protection in developing countries with huge inflation, like Venezuela. The people of Venezuela lost 60% of their purchasing power in one month. To Venezuelans, the volatility of bitcoin is probably not as big of a problem as the lost trust in the government and central bank. If Bitcoin can help them protect their savings, this is a real “early stage” use case.”
From Disruptive Innovation, Bitcoin and Venezuela
Here is Carlos, another Venezuelan bitcoiner.
“Borderless money” is more than a buzzword for those of us who live in a collapsing economy and a collapsing dictatorship.”
In this New York Times article Carlos Hernándes tells his story of surviving the collapse of Venezuela, using Bitcoin. Venezuelans gets paid in Bitcoin working online and uses it to avoid confiscation and hyperinflation.
“I don’t own bolívars, Venezuela’s official currency. I keep all of my money in Bitcoin. Keeping it in bolívars would be financial suicide.”
Carlos
2. Afghanistan: Empowering Afghan Women
In her work at Digital Citizen Fund and Code to Inspire Fereshteh Forough has been using Bitcoin to help other Afghan women achieve financial sovereignty.
Forough uses Bitcoin to pay the salary of Afghan girls for their work:
The majority of users were girls who were too young to have a bank account, or they were unbanked, so to make the payment process faster and more reliable, with lower fees per transaction, we switched to paying our users in Bitcoin.”
Forough on the potential of Bitcoin to provide Afghan women autonomy and independence:
What social media did for communication, cryptocurrency promises to do for women’s autonomy.” “Most importantly, it affords those marginalized by the brick-and-mortar finance system a chance to participate in the economy on their own terms.”
From the Bitcoin Magazine article “Code to Inspire: Bitcoin Gives Afghan Women Financial Freedom”.
3. Wikileaks: Activist Groups and Government Clampdown
In 2010 a banking blockade was initiated against Wikileaks, following the release of US diplomatic cables the same year. The banking blockade by Visa, MasterCard, Paypal, BOA and Western Union cut revenue by 95%. In June 2011 Wikileaks opened up Bitcoin donations and made a “strategic investment” in Bitcoin which according to Julian Assange helped Wikileaks “through the extralegal us banking blockade”.
The Wikileaks case is a clear example of how activist groups can use the property of censorship resistance in Bitcoin, to ensure revenue and continued operation in the face of political initiated clampdown.
4. Sovereign Individuals
While Bitcoin is not a necessity to get by in the western world, it’s been embraced and pushed forward by sovereign individuals. These people value censorship resistance, permissionless participation and the trust minimizing properties of the technology.
They understand the value of minimizing trust in 3rd parties as central banks, governments and centralized data silos. They think that the central planner strategies of massive money printing and mass surveillance aren’t sustainable and they seek for a way out.
They understand the power of permissionless innovation. Innovation with minimum friction. Innovation that provides unconditional ownership of assets and data. These are the sovereign individuals of the west. They want to escape the “Digital Berlin Wall” of mass surveillance and loss of sovereignty.
The map below shows worldwide Bitcoin nodes. It’s clear that nodes are concentrated in western countries, and not those of “emergent” markets/economies. Appetite for self sovereignty in Europe and the US seems large.
5. Influencer Censorship
Social media and financial censorship is on the rise. People like Jordan Peterson are leaving the membership platform Patreon, to start a censorship resistant alternative.
Historic Parallels: Bitcoin and the Internet
History never repeats itself, but it rhymes
Mark Twain
Will the evolution of Bitcoin rhyme with that of the Internet?
Here’s a couple of examples illustrating how people dismissed the internet, by evaluating it on mainstream parameters, early in the life cycle.
A Wasteland of Unfiltered Data Useless Cryptocurrencies
“Visionaries see a future of telecommuting workers, interactive libraries and multimedia classrooms. They speak of electronic town meetings and virtual communities. Commerce and business will shift from offices and malls to networks and modems. And the freedom of digital networks will make government more democratic. Baloney. Do our computer pundits lack all common sense? The truth is no online database will replace your daily newspaper, no CD-ROM can take the place of a competent teacher and no computer network will change the way government works.”
“What the Internet hucksters won’t tell you is that the Internet is one big ocean of unedited data, without any pretense of completeness. Lacking editors, reviewers or critics, the Internet has become a wasteland of unfiltered data.”
Newsweek, 1995: WHY THE WEB WON’T BE NIRVANA.
Bill Gates Explaining the Internet in 1995
Here’s another brilliant illustration how hard it is to grasp disruptive innovation. Bill Gates explaining the internet to David Letterman in 1995.
What’s Next in the Adoption of Bitcoin?
Who used the internet in early days (It might be obvious by now)? Not mainstream consumers, but techies and other groups who valued the new “clunky” features and permissionless innovation on the internet. Today we know how the internet evolved into being mainstream performance competitive in a number of industries. From news to movies and music.
Disruptive technology such as the internet and Bitcoin, tends to become mainstream when user-friendliness and performance catches up to that of incumbent technologies and products. It does this as technological progress overshoots the demand of consumers.
At this point, Bitcoin and Bitcoin based products could be performance competitive and technological superior to mainstream financial technologies and products.
In the case of Bitcoin vs. finance and central bank incumbents, this means user friendliness, performance and a technological superior foundation of decentralization, permissionless/ open innovation, censorship resistance and immutability.
We’ve seen the user experience of Bitcoin applications improve dramatically over the past five years. We have gone from having over 90% of trade on Mt. Gox in 2013, to having volume distributed across a number of professional exchanges. We have swapped the tedious process of producing secure paperwallet, with hardware wallets and professional custodians. We will se this trend of improving UX continue in the years to come.
More on Bitcoin Adoption and Use Cases
- Go to Adoption Category
(First published March 27, 2018)
UPDATE: VIDEO on Bitcoin and Human Rights
Bitcoin is a tool to free people from tyrannic government, dressed up as a get rich quick scheme
Naval Ravikant
Here’s a brilliant video covering recent bitcoin use cases from a human rights perspective. Think about it from the perspective of Disruptive Innovation. Bitcoin evolves along the patterns of Disruptive Innovation perfectly.