A lot of people think that if Bitcoin is adopted it means anarchy. I don’t think that is correct. I was reading “Is Bitcoin The World’s Next Major Currency?” in Chicago Booth’s Capital Ideas magazine. Sorry, no link to the article.
Booth asked economists Randy Krozner and Tyler Cowen about Bitcoin. Krozner was formally with the Federal Reserve. Cowen is at George Mason.
Currently, the price of Bitcoin has rallied 21% in four days. I don’t think these kinds of price moves are good for markets, but because of low liquidity they happen. Ironically, the Chinese stock market had a mini flash crash today but the moves aren’t correlated. Bitcoin is a niche market right now, but it has staying power.
Cowan said he thinks Africa is the most fertile ground for Bitcoin. They already transact by phone. He also sees the blockchain as a threat to the American legal system. The blockchain is a network-the legal system is hierarchy. He also doesn’t think Bitcoin replaces fiat currency, and thinks Bitcoin needs a killer app.
Krozner is also looking for a killer app. He looks at Ebay and Paypal, and wonders what that would look like with Bitcoin and blockchain. He correctly cites the legal uncertainty surrounding Bitcoin. Is it a currency? Is it a commodity? The outcome of Bitcoin will revolve around how regulators look at it. Currently the US IRS views Bitcoin as property. That means it’s not subject to the same rules and regulations as foreign currency. It is subject to capital gains taxes. However, world governments don’t have a standardized way to view it. Krozner concludes that without a clear set of legal frameworks in place, the next wave of Bitcoin evolution will be arduous.
What makes it go from niche to movement? I don’t think it needs the legal aspect. I think the legal aspect will always be catching up once a clear use case is deliberately built, or discovered. Bitcoin also isn’t the only cryptocurrency out there. It might be a different cryptocurrency that makes the breakthrough.
Usually with technology, it happens where you least expect it. Innovation isn’t a clear, linear path when looking ahead. It is when you look backward. Africans already have solved their problem with M-Pesa and other currencies. Why would they switch to Bitcoin?
Krozner is onto something. Where is there a place like Ebay looking for a way to transact efficiently? Looking further, what markets could open up if they utilized Bitcoin instead of traditional fiat currency? If we think about Bitcoin’s pluses they are
- Low/no fees
- Guarantee of payment (no bounced checks, no fraud)
- 10 minute transfer of value
Many of the negatives Bitcoin has are solvable over time. Right now, Bitcoin is looking for product/market fit. But, it also needs a stable place to transact and hold assets. Coinbase seemed to be the place, but now there are some concerns.
Certainly, a place like a customized derivative market where there is counter party risk could be a home for Bitcoin. I wonder a lot about commodity markets. Many industries that have been blown up by the internet. In the Industrial Age, they went from dispersed to centralized. In the Information Age, they are decentralizing again.
Here is a quick example. Prior to 1848, farmers would bring their grain to Chicago to be graded. The markets were P2P, as a grain merchant found a buyer for a particular farmers grain. Someone realized that grain was basically all the same-and created a warehouse receipt. That begat a futures market and everyone could hedge their risk. They were assured of grain quality because of a centralized clearinghouse operation. Could Bitcoin/blockchain create a new P2P market that eliminated all the costs of the middlemen?
What about in other countries? What about international supply chains? What about internal cost accounting chains?
I go back to a Milton Friedman video in which he explains how the price system creates the necessary market/production coordination to make a pencil. Bitcoin/blockchain creates a transparent price with no/low fees. What markets are inefficient today, or could be created that need that sort of technology?
I don’t think anarchy is a pre-requisite for Bitcoin. Most of the time, when anarchy prevails, the people that are rioting aren’t powerful enough, or rich enough to worry about currency. Look at the total collapse of socialist countries in Central and South America. Bitcoin hasn’t taken hold in Venezuela, Brazil, or Argentina. But, merchants in those countries really want US dollars.
Even financial distress isn’t a clarion call for Bitcoin. Greece is in horrible shape. Merchants there aren’t switching over to Bitcoin as a substitute for fiat currency.
That being said, I think Bitcoin has a pretty bright future. The ecosystem around it has to be developed. It’s not a hammer in search of a nail yet. It’s early in the technology.