Bitcoin and Patterns of Disruptive Technology
Discover the patterns of disruptive technology in Bitcoin
Clayton Christensen’s theory can be used to understand how a disruptive technology like Bitcoin evolves and what it means for you.
Disruptive technologies like Bitcoin initially underperforms in mainstream markets, but offers new features valued by niche/emergent markets. Mainstream firms and thought leaders typically dismiss the disruptive technology, as it doesn’t serve the interest of their customers. It doesn’t solve mainstream problems.
What the incumbents often fail to realize is that technological progress overshoot the level of performance mainstream consumers demand. Thus, disruptive technologies underperforming in mainstream markets today, may be directly competitive in mainstream markets tomorrow.
If you know about Bitcoin, some of this probably sounds familiar to you. There seems to be certain patterns in the lifespan of disruptive technologies. They behave similarly and spark the same responses in people. These patterns are, as you will see below, clearly visible in the adoption of Bitcoin and the reactions from mainstream influencers.
In January 2016 I wrote a blog post wherein I discussed how Bitcoin fits the definition of Disruptive Technology perfectly. This post seeks to explore further how Bitcoin fits the characteristics of disruptive technology, but first an excerpt of the 2016 post.
Bitcoin and Central Bank Disruption
“Bitcoin brings to the world global decentralized money. Mainstream media and conventional thinkers dismiss Bitcoin because it’s “not being backed by a government” and as “way too volatile to be a store of value” (one of the three core properties of money). Bitcoin, like any other disruptive technology early in its life-cycle, can’t serve mainstream customer demands. Bitcoin can’t compete on the same criteria as national currencies (yet).
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. Remittances is another niche use case. Remittance is hugely expensive, and Bitcoin might be able to shave of some of the cost of sending money abroad due to its global nature.
Imagine the creative destruction if Bitcoin evolves into meeting mainstream customers’ demands of stability in price and trust.”
To sum up, the main points of the post were:
- Critique by mainstream thinkers exists around the fact that Bitcoin can’t compete in mainstream markets.
- 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 Underperforms in Mainstream Markets
Bitcoin underperforms on most of the parameters valued by mainstream consumers. Here is a couple of examples.
What is the performance parameters of currencies used by mainstream consumers? Low volatility is one. Mainstream 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 its 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.
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. Thus, looking at Christensen’s theory of disruption and the history of disruptive technologies, Bitcoin should be hard and inconvenient to use for mainstream consumers. It’s simply the nature of disruptive technologies in its infancy. The following will illustrate 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 the use of Bitcoin:
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 discrediting Cryptocurrencies this way, Krugman ignores the nature of disruptive technologies:
1. Technological progress overshoots the demand of consumers. Disruptive technologies evolves 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.
Bitcoin already solves legitimate problems outside the mainstream financial markets. See the list below.
Bitcoin Solves Problems in Niche/Emergent Markets
Bitcoin performs on new criteria such 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 apparently, is not something the mainstream consumer cares much about. People in general, have trust in the government, banks and other central infrastructure.
Who cares about “trust minimization”?
People and organization in environments/situations where critical institutions and systems have shown not to be trustworthy. You’ll notice that most of these use cases have them common theme of self-sovereignty.
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.
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.
2. Afghanistan: Empowering Afghan Women
Forough use 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 3rdparties 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.
A Wasteland of Unfiltered Data Useless Cryptocurrencies
Here’s a quote from a 1995 Newsweek article illustrating how to get it wrong by evaluating disruptive technologies on mainstream parameters.
“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.
Visions largely realized today, 23 years later, were denounced with arguments of current mainstream incapability. Unedited data, lack of editors etc. Who used the internet in early days? Not mainstream consumers. Probably techies and other who valued the new “clunky” features of the internet. Today we know how the internet evolved into being mainstream performance competitive in a number of industries.
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 tends to do this eventually 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 see this trend of improving UX continue in the years to come.