– October 3, 2019
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Bitcoin’s technical “superiority” in no way assures its success 

The market doesn’t really care about pure technology, at least not in the context some bitcoin proponents and maximalists may believe. 

As the price of bitcoin continues to drift lower and seems unable to sustain a breakthrough of the $10,000 resistance level, a new refrain seems to be catching on in the bitcoin maximalist and the HODL community. Since bitcoin is technologically superior to current fiat systems, not beholden to the whims of politicians and central bankers, provides privacy to users, and provides a secure record of transactions, it is inevitable that bitcoin will sweep aside the current financial system and claim its rightful role leading the global financial system. 

Reality, however, is more complicated than that neat and simple narrative. 

The problem is that technological “superiority,” the definition of which is ambiguous under the best of circumstances, has a poor track record of predicting the success or failure of a product. Even more importantly, and something that technology-obsessed market actors should remember, is that cryptocurrencies are not the first time a superior product was introduced with great fanfare, only to stumble upon further review. 

Context also matters when examining the supposed technological superiority and inevitability of bitcoin dominance; the world has dramatically changed since 2009. In the early to mid-2000s the payments market was, by all accounts, a mess. Credit card and identity theft were causing billions in losses, counterparty risk between financial institutions had just been thrust to the forefront by the ripple effects of the financial crisis, and even accepting credit card payments was so costly that it excluded many small and medium-size merchants from participating. 

Slowly but surely the marketplace began addressing and solving these issues, without bitcoin. In 2007 Apple launched the iPhone, completely revolutionizing the mobile business landscape, and assisting in the development of the peer-to-peer payment industry. Venmo, PayPal, and Zelle — a creation of the very financial institutions bitcoin will purportedly disrupt — provide low cost, near instantaneous, and easy to use platforms for consumers to pay for goods and services on a peer-to-peer basis. Square, cheap and accessible enough to be used by even the smallest of merchants, also debuted in 2009, and provides an option to accept payments on the go without the complexity of cryptocurrency. 

Objectively speaking, and spurred on by the introduction of bitcoin as a competitor, the marketplace has addressed virtually every use case bitcoin was developed to address. Counterparty risk, cost associated with credit card payments, time delays in the settling of transactions, and the lack of peer-to-peer platforms are all being addressed by the marketplace, and none are dependent on cryptocurrency to function.

Resting on supposed technological superiority is never an acceptable business strategy, but bitcoin is not the first instance of this occurring. 

Not a new phenomena 

One need only look back through the last several decades to see a marketplace littered with examples of products, touted by proponents as technically superior to existing options, that flopped when confronted with the reality of market forces. 

Iconic stumbles of technically superior or innovative products failing include Betamax losing to VHS, Google Glass flopping completely, Segways never catching on to any substantial extent, the fact that iOS still lags far behind Windows and Android in terms of global usage, TiVo losing its core product – recording TV – to the TV networks, and the fact that 80% of college-aged Americans still do not understand what the functionality of QR codes, a supercharged and technically superior version of the ubiquitous barcode, actually is. 

Or consider the history of word processing. In the early days, software was clean and functional, took up very little space, and did just what was necessary. Then the battle began: WordStar vs WordPerfect vs Word vs many others. The loser in the space seemed obvious. Word was bloatware. It was slow. It was packed with functionality that people didn’t really need. Any technician at the time could tell you that Micrsosoft’s product would fail. 

There was one thing all the experts overlooked: consumer choice. It turns out that users like Word better. Eventually – slowly but eventually –it wiped out its competitors. Then came Google Docs. It was terrible by comparison. Everyone knew that it stood no chance. But Google anticipated something that Microsoft missed: the need for cloud-based solutions that solve the problem of version control and allow multiple users. By the time Microsoft caught up, their own solution ended up being worse than Google’s. 

We could tell the same story about operating systems of course. Fifteen years ago, who would have imagined that the browser itself could effectively serve as the whole controlling brain behind the desktop experience, without the use of Windows or iOS? 

Technology is a high growth sector; software eating the world is a phrase repeated so often it has become a cliche. Simply being labeled superior, usually by proponents of the product or service, is no guarantee or success, nor does it ensure the product or service will actually be adopted as initially intended.

Differentiation that matters 

What the market, and by extent the millions of consumers and businesses that comprise the market, actually care about is the functionality and applications of a product or service. Does the product deliver a superior consumer experience? Are consumers aware, or do they care about, the technical differentiation between current options and this new option? Finally, are the increases in price, or learning curve required to use this purportedly superior product worth the time and effort when compared to the benefits the product delivers? 

These are the questions that have been conveniently ignored by some maximalists, but must be answered if bitcoin is to ever achieve anywhere near the levels of adoption many supporters are banking on. While some ignore these questions, others, including the creators of other blockchain and cryptoasset products, seem to be directly tackling them to create products and services that are lower in cost, simpler to understand, and easier to use. 

Those factors, and not some theoretical construct of superiority, are what drive the success of any product or service. 

Based on current market evidence, bitcoin is not effectively addressing these requirements. It would be imprudent, and wholly unjustified based on any precedent, to assume that the first mainstream application (bitcoin) of a new technology platform (blockchain) is destined to be its most successful. It is too early to say what, if any, blockchain application will be adopted for day-to-day transactions.

The greatest contribution that bitcoin may be that it spurred incumbent actors to improve and an entire new industry to develop, not that it swept away the entire monetary and financial system as we know it. 

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Sean Stein Smith

Sean Stein Smith is a Visiting Research Fellow at the American Institute for Economic Research, focusing on blockchain, cryptoassets, and the economic impact of these technologies. He is an Assistant Professor at the City University of New York (Lehman College), serves on the Advisory Board of Wall Street Blockchain Alliance, where he also chairs the Accounting Working Group, and chairs the Emerging Technology Interest Group of the New Jersey Society of CPAs.  His research has been quoted in dozens of scholarly and practitioner publications, and he is a regular speaker at accounting and technology conferences. Follow him on Twitter.

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