One of our 10 Fintech predictions for 2017 (in December) was:
“Bitcoin moves from its Darknet phase (illegal) to the early adopter Clearnet phase. This is when legitimate people charge in bitcoin for legal transactions. This will start with cross border digital products. Because this brings new bitcoins into “circulation” with owners who also then want to pay in bitcoin, this starts a sustainable move to mainstream use which supports the price.”
This post expands on that thesis. But first we have to look at an ugly backdrop which is the Bitcoin civil war.
Note: this was written in April 2017, an eon ago in Bitcoin time.
If we get a hard fork, all bets are off. Spoiler alert, I think the probability of that is now low (around 10%) so planning for the future makes sense. The bad news if you hold bitcoin – a 10% chance of total loss. The good news if you hold bitcoin – a 90% chance of a big appreciation.
Talking about a glorious future during a civil war is strange
We have about a 10% chance of apocalypse now in Bitcoin.
Nobody can say exactly when the Bitcoin Civil War will be over, but it will be over soon one way or another. It is a % game as I write. I rate the chance of a hard fork relatively low, around 10%. Assigning a % smacks of false certainty. All I mean is that the probability is low and investing is all about assessing probability (anybody selling a “sure thing” probably also has a bridge to sell you).
My reasons for saying this are based on my reading of the Bitcoin scaling challenges and solutions (see here). I think that Segwit makes sense technically and a move to a more commercial Bitcoin via Lightning network is just the way the world works, whether you like it or not. The pure P2P vision, where everybody runs their own node, will turn into a more commercial reality. Today we could all run a server in our closet, but most of us choose to trade control for convenience by using some cloud services for things we like to do like email, social media and blogging. The same thing is likely to happen in Bitcoin, with some centralized services within a free permissionless network. This will still be a free market, where anybody can connect and offer a new service.
The permissionless genie will never go back into the bottle of control.
There is lot at stake in this civil war. If there is a hard fork, Bitcoin may not recover. I do not see this as just another Mt Gox. The damage to reputation among mainstream people will be too severe.
If bitcoin dies, it will also drag Altcoins into the same shallow grave. Sorry to strike a morbid note, but I don’t buy the idea that a better Crypto Coin will arise like a phoenix from the ashes from the death of bitcoin. Yes this may happen in the really long term, but “in the long run we are all dead”. Try telling your average Joe/Josephine who is already skeptical of bitcoin “I know that bitcoin failed, but this one is better, really I promise”.
We will know when bitcoin is forked; there will be a lot of sound and fury. What is harder to know is when we can declare the civil war over; that event may be accompanied by silence. I asked @tonevays on Twitter and he responded with:
Hopefully peace will soon be declared. Now to my thesis about how bitcoin will move to the mainstream via an early adopter Clearnet community (in contrast to the Darknet phase).
Bitcoin’s Darknet phase was critical and will remain
To see how big the Darknet is, go to DeepDotWeb. The Darknet is a perfect early adopter market for bitcoin. The market may be a niche, but it is a big enough niche to prove the technology. There are plenty of people who do things that are illegal in some jurisdiction or another. They may live in a dictatorship or believe that what they want to do (such as use drugs) should be none of their government’s business. Crooks and good people co-exist in these markets.
Bitcoin needed Darknet users because they are motivated. Traditional payment methods don’t work for them, so they use bitcoin even if it takes a bit more effort.
Reality check in one chart – bitcoin is a tiny, tiny part of the world economy. That is why bitcoin needs to move to the Clearnet phase.
I am not suggesting that the Darknet will disappear. It will coexist with the Clarinet. It serves a real purpose.
Why Bitcoin will move to Clearnet phase
Clearnet does not mean retailers adding bitcoin as a payment option. We had lots of Press Releases about that and it is not much more significant than adding some obscure Fiat currency. If you think you will get a lot of visitors from Swaziland (close to Switzerland in the pick list but only about $6 billion GDP) you might offer to accept payments in Swaziland currency. If you think you will get a lot of visitors from bitcoin land you might offer to accept payments in bitcoin (GDP er I meant market cap about 10x higher than Swaziland and 10x lower than Switzerland). Two key points about this transaction:
- It is not a game-changer for the retailer. They think “if it is totally simple, why not do it, but don’t expect much from it”.
- Retailers will probably convert to Fiat as they really don’t know much about bitcoin. That could depress bitcoin price leading to lower interest in bitcoin.
That is very different from Darknet, where Bitcoin is critical to both buyer and seller.
The Clearnet phase will be when thousands or even millions of free agent knowledge workers charge for their digital products (code, writing, designs, movies, music, etc) primarily or entirely using bitcoin. These buyers and sellers care about bitcoin, but unlike the Darknet these are for legal transactions.
They will price in bitcoin (or in Satoshi, depending on the price point) and maybe offer conversion to Fiat and maybe an option to pay using legacy payment rails (maybe for an additional fee). This is the bitcoin-first option.
For example, the aforementioned Tone Vays charges 0.1 bitcoin per hour (a bargain for somebody with his knowledge and insight). Note that he does not price as US$400 (about 0.1 bitcoin). The native pricing is in bitcoin.
The more radical is bitcoin-only. You are invited to pay in bitcoin and those who do not already have a bitcoin wallet are given links to help them get into the bitcoin economy. That network effect will drive adoption. Tone Vays is one of many in the bitcoin economy who only price in bitcoin. It is not much point paying somebody like Tone Vays if you cannot figure out how to use a bitcoin wallet to pay him.
This will happen first in free agent, digital knowledge workers offering products/services cross border. Let me break that down:
- Free agent. This means an individual or micro business, which accounts for an increasingly large share of global GDP.
- Digital knowledge workers. The bitcoin Clearnet will happen first in digital products, because the no return irrevocability of bitcoin is easier in digital products where delivery and payment can be concurrent.
- Cross Border. If somebody in Swaziland wants to pay somebody in Sweden (very close in the country pick list), what currency do they choose and what payment rail? Bitcoin is simply the easiest option, particularly if you get a more complex transaction such as Swaziland Bob pays 1 bitcoin to Sweden Alice with 20% automatically going to Ted in Tokyo who then buys something from Carol in Copenhagen.
Three reasons why this will happen in 2017.
- Price move. The correlation of searches for “bitcoin” and a rising price are clear. When the price goes up, the mainstream notices.
- Increasing Respectability. This varies by country. Switzerland is one where you can buy bitcoin at any train station, pay your taxes and speeding fines and it is all totally legal and normal. Japan is another country where bitcoin is legal and increasingly mainstream.
- Real need. The highly educated knowledge worker gig economy is real. In Fintech that market is becoming bigger as managers leave incumbents (voluntarily or involuntarily) to set up shop as consultants. The bitcoin Clearnet means that highly educated knowledge workers don’t have to trade their expensive education for a “career” driving a car for Uber.
Bernard Lunn is a Fintech thought-leader and deal-maker.
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