Paths to Wider Adoption

Bitcoin has had trouble expanding outside its circle of early adopters.  How will the digital currency penetrate the mainstream?

Written on: May 8

Venture capital is pouring into bitcoin at record pace, and the media seems to have caught the bitcoin bug, with every major publication having devoted decent space to the topic in 2015. And yet the bitcoin price remains depressed year on year, and other indicators - like new wallet creation and trading volumes - are underperforming expectations. What accounts for this diversion of price and interest? We've identified three aspects.

First, new investors are not entering the space as quickly as expected, likely due to a combination of security apprehension, barriers to entry, volatility and regulatory uncertainty. Second, there has been a slower than hoped for expansion into new markets and demographics. And finally, a lack of utility - is bitcoin actually being used or just hoarded? - has resulted in depressed demand and a slowdown in the growth of bitcoin-accepting merchants and bitcoin ATMs, essential aspects in the roll out of bitcoin infrastructure.

However, we believe that bitcoin is at a tipping point in terms of adoption rate and price. We explain why below.

Lack of New Investment

Bitcoin has suffered from an image problem. Its association with drug marketplaces like Silk Road, as well as a the millions lost in a number of high profile thefts, has no doubt turned off many potential investors. However, governments have begun to see bitcoin as a legitimate innovation in financial technology. In the US, UK and to a lesser extent the EU, there are sustained efforts to formulate an appropriate regulatory framework. A group of well-funded and compliant exchanges have arisen, like Coinbase, which offer users insured fiat and bitcoin accounts, not to mention efficient and user friendly on-ramps. Investors can also simply choose to trade shares of the Bitcoin Investment Trust (BIT), an exchange traded fund that can be purchased just like any other stock, through most online brokers. Regulatory progress and the emergence of reputable, insured brokerages and exchanges should do much to rectify bitcoin's image problem and hopefully encourage adoption on Wall Street and Main Street.

Of course, as unfavorably as many might view US monetary policy, the dollar is relatively stable, the economy relatively strong, and inflation relatively low. In such an environment, bitcoin is likely to remain largely an investment vehicle - if no alternative applications are found and embraced. But what about in other, less stable markets? Can Bitcoin be viewed as an alternative currency?

New Markets

If Satoshi Nakamoto himself were to devise the type of economy most likely to benefit from bitcoin - or more accurately, the people most likely to benefit - he would be hard pressed to top present day Argentina (Maybe Venezuela takes the crown). For those interested in deeper analysis you can start here, but suffice it to say that a cycle of artificially inflated exchange rates, resulting trade imbalances, international borrowing and default has led to towering inflation levels, a devalued currency, and a stagnating economy.

In a futile attempt to stem the rising inflation - approximately 41% in 2014 - the government of Cristina Kirchner has sought to closely regulate foreign exchange. The purchase of dollars has not only been capped since 2011, but the mandated exchange rate offered through banks fluctuates between 30-40% of true value, as set in the underground currency exchange. Foreign credit card payments are converted at the official government rate and take 20 days for settlement, and bank transfers are no less expensive and cumbersome, both incoming and outbound. Paypal has been ordered to stop servicing payments between Argentinians, who were using the service as a currency exchange. These pseudo-autarkic policies have not succeeded in stemming inflation or currency devaluation, but they have been greatly successful in stymying international trade, which has put a further stranglehold on the economy.

A fascinating New York Times feature entitled "How Bitcoin is Disrupting Argentina's Economy" documents a number of ways in which bitcoin is being used to manage the day to day affairs of normal Argentinians. More and more local businesses work with BitPagos, which processes credit card payments in the US, exchange the dollars for bitcoins using Coinbase, and then send them instantaneously to the local business. Not only do businesses thus avoid losing 30-40% the value of foreign payments, they need not wait 20 days to receive their funds. The same solutions are being employed by Argentine companies with international clientele, or international companies with local Argentinian representation. For instance, Bitpay's Argentinian employees are paid in bitcoin, and live outside the mainstream economy. When payments must be made in Peso, bitcoin is exchanged with offline brokers, Argentina's version of Local Bitcoins. According to one bitcoin broker, many normal Argentinians are turning to bitcoin as their gateway to online commerce, as Pesos are not accepted abroad. Basically, bitcoin offers an alternative directly to populations held hostage by incompetent governmental economic policy - and there is very little these governments can do about it.

And while it might sound odd considering bitcoin's volatility, many Argentinians, distrustful of banks and scarred by rampant inflation, simply use bitcoin as a method of storing value. Argentinians are not alone in viewing bitcoin as a useful method of storing capital. Bitcoin experienced its first massive jump in value during the 2013 Cyprus banking crisis when, after squandering their customer's money on foolish, risky investments, Cypriot banks used depositor funds to bail themselves out. With each additional crisis event the allure of bitcoin expands, tempered only by the coin's volatility.

If and when the price becomes more stable, bitcoin should become a much more attractive vehicle for capital storage. A number of events - perhaps the continued decline of the ruble or a Grexit to name two instances - could lead to a large influx of capital into the bitcoin market. Not only would attracting investment from those fleeing the Greek and Russian capital markets be quite a boost to bitcoin prices in and of its own right, the resulting increase in price would rekindle interest elsewhere.

Finding Utility

The introduction of multi-currency fiat wallets on coinbase, while not too exciting at first glance, could revolutionize how businesses and travelers manage international currency exchange, a process that is usually expensive and tedious. A quick check at Bank of America shows a 5 ½ % difference between the USD/EUR offered and the interbank exchange rate. Even if lower rates are sourced, international wire fees are expensive, and it often takes a few days for transfer completion.

Using bitcoin as intermediary offers an instant and cheap alternative for international currency exchange - 0.4% at Coinbase, for instance. The solution allows businesses to leverage bitcoin to transfer large sums instantly at low cost without exposure to additional volatility that comes with holding bitcoin. Travelers can simply open their account at Coinbase, transfer fiat - freely if they are based in the US and use the ACH transfer option - and then convert according to the above. The integration of a debit card would complete the cycle, either allowing the spending of previously converted funds or instantly converting bitcoin to fiat at point of sale or automated cash machine.

Banks themselves seem to be waking up to the blockchain as a low cost alternative for international money transfer and settlement. Digital Asset Holdings, founded by Wall Street veterans Blythe Masters, Donald Wilson and Sunil Hirani, are developing the the above concept for bank use, with fiat transfers being recorded and settled directly on the blockchain, using a colored coin type protocol.

Which brings us to the holy grail of Bitcoin disruption, the remittance market. This is discussed in greater depth elsewhere, but in short utilizing bitcoin to facilitate the transfer of funds from foreign workers to their relatives back home not only can greatly improve their individual financial situation, but can potentially inject a very substantial majority of the $50 billion currently being taken as fees by Western Union and the like into developing economies where the money belongs.

Bitcoin Price (USD): 853.48