The Hype Bubble That May Not Be Just Hype

The upward trajectory of bitcoin (BTC) over the last year has attracted a great deal of attention back to the cryptocurrency, especially as it begins to gain larger acceptance from institutional investors, even seemingly converting some detractors. As is the case every time suspicions of a hype-fueled bubble arise in the financial world, the camps divide into those who proclaim its existence urging caution, and those who deny it opting for speculative largesse. What tends to get lost amidst the excitement of watching the value of an asset like bitcoin go “up and to the right,” is the fact that we may still be at the very beginning of the cryptocurrency’s product adoption curve. The hype of its promise may actually be warranted, though the bubble part is up for debate.

During these times, it is helpful to step back and study the strengths of the product behind the hype to evaluate its potential for further adoption. In the case of Bitcoin, these are:

  • The coin is the best practical application of the blockchain, the technology that makes it (and all other cryptocurrencies) possible.
  • It continues to captivate the minds of users, especially younger generations, all over the world in spite of fierce resistance from institutions of all kinds.
  • In the face of strong competition from a growing number of alt-coins, it continues to gain market share.
  • It thrives in spite of some organizational strife amidst the massive international community that supports it.
  • It is still largely mined and traded as specified by its original creator.

In order to understand the strengths of the platform’s top use cases, I highly recommend Haseeb Qureshi’s incisive look into the top applications of blockchain technology, its “killer apps,” to use the same Silicon Valley parlance he aptly employs. Two of the four he lists are of particularly high interest to those of us getting involved in the world of diaspora financing: bitcoin as an effective instrument for storing value, and bitcoin’s potential for revolutionizing international money transfers and micro-transactions. As Qureshi points out, the first one is where we are seeing much of the growth in the adoption of bitcoin today. The potential for the second one to bring currency stability for the 85% of people who don’t live in the industrialized west has yet to be fully tapped.

We can use the product adoption curve as a framework to study the trajectory of bitcoin and understand its resilience over the years. Moreover, it can help us set the current year-long rally against a historical context. In this model, Innovators are the first tiny minority to understand a technology and begin using it. Early adopters follow, helping propagate it even further. Once the technology has proven itself in a certain market segment, Early and Late Majorities embrace it. The Laggards, who are usually the skeptics, eventually follow.

Product Adoption Curve

For example, back in November of 2013, bitcoin reached an apex that many at the time thought incredibly over-valued. Some even engaged in a bit of good old fashioned “schadenfreude” after the price of BTC crashed, chastising the late-majority adopters of that time for what surely seemed like a gross miscalculation. We can trace the adoption curve over the peak and see that back then, all signs pointed to bitcoin heading down towards a slow fade-out into the long-tail of its product life. And yet…

Stepping back and zooming out on the BTC timeline, we can recognize the resilience of this particular cryptocurrency as it survives another in a series of serious challenges at the end of 2013, going along sustaining its value for about 4 years. At the beginning of year 5, it rallies once again and bests its previous peak 8-times-over. So what is happening here?

In many industries, companies will re-tool a particular product and introduce a new version once the market begins to saturate in order to sustain long-term growth — think smartphones and their umpteenth versions. In such cases, the product life-cycle curves will overlap, with a new product being introduced as its older version begins to lag:

Although bitcoin is not produced by a company, per se, and it does not have a traditional product roadmap that could be tailored to respond directly to flagging consumer demand, it is nonetheless beholden to the principles of technological adoption. In the current state, this adoption manifests itself in the price people are willing to pay to use the coin to store value. And like a solidly designed product, it seems to be able to handle the pressure that comes with each wave of adoption.

The cycle that started at the very beginning with a tiny group of innovators within the technology community becoming deeply involved in bitcoin and the blockchain, followed by a tiny group of early adopters, that then became a tiny new group that formed an early majority, etc. has replayed itself several times over the last 9 years. And even though the price per coin sounds outrageous on its face at the moment I’m editing this post ($9,000+?!), the potential for even further adoption cycles that involve people beyond investors is still there. A big part of bitcoin’s promise lies in uses that have yet to be fully realized.

At this point, it might be helpful to look at other trading peaks in the BTC timeline within the framework of the adoption curve once again:

For instance, the trading high of $266 per coin reached in April of 2013 barely registers in the stratospheric highs being reached these days. But it is helpful to see how the awareness caused by one peak in April begat another trading rush with its corresponding price-per-coin record, in November.

The astonishing surge in price we are witnessing at the end f 2017 is being attributed to an increase in acceptance by Wall Street. The same awareness that brought about earlier cycles is now bringing a whole new crop of innovators, early adopters, etc. from industries beyond tech. What began as a fringe little experiment with big dreams and a sweeping vision rooted in math was embraced by the technorati some 9 years ago. It is now being put through the wringer by a financial sector that, enamored with the promise of the blockchain, has begun to take another look at the currency such a technological breakthrough makes possible. Bitcoin is proving its mettle as an instrument for storing value as more investors enter the fray.

As a side note, the irony of big financial institutions begrudgingly beginning to develop ways to trade bitcoin, whose raison d’etre is ostensibly to provide an alternative to them in the first place, isn’t lost on some commentators:

Of course if you are buying shares in a bitcoin ETF (Exchange-Traded Fund) it is to bet that the price of bitcoin will go up. If you are betting that the price of bitcoin will go up, it might be because you think that bitcoin will see further adoption as a currency. But the fact that you are buying shares of the ETF, rather than buying bitcoin directly, undermines that thesis. The need for a bitcoin ETF is an argument against buying it.

Matt Levine, Bloomberg View, October 20, 2017

We can put aside the high-stakes drama that will likely ensue when the world of sophisticated financial investment clashes mightily with the scrappy cryptocurrency upstart invented to replace it for the purposes of examining its adoption. Instead, let’s imagine what might happen as even more players from wide ranging sectors continue deploying experiments to test bitcoin’s seemingly endless potential for the types of legitimate uses that draw investor interest. Players like existing digital payment systems, entire towns, entire cities, even, will end up expanding the adoption of the cryptocurrency concept in general, and that of bitcoin in particular. The product adoption cycle could be repeating itself for some time to come:

Of course, this is the point in the story where I insert the caveat emptor that clarifies that the above chart is merely speculation. Who knows exactly what will happen. However, given the massive rate of bitcoin adoption taking place in the financial sector, a key constituency, it is not altogether inconceivable that the value the broader market places on the cryptocurrency will continue to rise. And yes, that includes a few corrections along the way. After all, the world is not only made up of technologists and financiers. These demographics are merely the first and most natural fit to adopt cryptocurrency as a concept. But widespread adoption is only now beginning to feel possible.

Of course, challenges to wide spread adoption still abound — not least of which are environmental concerns about energy consumption that arise from the bitcoin ecosystem. Still, as unfathomable as some of the claims being made by the most bullish of analysts can seem, the reality is we simply have just begun to understand the implications of this seismic paradigm shift in the history of money. Just as we think we have some things figured out, more news come out to signal that the ground might still be shifting for some time to come.


Also posted on Medium.

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