If widespread use of Bitcoin or another cryptocurrency is truly in our future, some series of events will have to disrupt the status quo. Broadly speaking, I see two possibilities, which I’ll call the revolutionary and evolutionary approaches. In the revolutionary approach, a crisis of confidence in one or many major fiat currencies around the world forces a switch to a digital currency that governments cannot manipulate. In the evolutionary approach, consumers and businesses gradually begin using and accepting Bitcoin for any number of reasons, until network effects take hold and adoption accelerates. While far from certain, we are beginning to see signs of both approaches at work.
The explosion of popularity of Bitcoin in Venezuela is an example of the revolutionary approach. Terrible governance has led to hyperinflation, and residents have looked to purchasing media that cannot fall victim to such a calamity. The Venezuelan government has attempted to crack down on Bitcoin mining and usage within the country, but has largely failed. LocalBitcoins Venezuela, a decentralized exchange, as seen trading volume quadruple since June. The parallels to “dollarization” in Argentina almost 20 years ago are obvious, except now, technology has provided a currency that is controlled by no government at all, domestic or foreign.
The evolutionary approach is more difficult to see day-to-day (isn’t that always the case with evolution) but the number of “legitimate” businesses accepting Bitcoin continues to grow. Cryptocurrency exchange Coinbase partners with an impressive list of companies to allow them to accept Bitcoin payments and quickly exchange those bitcoins for cash, thus avoiding exposure Bitcoin’s volatility. Current Coinbase partners include Intuit, PayPal and Expedia. Sites like coinmap track the locations of smaller businesses accepting Bitcoin as well as Bitcoin ATMs (where bitcoins can be bought or sold). These businesses may be accepting Bitcoin for reasons of convenience, or just plain visibility and trendiness. It doesn’t fully matter why, as long as the number keeps growing. Even since the pioneering work on farmers’ adoption of hybrid corn in the 1950s by economist Zvi Griliches, economists have thought of technology adoption as typically following an “S-curve,” with a small number of early adopters leading to a boom, followed by a lower rate of late adopters. It’s a very similar idea to the one Malcolm Gladwell popularized in his book Tipping Point. While not inevitable, we could be moving up the bottom of such an S-curve with Bitcoin.
Note that both of these paths to Bitcoin adoption involve coordinating peoples’ expectations—an essential part of any currency. It is possible that either or both a catastrophe or gradual acceptance will lead to such expectations reaching a critical mass.