Bitcoin: It’s not too late to be early [Part 2]
Bitcoin’s innovation is often compared to that of the Internet, and its first ten years have produced a common mainstream narrative: widespread skepticism in a seldomly used, seemingly complex technology that is prone to “bubbles” and performance difficulties. Sound familiar? The Internet was overlooked — no corporates supported it with any significance until Microsoft stated it would be “hardcore about the Internet” in late-1995. It was also used by very few (just under 1% of the world’s population used the Internet in 1995 and less than 7% in 2000), was difficult to explain, and, despite being slow and expensive, still led to an asset bubble almost $7 trillion in size at the turn of the century.
None of those similarities make Bitcoin more likely to succeed. But they do illustrate two points that should serve as a reminder to the optimists and reason for critics to remain open-minded: it is not too late to be early and the promise of paradigm-shifting innovation is almost always underappreciated in the moment.
User Adoption
Per BitInfoCharts, the total number of addresses holding $1 or more of Bitcoin is now roughly 30 million. There are caveats to that number, highlighted in this series of tweets, which make it likely that the true number of individuals who own Bitcoin may be more than 30 million. Even in the most generous scenario, however, it is unlikely that even 1% of the world’s population (75-80 million people) currently own Bitcoin.
[As a reference point, nearly 60% of the world’s population today — 4.5 billion people — are active Internet users. It is worth noting that Blockchain.com counts approximately 45 million wallet users, though individuals can have multiple Bitcoin addresses, and it has been reported that Coinbase has more than 30 million users, though not all necessarily hold Bitcoin.]
Broad user adoption is clearly still developing. However, there are early signs of product-market fit for Bitcoin, specifically as a store of value for individuals living under oppressive regimes or broken central banking systems. This is best seen in Latin America, a region with several currencies that have seen their value destroyed in recent years because of crippling hyperinflation born out of mismanaged (best case) or malicious (worst case) central banking policies.
Nowhere is this truer than Argentina: over the last ten years, the inflation rate has skyrocketed from ~10% to north of 50% while the Argentine Peso has lost nearly 94% of its value relative to the U.S. Dollar. The worst of it has come over the last two years — with inflation nearly tripling — coinciding with a period in which weekly Bitcoin volume in Argentina through LocalBitcoins has grown by ~6x in peso terms and 2-3x in dollar terms despite a declining Bitcoin spot price and bearish crypto market.
Maybe more importantly, demand for a more stable and censorship-resistant asset such as Bitcoin has created a seller’s market, with Bitcoin trading at a premium to its spot price consistently over the last four years and increasingly so over the last six months.
Venezuela is another country that has struggled with hyperinflation and national currency devaluation, having its credibility dented by the perception of political interference in 2017. The country has since introduced a new regime to stabilize the peso, but trust takes years to build and moments to lose. As such, it is not surprising that Venezuela has seen the greatest amount of activity through LocalBitcoins over the last several years, with weekly Bitcoin volume climbing to more than $5 million and selling at a premium of more than twice that of Bitcoin’s current spot price. In the last year alone, more than $300 million of Bitcoin volume has transacted through LocalBitcoins in Venezuela.
Another possible sign of early adoption of Bitcoin as a store of value: the inverse relationship of Bitcoin activity between Argentina and Colombia. Bitcoin purchased in Argentina, as established above, is acquired by paying a premium — in that market, demand outweighs supply. However, the opposite is true in Colombia: Bitcoin traded through LocalBitcoins has done so at a consistent 5–10% discount over the last two years. Those closest to the region point to this as evidence of an asset storing value in public view — to protect their wealth in dollar terms while facing domestic government scrutiny when exchanging out of the Venezuela Bolivar, Venezuelans are buying Bitcoin in their home country (driving demand up) before crossing the border to sell that Bitcoin in Colombia (driving supply up).
Most recently, the macro case for Bitcoin was on full display across the globe in Iran. Following reports that the U.S. ordered and executed a drone strike on Qasem Soleimani, an Iranian major general and one of the most powerful people in Iran, the price of Bitcoin ticked up noticeably. It was then pushed further up less than a week later when Iran launched a retaliatory missile strike at an American base in Iraq. However, within a day of the retaliatory attack, the geopolitical temperament changed to one of de-escalation and Bitcoin sold off alongside gold. Following the second display of escalation (Iran missile attack) and subsequent de-escalation (Trump’s speech), down to the hour, Bitcoin reacted as one would expect a store of value to, and consistent with gold: as geopolitical tensions and uncertainty rose, Bitcoin’s price moved up; as those pressures waned, that price momentum cooled.
Though traditional store of value adoption is often shown in hodling terms — the amount of Bitcoin held in wallets that has remained unmoved for long time periods — the active protection of value seen in Latin America and flight to Bitcoin (and gold) in Iran is just as significant.
While Bitcoin as a store of value is showing early promise, its use case as a medium of exchange is still in the foundational stages. While there are now more than 100,000 organizations worldwide accepting Bitcoin, the amount of value transacting through merchants is still quite low — somewhere around 1% of all value transacted on the Bitcoin blockchain is from economic activity. There are, however, several startups and projects looking to capitalize on this gap between Bitcoin’s potential as a medium of exchange — as an alternative to cash, which can be counterfeit, and credit cards, which are subject to the possibility of fraudulent charge-backs — and the reluctance of both merchants and individuals to use it as a facilitator for economic activity. Companies like lolli, fold.app, and Moon act as either Bitcoin distribution hubs (through Bitcoin-back merchant relationships) or payment facilitators (improving ease-of-use for those looking to spend Bitcoin online), expanding the range of merchants with which Bitcoin-holding consumers can interact with, without necessarily requiring merchants to accept Bitcoin themselves.
Network Value
While individual adoption remains in its infancy, the network value of Bitcoin has grown to more than $150 billion — a fraction of both the gold (~2% of $8.5 trillion) and fiat (~0.4% of $30 trillion) markets. And the opportunity ahead of Bitcoin is even larger than the oft-cited addressable market for digital gold of $8.5 trillion. Much of the world does not have regulated access to securitized gold. Considering that the world’s five most stable and sought-after currencies — USD, EUR, CHF, GBP, and JPY — represent only 1 billion of the almost 8 billion people in the world, today’s gold market is likely available to no more than 20–25% of the world’s population. Bitcoin improves upon gold’s monetary properties and then expands the market it can reach. If Bitcoin succeeds, at least in the intermediate term, it is far more likely to do so not at the expense of gold’s market cap but as a complement and addition to it. Assuming steady adoption rates, Bitcoin will expand the store of value market by trillions of dollars, if not multiples of its current size.
“Gold has an $8 trillion market cap with zero merchant adoption. So why does the mainstream press think Bitcoin can only have value if it’s used for coffee payments?” — Dan Held, Co-Founder of Interchange
As mentioned above, Bitcoin’s use case as a medium of exchange is even more unproven. If we define success as reaching 50% global penetration, Bitcoin may do that through a single use, as a store of value, considering the dominant market leader in that space itself (gold) has zero merchant adoption. But bitcoin isn’t just exciting because it is a gold replacement. It is exciting because it has the potential to be so much more. It remains to be seen if it can capture significant portions of both sides — as a store of value and a payment option — but if it does, it will have undoubtedly become the defining force of a generation, and carry decades of prominence with it, like the Internet before it.
Disclaimer: views are my own and may not reflect those of SVB Capital.
