Who cares about bitcoin?
I’ll be attending the North America Bitcoin Conference in Miami. Definitely reach out if you will be there too!
Beyond speculation, what are the real use cases for bitcoin and by extension other cryptocurrencies?
The always-entertaining Jamie Dimon, CEO of JP Morgan, made news earlier this summer by criticizing Bitcoin and the hype surrounding the crpyto-currency market as a whole.
While Dimon’s words were harsh and probably a little exaggerated he made a valid point: “Who cares about bitcoin?” In our first presentation for Wolverine Crypto Trading this semester my co-presenter, Briana, and I stressed the same point. Aside from the speculation frenzy, if bitcoin were to go away, the world wouldn’t change for most of us. As compared to our existing payment system in developed countries, bitcoin is slower, more expensive, less scalable, and not very well understood. In reality, cryptocurrencies only have had a tangible impact on those who can’t rely on existing financial institutions. So who are these people?
In reality, cryptocurrencies only have had a tangible impact on those who can’t rely on existing financial institutions.
Bitcoin’s Actual Benefactors
1.Illegal Actors
Let’s start with Jamie’s answer (and the first thought in many of your minds): criminals. It’s true — the notorious Silk Road network (the largest online marketplace for illicit material) was powered entirely by bitcoin. For many years criminals thought they were invincible with crypto-currencies. Then, in 2013, Silk Road was shut down. In the years that followed law enforcement agencies nabbed many crypto-criminals. The world realized that “the paradox of cryptocurrency is that its associated data create a forensic trail that can suddenly make your entire financial history public information.” Since then the fraction of estimated illegal transactions has dropped.
After 2013, the Dimons of the world speculated that bitcoin was useless. “After all, bitcoin was for criminals, the narrative went, and now that the greatest criminal use for bitcoins was gone, what was bitcoin good for?” While there are probably still criminals who use the currency, it’s suffice to say that the value can’t just be propped up by them.
2. The Unbanked
The second category of folks are those who don’t have access to financial institutions. “The Age of Crypto Currency” — a deep dive into cryptocurrency by two WSJ journalists Paul Vigna and Michael J. Casey— has a chapter called the “Unbanked.” Vigna and Casey give a plethora of examples for these people, which I break down into two categories: a) underserved markets and b) discriminated minorities.
a) Underserved markets: The book cites the fact that 2.5 billion adults across the world don’t have access to a bank. Banks don’t operate in their communities because of a combination of three factors: i) a lack of infrastructure and security in some remote regions, ii) lack of legal and government institutions supporting banks and/or iii) a lack of a monetary incentive for serving poor customers. So if you live in these “unbankable” regions, there is no convenient mechanism transferring or storing money. The authors use the example of Mali. Many foreign workers who need to send remittances home to Mali must use a wildly unreliable network of human carriers to transfer money across the continent. Sounds medieval right? But this is the reality for millions of people across Africa. “Sometimes the money arrived. Sometimes it didn’t.” Those are the words of Fatima, a Malian villager who relies on her husband’s remittances to feed her family.
“Sometimes the money arrived. Sometimes it didn’t.”
However, many residents in Mali do carry cheap $5 feature phones. A startup called 37Coins took advantage of this fact to connect Malians to payments. Their service allows any one with a feature phone to send money through SMS by using the bitcoin network. This allows millions of people like Fatima to receive cash for basic needs.
While 37Coins has shuttered since the book was written, many other startups including BigPagos, Voltabit and BitPesa have continued the same business model.
b) Discriminated minorities: In other countries where banks do operate, social norms prevent women from opening their own bank account. Vigna and Casey tell the story of Parisa Ahmadi a teen blogger in Afghanstian. Afghani women are forced to transfer their earnings to their husband’s or father’s bank accounts; essentially forfeiting control of their earnings to their male counterparts. Ahmadi got connected to a startup called BitLanders (formerly known as Film Annex). BitLanders incentivizes citizen bloggers to express their views online by paying them in, you guessed it, bitcoin! This allows Ahmadi to circumvent social challenges, and receive money directly in her own mobile wallet!
3. Imperfect financial institutions
Bitcoin was born in the aftermath of the 2008 recession, a time when the financial system collapsed. So it’s original motivation wasn’t to serve illegal actors, or even the unbanked — it was to provide an alternative for those who found their existing financial systems to be unreliable, inefficient or restrictive. While the world financial system has largely recovered, there are still millions of people who fall in this category:
a) unreliable: Existing financial systems are unreliable anytime customers don’t trust the value of their currency or can’t rely on banks to store their currency. These situations include a currency crisis , hyperinflation or bank failures. There are historic examples — Weimar Republic 1920’s and the US 1929 — but many recent ones as well — Zimbabwe 1990s, Mexico 1994, Thailand 1997, and Argentina for the past 30 years (in the words of my international finance professor — “if you want any example of bad financial policy look at Argentina”), and of course the US in 2008.
If one day you wake up and dollar is certainly worthless or your bank tells you that can’t withdraw any money what would you do? This is when you wished you had a currency that is independent of all domestic policy and financial concerns and a bank that will never fail: enter crypto and mobile wallets.
b) inefficient: In other countries where financial systems are effective, they are very expensive, especially for cross-border payments. In the US and most of Europe we pay a nominal fee for sending money internationally. This is why Bitcoin’s fees seem high (Ripple is another coin that is better suited for this purpose). Yet in the Caribbean, foreign exchange fees are 8–9%! The book uses the anecdote of an entrepreneur in Barbados named Gabriel Abed. Mr. Abed states that most of his colleagues can’t imagine expanding their businesses abroad because the high transaction fees make their products too expensive for most consumers. So Abed created Bitt, a bitcoin exchange for merchants that allows them to convert easily between bitcoin and fiat currencies. His value proposition is simple “What if I can give you a payment option that is only 1%.” Thanks to Bitcoin, Abed and other Caribbean merchants can finally grow their businesses unfettered of any financial constraints.
The Caribbean isn’t an isolated example either. Payment transfer services like WesternUnion often charge exorbitant fees to transfer money to developing and underdeveloped countries. Bitcoin offers customers a chance to cut this expensive middleman.
c) restrictive: Finally, there are situations where financial systems are strong and effective, but they are restrictive. The prime example for this is China. In order to maintain a synthetic exchange rate, the country caps the amount that citizens can purchase in foreign currency. This is a burden to citizens who want to buy property abroad in London or send their kids to study at an American university (Go Blue!). So Chinese citizens seek a way to circumvent banks and conduct transactions of the books. Once again, bitcoin answers the call. (Technically these transactions are not legal in China, and the transactors could be considered illegal actors. However I believe there is a distinction between them and buyers on the Silk Road; what they are buying/selling is not illegal, it’s just the how that is illegal in one country).
Caveats
The goal of this article has been to reveal the various use cases of Bitcoin (and by extension other cryptocurrencies). So far, hopefully I’ve convinced you that there is an inherent utility beyond just speculation. However, I would be remiss if I didn’t talk about some of the challenges to bitcoin’s adoption:
- Level of understanding: many in the developing world are generally hesitant to place their money in Bitcoin because most don’t understand what it is. Can you blame them — most of us can’t understand Satoshi’s paper either. To increase adoption Bitcoin-entrepreneurs will need to educate their customers.
- Conversion to local currency / goods: Another hurdle to adoption for most customers is that in most places merchants don’t accept Bitcoin to buy and goods or services. This means that online exchanges must provide a way to i) convert to fiat currencies or ii) trade goods for bitcoin themselves. BitLanders, which I referred to earlier in the article solves this problem by allowing users to trade bitcoin for gift cards.
- Price stability: Bitcoin has a good use case in countries with currency crises if we assume that Bitcoin itself has a stable price. Yet the past months have revealed that the price is anything but that. If customers fear a Bitcoin bubble they won’t want to invest their life savings in the currency.
- Impending government regulation: Circling back to Jamie Dimon’s comments, if the regulators decide to restrict or heavily tax bitcoin, it will remove the incentive for people to use it. In this case, all bitcoin enthusiasts can do is to cross their fingers and hope that Uncle Sam plays nice.
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Takeaway
So what’s the takeaway here? Did I just waste 8 minutes of your life by telling you about applications and then rebuffing them? Here’s my point: More people than you think (in fact a majority of the word’s population) fall in one of the 3 buckets I provided above; aka they can actually benefit from using bitcoin. However, the technology must overcome some serious hurdles for it to be practical for these people to use it.
I for one am hoping that bitcoin (or some other coin) does cross these hurdles. Mr. Dimon may not be.
