Bitcoin appears to be in a strange place right now. The biggest advocates of its future use as a currency are also its owners, and prefer not to spend their holdings because they believe the value will continue to increase. Those who believe Bitcoin is a speculative bubble have a hard time placing bets against the cryptocurrency: shorting Bitcoin is becoming less difficult but still involves working through obscure exchanges. So how might Bitcoin go from a speculative asset to a widely used currency?
The most direct path is what some observers call “hyperbitcoinization,” essentially where a tipping point is hit and citizens of a given country adopt Bitcoin as their currency of choice very quickly. We’ve seen this happen to some extent in places such as Venezuela, where hyperinflation has taken hold. If a similar currency crisis happened in the United States, it seems conceivable that people would quickly try to get their assets into Bitcoin, along with gold and other assets of more stable value (hard assets would have the advantage of more solid mutual expectations of value, while Bitcoin would have the advantage of being more easily spent and received).
Economists generally view adoption of most technology as following an “s-curve,” in which there is a period of gradual increase in use by early adopters, followed by a tipping point and mass adoption, with stragglers gradually adopting at the end. One intriguing question is whether it is possible to hit that tipping point without a crisis as described above. In a 2015 paper, William Luther of AIER’s Sound Money Project identifies network effects and switching costs as major barriers to mass adoption of a cryptocurrency: in other words, even if people believed Bitcoin to be superior to the U.S. dollar, the fact that everyone else used dollars and it was costly to switch would pose major impediments. He concludes that mass adoption of cryptocurrencies is unlikely to take place unless there is “significant monetary instability” (see above) or “government support” (fat chance, at least with Bitcoin).
So is buying and holding Bitcoin nothing more than a bet against the medium- to long-term stability of fiat currencies? More gradual adoption followed by a tipping point that wasn’t brought on by a catastrophe would be difficult. It would require stability in the Bitcoin exchange rate, a consensus method to handle a high volume of transactions, and mass public education about the virtues of money that can’t be inflated by the state. That seems like a tall order, but who would have thought even a few years ago we’d be writing today about mass adoption of a cryptocurrency as a realistic possibility?