Unless you’ve been living under a rock for the past twelve years, it’s hard not to have heard of Bitcoin. The cryptocurrency regularly makes headlines, whether it’s record drops after an Elon Musk tweet or interviews with would-be millionaires combing through landfills for tossed laptops containing their forgotten passwords. So, if Bitcoin is so seemingly unstable, why are there over 135 million users? Why has Bitcoin seen a faster adoption rate than virtual banking tools, mobile phones, or the internet?
Are they all foolish prospectors, like the gold diggers of the 1800s searching for the nugget that will turn into a fortune? Or is Bitcoin on a pathway to mainstream adoption that will see our future selves wondering how there was ever a world without it?
How innovations get adopted
There’s no doubt about it; Bitcoin is an innovation. Of course, computational cryptography, and the idea that solutions to computational cryptography problems could be used as a value base, are not new inventions. But it is the application of these ideas to a usable product that moves it from an idea to a technological innovation that can be interacted with and generate impact. Innovation has been around for millennia, but modern innovation does not spread uniformly throughout a population, unlike the concept of fire or the wheel. More complex technologies tend to be adopted by specific sectors of the population first, with other more risk-averse groups waiting to see what happens before they dive in. The ‘Diffusion of Innovation theory’ was first proposed by Everett Rogers in 1962 and outlines five categories of adopters for a new idea or product. We’ve used the adoption of WiFi as an illustration.
Innovators – The first 2.5%. This is the more adventurous sector of the population, with a high-risk tolerance but also with an ambition for the potential high reward through early access to new opportunities.
These were like the inventors of WiFi. They weren’t sure what a wireless network could be used for, but they recognized the step-change in innovation.
Early Adopters – The first 16%. They wait to see the benefits of a new innovation begin to manifest, but they jump in soon after to gain a competitive advantage over their peers.
The first backers of WiFi invested in creating standards and protocols and ensuring their future products would be compatible.
Early Majority – This is the first 50%. This group is looking for a proven solution that can solve a specific problem. They want assurance that if they adopt something, they will get results.
In 1999, Apple adopted WiFi for their iBook laptops. This appealed to the early majority as a complete product that worked to deliver the benefit of a wireless connection.
Late Majority – This is the first 84%. This group only adopts a new innovation to avoid the embarrassment of being left behind.
As WiFi became mainstream and available as standard with most new electronic products, this group adopted it to avoid the embarrassment of asking where to plug in their Ethernet cable.
Laggards – The final 16%. They refuse to adopt a new technology until they are forced to because their old system is now obsolete.
Some still refuse to use WiFi because they don’t trust it or think the radio waves are killing their brain cells. But you’d be hard-pressed to find a cafe that would let you directly connect your laptop to their modem, and these final few are forced to adopt if they want to use the same service offered to others.
Like any other innovation in history, Bitcoin is following this same ‘Diffusion of innovation’ theory. Interestingly, however, it is following not one adoption curve, but two.
The first is based on Bitcoin as an asset. The second is based on Bitcoin as a network.
Bitcoin the asset & Bitcoin the network
Bitcoin is an electronic currency. Like any currency, its intrinsic value can go up or down. The same goes for gold, oil, diamonds, property… anything where the profit is the difference between the price it was bought at and the price it is sold at.
Those adopting Bitcoin as an asset are doing so because they believe that it will ultimately become a global store of value. Bitcoin is a bit different from traditional assets like gold, or fiat money (government-issued currency that is not backed by a physical commodity). Unlike gold or fiat, if used as intended, Bitcoin cannot be forged as the inherent premise is that each ‘coin’ is verified using unbreakable computational cryptography. Bitcoin is also consistently scarce, because of the increasing difficulty in mining additional coins. This is different from gold, where changing supply rates can affect demand and therefore price, or fiat money, which governments can issue more of in response to inflation. Additionally, each Bitcoin is infinitely divisible and entirely portable, potentially making it more accessible to more of the global population.
Bitcoin is also censorship-resistant. This might be considered both good and bad – because there is no third party handling the asset, there is no possibility of external control. The government or a bank cannot freeze your Bitcoin, or even know that you are a Bitcoin millionaire, but the same holds true for individuals with criminal or malicious intent. The most obvious disadvantage of Bitcoin as an asset is the fact that it does not have an established history. As an unregulated commodity, there is always the small chance that this ‘invented’ currency could be deemed entirely worthless tomorrow. Finally, any currency, whether it’s Bitcoin or fiat, is less durable than gold, which is an inert element that will never degrade. All of the gold mined in the world is still around today. Bitcoin is more durable than fiat, which still takes a physical form that can be lost or damaged despite the move to digital banking.
Bitcoin’s innovation is not just as a novel asset type, the Bitcoin network is also a new technology. The origin of Bitcoin was to create a direct, peer-to-peer electronic cash system that did not rely on trust. At the time of its launch in 2009, the world was recovering from the effects of the Global Financial Crisis and many were grappling with the fact that the stalwart institutions of the worldwide economy were not invincible. What if there was a currency and the ability to trade this currency that was not dependent on banks, or other middlemen? This is the concept for Bitcoin. There is no need for a ‘trusted’ facilitator because the system itself can be trusted.
Bitcoin, the network, enables global, permissionless, programmable money for anyone connected to the internet. This is the idea that adopters of Bitcoin the network are engaging in.
The adoption of money
The adoption of Bitcoin has the same evolutionary pathway as the way in which money has historically been adopted. ‘The Bullish Case for Bitcoin’ by Vijay Boyapati outlines this as:
Collectible – Money is initially in demand because it is desirable. Gold, shells, beads and salt were all collected before they became money.
Store of value – Once enough people recognise that money is desirable, it becomes a store of value and can be used for purchasing power. Purchasing power rises as more people use it as a store of value.
Medium of exchange – Purchasing power stabilises as money becomes fully established as a store of value. As there is no longer the potential for money to rise in value drastically, people stop stockpiling it and begin to trade it more freely.
Unit of account – When money becomes used widely enough, goods and services are valued in terms of that money.
As an asset, Bitcoin is estimated to have around a 6% global adoption rate amongst those who have a net worth of at least $10,000. Amongst investors, however, the adoption rate is estimated to be almost 12%, almost into the ‘early majority phase of innovation adoption. The adoption rate as a network is more difficult to estimate, but using the number of Bitcoin owners as a proportion of internet users, this is almost 3%. Just entering the ‘early adopter’ phase.
Innovations of the past were constrained by locale, and were adopted very slowly. They depended on word of mouth or limited and slow communications, meaning that the adoption of money passed through each phase chronologically, step by step. Information about a modern innovation like Bitcoin can reach all early adopters across the globe, meaning that the adoption curve occurs on a global scale. Importantly, those early adopters may be either adopters of Bitcoin the asset or Bitcoin the network, and therefore, the two ideas can grow simultaneously.
Bitcoin is currently in the ‘store of value’ phase, but it doesn’t necessarily mean that it’s purchasing power needs to stabilise before it enters the ‘medium of exchange’ phase. Because so many people are exposed to the notion of Bitcoin as a network, the adoption of this idea may kick-start this third phase before the second phase has met its traditional transition point. The two effects of global access to adopters, and the dual adoption of the innovation as an asset and as a network, may see Bitcoin enter the early majority phase far sooner than expected.
Will Bitcoin become mainstream?
The ability for an innovation to move from the early adopters phase to the early majority phase is not a linear process, however. It is not a straightforward matter of more people just getting on board with the idea. Geoffrey Moore described the transition as a ‘chasm’, proposing in the 1990s that innovations had some kind of hurdle that had to be overcome in order to become mainstream. The chasm exists because of the vast psychological and social differences between the first 15% of adopters, and the next 34%.
Early adopters are visionaries, actively seeking paradigm change, looking for opportunities and willing to take risks. The early majority on the other hand, although open to the benefits of new technology, are looking for incremental solutions to more immediate problems and want to see proven, reliable results from reliable providers. Importantly, the early majority are not influenced at all by the early adopters, whereas the late majority are persuaded to adopt by the embarrassment that they are being left behind. Moore says that the way to cross the chasm is to target a specific market niche, a ‘beachhead’, and focus on achieving dominant leadership in that segment. For that target market, you need to provide a whole product – the technology, integration, services, support, standards and procedures etc. – that ‘just works’. You don’t have to make it work for every type of customer and use case, just for the entry point into the early majority adopters. This was the approach taken by Tesla during its early adopter phase. The company specifically targeted high-end car owners with a concern for the environment, or who wanted to be seen as doing something to combat climate change. It was only once this use case had been proven and adopted, that more affordable Teslas for a wider range of the early majority began to be developed. For Bitcoin, the concept of the network may be more likely than the concept of an asset, to convince early majority adopters. Assets and investments carry risk, and do not present a solution to a problem. An innovative network, on the other hand, may present a solution to those seeking an alternative to existing money systems.
So, what will be the beachhead that enables Bitcoin to cross the chasm?
The first part of answering the question is to know if Bitcoin has a ‘whole’ product available that can ‘just work’. Over the past couple of years, the Lightning Network has been developed, which is a piece of ‘gateway’ software that lies on top of Bitcoin. It allows for ‘payment channels’ to be set up between Bitcoin users, through which instant, very low-cost transactions can be made. The channels can be networked to link up participants. The process is still based on the cryptographic proof and smart contracts of Bitcoin, but allows for easier interaction. The second part of answering the question of Bitcoin’s beachhead, is who is the target, niche market? The Lightning Network allows developers to tailor their network according to the needs of their niche market. Bitcoin does not necessarily need to directly target a market, it can just equip entrepreneurs to do this for them, and the process has already started. Strike is helping people tap into the benefits of Bitcoin for international transactions, converting currencies into Bitcoin and back again instantaneously and with no fees. Within weeks of it’s launch in El Salvador, a country with 24% of its GDP based on remittance sent from friends and family from the US, it became the most popular app. Fold is another company making use of the Lightning Network. This is a credit card rewards system, that instead of awarding ‘points’ that can easily be devalued or even cancelled, awards Bitcoin for spending.
In the creator economy, tools such as Patreon or Substack have enabled fans to support creators directly, avoiding the high commission rates charged by platforms such as YouTube or App Stores. Sphinx.chat is another tool that facilitates direct payment from consumers to content creators, allowing for micropayments to be made that are lower than the smallest currency division, and don’t incur conversion fees. This granular system adds flexibility to the way people receive material, and diversifies and expands the potential revenue streams for producers. The list goes on and on – companies have developed systems for incorporating real money into the gaming experience, for payments to be made for microtasks and for data transmissions to be made. Wherever there is a problem with the existing financial system – high fees that create barriers to transactions, currency exchange costs and the indivisible nature of fiat currency just to name a few – Bitcoin may support a solution.
We might not be wondering how we ever managed without Bitcoin, but there are a million opportunities for us to wonder how we ever managed without a Bitcoin-based service.