When Will Bitcoin Cross the Chasm?

Many entrepreneurs and investors in the Bitcoin space seem to believe that the path for Bitcoin to achieve mainstream adoption will be similar to that followed by other recent technologies like the Internet, smartphones or social networking. Those businesses followed the kind of adoption curve as outlined in Geoffrey Moores Crossing the Chasm, where diligent entrepreneurs worked to find ways to push new technologies into the mainstream. Bitcoin is also going through its own kind of chasm crossing moment, but I believe there are some unique factors that apply to Bitcoin that havent applied to other technologies that have recently crossed the chasm.

A popular misunderstanding about Bitcoin is that its primarily a payment technology, and that its adoption curve will follow that of other payment technologies. Bitcoin is in fact a new and improved payment technology, but its only an evolutionary improvement over current systems like credit cards and PayPal. As discussed previously, Bitcoin is not so compelling as a payment technology that it makes sense to exchange dollars for bitcoins simply to execute a transaction. Bitcoin wont succeed simply by becoming accepted by a critical mass of merchants because until Bitcoin reaches a stable price, its users will be primarily interested in investing bitcoins rather than spending them.

The thing about Bitcoin that is truly revolutionary is its potential as an indestructible and inflation-resistant way to store value. Improved stores of value are developed much less frequently than improved payment technologies, with precious metals and counterfeit-resistant paper currencies being the only new store of value technologies widely adopted over the past thousand years or so. Because Bitcoin as a store of value is a much more fundamental technology competing with legacy technologies that are far more deeply embedded in the economy, I believe its path to mainstream adoption will be somewhat different than that followed by other high-tech innovations. In particular, entrepreneurs and businesses will most likely not play the central role in driving Bitcoin adoption, while broader macroeconomic developments are likely to be more critical.

As an alternative to national currencies for the store of value function, Bitcoin will ultimately be evaluated based on its ability to retain purchasing power. If Bitcoin can show that it is in fact more resistant to devaluation than the alternatives, it will begin to gain traction relative to national currencies. Bitcoins performance in this regard will be particularly apparent during times of financial crisis. The U.S. economy of the 1970s might be considered to be one example of such a crisis/inflation episode, when the price of gold rose from $36 to $615 over a period of ten years. If a similar episode were to occur in the future, it could serve to drive more users looking to protect the value of their savings into Bitcoin.

Precious metals are another potential Bitcoin competitor in the store of value market. Gold and silver have historically performed better than paper currencies during times of inflation, and Bitcoin offers additional benefits in its ease of storage and transfer. While this portability is a generally desirable property for a store of value and medium of exchange, it becomes of even greater importance during times of financial crisis, as historically, precious metals have been made subject to capital controls (such as in India now), or to confiscation (as happened in the U.S. during the 1930s). Note that national currencies are also often subject to capital controls (such as exist in Argentina and China today), and confiscation (as occurred in Cyprus last year). Bitcoin allows its users much greater control over their assets in these kinds of situations.

Unfortunately, stores of value are only truly tested during times of financial and currency crisis, and it will be during times of crisis that Bitcoin would potentially establish a stable position in the currency market and thus achieve reduced price volatility. Bitcoin will need to achieve this stability before it can be widely used as a payment system because businesses and consumers will need to be at least as comfortable holding bitcoins between transactions as they are national currencies. If businesses and consumers are exchanging bitcoins for national currencies after each transaction, Bitcoin transactions will be too costly and inconvenient to be compelling.

In the end, the path to mainstream, global adoption of Bitcoin as a store of value and a payment system will likely require endurance through at least one major financial crisis. The timing of financial crises is certainly difficult to predict, so it may take anywhere between a few years and a decade or more before a financial crisis appears thats capable of driving Bitcoin into the mainstream. Until a financial and currency crisis emerges, or if such an event never takes place, Bitcoin will remain a technology for early adopters and relatively niche use cases (e.g. under the table payments, hiding assets for legal or tax reasons, purchasing illegal goods, gambling, tipping). In the meantime, there is a great deal that entrepreneurs can do to make sure that Bitcoin succeeds when the opportunity arises, and there are many opportunities in global commerce and financial services that entrepreneurs should be eventually prepared to pursue.

In the meantime, Bitcoin will be primarily an investment vehicle, with ownership of bitcoins being akin to placing a bet that one or more major economies will experience duress at some point, and that Bitcoin will be one of the vehicles employed by those seeking to protect their wealth. With a current trading price of around $575 and with a potential price in the tens of thousands (for each 1% of the market for gold and major national currencies Bitcoin captures, its price would rise by approximately $10,000), the potential return is high. As every national currency with any significant historical record has experienced episodes of inflation and financial crisis in its past, it would seem reasonable to wager that Bitcoin will eventually have an opportunity to prove its mettle.