Since the advent of Bitcoin in 2009 — and the subsequent rise of thousands of ancillary imitators using the same algorithm — there hasn’t been much interest in the technology from big corporations around the globe. This isn’t surprising; the instruments are new, risky, and their collective goal is to decentralize and reduce the costs of global capital transfers. This presents huge potential threats to existing payment systems, and it stands to reason that any firm with a considerable market capitalization might want to take a wait-and-see approach.
For companies with sufficient capital and patience, however, there are opportunities developing that have gone unnoticed so far. The cryptocurrency market is maturing quickly. I believe the entire world is about to seriously consider the implications and potential of Bitcoin adoption and name-brand recognition.
The controversies surrounding cryptocurrencies are innumerable, but there is one thing we can (or should) agree on: digital money is not going away. With almost no barriers to entry, these currencies are popping up everywhere; they are extremely cheap and easy to create. This has engendered a lot of competition and led many people to doubt that any single currency — or group of currencies — can dominate the landscape.
Of course this has always been true in fledgling industries, and digital currencies will be no exception to the rule: in time, the winners will survive and create a global standard. But this leads to inevitable questions: which cryptocurrencies will proliferate, and what factors will differentiate them?
In the late 19th century, a company from Atlanta introduced a new product called Coca-Cola (you may have heard of it). Not long after its appearance, a huge number of competitors popped up — two of which were Dr. Pepper and Pepsi. There are probably many factors contributing to the fact that — in its almost 130 year history — Coca-Cola always has held more market share than any of its closest rivals (Coca-Cola actually bought Dr. Pepper early on). But by far the biggest contributing factor is name-brand recognition.
In short, Coca-Cola was the first of its kind, and its owners were very, very careful, meticulous, and thorough in its brand-promotion. They were so successful that Coca-Cola is today the most recognized brand name in the world, and it is difficult to find any place on earth so remote that you can’t find a Coke. Warren Buffett has boldly asserted that if he were offered a billion dollars to compete against the Coca-Cola Company, he would decline the money. The brand is that strong.
Cryptocurrencies will come and they will go. They will have different features and provide different services. But the one that will forever carry the honor of being the first successful decentralized private money will be Bitcoin.
Because of this fact — and because it already has such an enormous publicity lead over even its closest rivals — Bitcoin will likely continue to gain market share as the world embraces the brilliance, privacy, and efficiency of digital currencies. For those ready to experiment with the new technology, Bitcoin is by far the obvious choice. After all, it’s hard to imagine someone in Nepal or Bolivia reaching out to a relatively unknown alt-currency for his first foray into the world of private digital money.
Since 2009, naysayers have exuberantly insisted that Bitcoin is a fad, doomed to die. And yet for five years it has persisted — becoming ever more widespread and valuable as it has proliferated. The financial world has been slow to embrace Bitcoin, but I believe we are on the cusp of a period of adoption — unprecedented in human history. There are two distinct and divergent components to my theory:
First, as financial institutions struggle with their roles in the coming foregone transition to private, digital money, I am waiting patiently for the first company to make its move. So far no one has stepped up, but I believe soon one (or more) well-capitalized company will begin buying vast amounts of Bitcoin — capturing as much as 20% or 30% of the total available supply.
It will be a brilliant move, and hugely beneficial to both the Bitcoin economy and the investing company as well. The group will undoubtedly feel obligated to promote the Bitcoin brand — as well as to protect it from potential threats like hackers. As the Bitcoin economy grows, this company will profit handsomely. It will also have a ready supply of available Bitcoins, whose collective potential will be limited only by imagination.
Think about, for instance, a bank or a brokerage that could offer its clients instant Bitcoins through a proprietary interface that guaranteed the transactions — much the same way credit cards do now — at little to no cost. It would be something like Berkshire-Hathaway purchasing part of American Express decades ago.
Buffett’s approach has always been to buy name-brands and to profit from capital appreciation. I will grant that his investments are almost exclusively determined by a company’s ability to generate free cash. But Buffett has also been known to buy commodities (like copper in the late 90s); no matter how unpalatable the story (think U.S. Air) if the price goes low enough, Buffett is often willing to step in to partake in the bargain hunting.
Bitcoin growth is going to explode when these sorts of corporate investments begin in earnest. But it is a second catalyst looming on the horizon that I believe may be the biggest boon to the cryptocurrency economy.
In a recent study, researchers estimated the global black market makes up almost a quarter of the world’s economy. I am an economist and a financial analyst, and as such I am reluctant to take a moral or ethical stance on this shadow economy. Say what you will, but governments and law enforcement agencies have been trying to abolish “illegal” activities for centuries with limited results. If the figure I just introduced is even remotely accurate, however, at some point this shadow economy is going to pounce on digital currencies like ants on sugar.
Again, there may be some argument that the participants in these economies would choose a cryptocurrency other than Bitcoin, but I can’t see any rational reason behind such a choice. Some claim the Bitcoin block chain is only moderately anonymous, but mixing and tumbling has become widespread and easy — ensuring proper obfuscation. If lack of anonymity has ever been a real problem in the Bitcoin economy, it won’t be for much longer.
No matter how you look at it, we are entering a different world. It’s not a question of whether cryptocurrencies are going to survive, but rather which currencies are going to gain popularity and adoption — setting the standard for anonymous, inexpensive global transactions. Bitcoin has the momentum, publicity, and the brand. If I were a gambling man, that’s where my money would be.