The virtual currency Bitcoin is a mere speculative bubble or a force set to transform the financial world, depending on whom one asks.
Created in 2009, Bitcoin is clearly in its early stages — and its future remains unclear. This brief explores three potential scenarios for Bitcoin, which range from outright suppression by governments to success as a mainstream currency, with the current marginal existence as a third outcome.
Because outcomes are uncertain, it is too early to say whether Bitcoin is important in the future of business. The drivers and indicators that accompany each of the three scenarios will help to suggest whether this is changing.
- Scroll down for a summary of the scenarios about the future of Bitcoin.
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First, a primer: How Bitcoin Works
Bitcoin was created in 2009 as a decentralized, peer-to-peer currency system. Its anonymous programmer designed it so that no banks or governments were involved in transactions, which could be anonymous.
Transactions are verified by distributed computers running Bitcoin software; this activity is called “mining,” and generates new Bitcoins to those supplying the computing resources.
First used to purchase pizza, Bitcoins can be exchanged for goods or conventional currencies, and markets have developed that help to determine the rate of exchange. Exchanges hold people’s Bitcoins and provide conversion to conventional currencies.
The network eventually released 21 million Bitcoins, of which about half have been released as of early 2014. The release rate will slow over time, so experts forecast that the full process could take many decades. A single Bitcoin can be divided into fractions out to eight decimal places. Plus, mining is currently valuable enough that people are running dedicated, custom server farms just to mine Bitcoins.
Will We All Be Using Bitcoin in the Future?
Scenario 1: Bitcoin on the Margins
Bitcoin continues on its present trajectory. Its value fluctuates, though perhaps with continued overall rise. Adoption remains peripheral, largely limited to cryptocurrency enthusiasts, techies, and those with a strong need for one of the features of Bitcoin, such as untraceability.
Governments mostly keep their hands off, though some place limits on cryptocurrencies or ban them altogether. Bitcoin faces competition from other virtual currencies, such as Zerocoin, Namecoin, and Litecoin.
3 drivers and indicators: A variety of drivers and indicators support Scenario 1.
- Complexity. Bitcoin remains relatively complex to use, which constitutes a significant barrier to widespread adoption beyond enthusiasts and those with a compelling need.
- Bitcoin volatility. The value of Bitcoins began to fluctuate sharply in 2013, and over the course of the year rose as much as 8,400%.1 Some economists have said this marks the currency more as a vehicle for a speculative bubble than an actual viable unit of exchange.2 Observers have suggested that the lack of management by a central bank will prevent Bitcoin from ever enjoying any real stability.
- Lack of security. Despite its status as a stealthy currency, Bitcoins are fairly easy to lose or steal. They require an alphanumeric key to retrieve, and this key must be stored somewhere, as it cannot be memorized. Without access to this key, the Bitcoins might as well not exist. A man showed up at a Welsh garbage dump in 2013 seeking a hard drive he had discarded, after discovering it contained the key to $6 million worth of Bitcoins. Theft is also easy. In 2013 an anchorman on Bloomberg TV showed the QR code for the key on the air, and within minutes a viewer had stolen the Bitcoins. (He offered to return them, having made his point, but the anchor declined.)8 Bitcoin exchanges have been targeted by hackers intent on theft.
￼Scenario 2: Bitcoin is Suppressed
A few major governments with economic leverage on global finance and multinational corporations turn against Bitcoin, provoked by its facilitation of illegal activities from pornography to terrorism.
They succeed in widespread bans, so that the currency has to be used quietly in most places, and interfaces with conventional markets and banking are hard to find. Bitcoin still exists, but mostly as a covert and somewhat illicit technology, akin to pirated file sharing.
Drivers and indicators:
- Stealthiness. Bitcoin was created partly to place some financial transactions beyond the reach of governments.13 A feature to users, the stealth nature of Bitcoin tends to be seen as a nuisance by governments, who view controlling and monitoring currency creation and flows as crucial to economic policy and law enforcement.
- Illicit uses. Bitcoin’s anonymity has made it suitable for various criminal activities. It was used as the currency for millions of dollars’ worth of transactions on the online supermarket for illegal drugs called Silk Road, which was shut down in 2013.14 A website called Assassination Market is collecting anonymously donated Bitcoins to distribute as rewards for killing various public officials, including former Federal Reserve chairman Ben Bernanke.
- Government backlash. Governments have taken steps to impede Bitcoin already including a crackdown by the Chinese, and warnings from India that Bitcoin activity might violate currency or financial terrorism laws.
Scenario 3: Bitcoin Triumphs
Bitcoin surges in use, propelled by a combination of widespread acceptance and use in e-commerce and payment systems. It is already finding increasing adoption by consumers in economically unsteady countries that lack stable, readily convertible currencies or widespread bank accounts and credit card networks—and in this scenario, that helps propel Bitcoin toward the mainstream.
This scenario would become even more plausible if a large-scale financial discontinuity is perceived to be likely in a major market, as Bitcoin might be seen as an alternative to national currencies.
Drivers and indicators:
- Ease of use. Bitcoins would need to be easier to use to spread widely. This could be achieved by intermediaries or some form of derivatives, but some of the essential advantages of Bitcoin would likely be lost in the process. Some companies offering intermediary services have appeared, including payment processors such as BitPay and Coinbase, which enable people to use Bitcoins for online payment as easily as if they were credit cards.
- Big retail player adoption. Large retailers would need to accept Bitcoins for them to become widely useful. Overstock.com, a large discount e-commerce site, began to do so in early 2014. Enthusiasts believe that Bitcoin can become a competitor to major currencies.
- US regulatory acceptance. A hearing before the US Senate in late 2013 revealed American regulators, bankers, and law enforcement personnel all willing to characterize Bitcoin and other virtual currencies as a technology that offered more promise than threat. The value of the currency rose sharply at this unexpected outcome.
So will be seeing Bitcoin ATMs?
If so, consider these business implications for the future of Bitcoin:
1. In the immediate future, being involved with Bitcoins will mostly buy a company publicity and street cred with certain kinds of consumers, principally techies and alternative investors. Overstock.com hopes to make money with Bitcoin but seems to be motivated to take the currency by its founder’s libertarian politics.
2. The currency will potentially be subject to substantial volatility for years to come, and it is not yet clear what will provide it real stability. The Bitcoin Foundation’s chief scientist himself said, “I still tell people that Bitcoin is an experiment: only invest time or money you can afford to lose, because Bitcoin is still an experiment.”
3. Bitcoin faces restrictions that vary by jurisdiction, a circumstance that is likely to persist and could complicate efforts to use it for commercial purposes.
4. Bitcoin’s peer-to-peer, no-trust-required nature may make it useful in emerging markets that lack credit card and banking infrastructure.
5. There may be a role for Bitcoin in transactions in which consumers want a very high degree of privacy, such as for products considered embarrassing or socially unacceptable.