The Path To Mainstream Adoption Of Bitcoin Is Not Through Legacy Finance Institutions, It Is Through The Excluded

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TLDR. The conventional wisdom is that Legacy Finance Institutions will lead the way to mainstream adoption of Bitcoin.  This post outlines an alternative thesis that the route to mainstream adoption of Bitcoin is by building a second leg as a currency for everyday spending among those excluded from financial services today, starting in countries with a Fiat currency crisis such as Venezuela

This is an update to this chapter of The Blockchain Economy digital book.

This post describes:

  • The conventional wisdom trajectory
  • Bitcoin’s second leg will be built from the wreckage of exotic Fiat currencies
  • When Bitcoin gets traction in developed markets, it will be via those who feel excluded by Legacy Finance
  • Traders are from Venus, Investors are from Mars and Martians need to study Venezuela
  • Profit comes from serving the excluded said Captain Obvious
  • Investors who understand Bitcoin users will do best
  • Serving the Bottom of the Pyramid is a lot easier when the marginal cost is zero and payment cost is close to zero
  • Blue and Red Ocean strategies of Legacy Finance Institutions in the Blockchain Economy
  • Watch what is happening in the Exotic Fiat Currency Countries.

The conventional wisdom trajectory 

The conventional wisdom trajectory has 3 phases – from past, through present, to future.

  • Phase 1. The past (still with us). Cypherpunks, Anarchists & Libertarians. This created the early traction that got Bitcoin from an obscure message board to the possibility of game-changing innovation.
  • Phase 2. The present. Speculators. This classic speculative bubble of late 2017 (followed by the bear market of 2018 and early 2019) brought in new players and new capital (and excited the Legacy Finance Institutions). 
  • Phase 3. The future. Institutions & Governments. This is when Bitcoin is supposed to grow up and put on a suit, to make it make it easy for the masses to use services offered by Legacy Finance. Conventional wisdom sees this like a pivot from Phases 1 and 2. In this pivot scenario, the Cyperpunks, Anarchists & Libertarians are thrown into the dustbin of history and the speculators are told to grow up and trust in the products sold by Legacy Finance. 

This chapter argues a contrarian thesis that bitcoin’s path to mainstream is not a pivot but rather a continuation of Phases 1 & 2. The conventional wisdom scenario plays well at Davos (World Economic Forum), the gathering place of those with wealth and power (Big Tech & Big Bank). This post shows why that conventional wisdom is wrong.

Bitcoin needs a second leg to be stable. Bitcoin’s first leg – store of value – will eventually become unstable if it has to stand on its own. Bitcoin needs a second leg – a currency for everyday spending. That second leg will not be built by Institutions or Speculators, it will be built by entrepreneurs (maybe with Institutional partners) who know how to serve the needs of those who have been excluded by Legacy Finance (who need Bitcoin as a currency for everyday use).

Bitcoin’s second leg will be built from the wreckage of Exotic Fiat currencies 

We can witness this happening today in countries such as Venezuela that are suffering from hyperinflation (as described in this post). This has reached Act 4 in the Creative Destruction 7 Act Play This is “when the going gets weird, the weird turn pro” (quote from Hunter S Thompson, who was certainly weird but also professional enough to write best-selling books).

It is likely that the Bitcoin habit, which we can witness in Venezuela, will spread to countries that are close, physically and/or culturally, to countries with hyperinflation. These neighbours will witness the horror of hyperinflation and see how practical Bitcoin is as an alternative. For example, Argentina and Peru, while not yet suffering hyperinflation, may follow the example of Venezuela. This has reached Act 3 in the Creative Destruction 7 Act Play. Act 3 is Denial. A famous example of the Denial Act 3 was subprime mortgages that blew up in the Global Financial Crisis in 2008. For a long time the surface numbers looked good until a few nonconformists looked below the surface (watch The Big Short movie for an entertaining take on that story). A more recent example in Finance was the Wells Fargo fake accounts scandal (which was going on for a long time before it was uncovered).

If Bitcoin is limited to countries with hyperinflation, those of us working in developed markets with strong Fiat currencies can dismiss it as a phenomenon (like wheelbarrows full of cash) that have nothing to do with “normal” countries.  The next bull market needs a use case story that more people can relate to.

If  Bitcoin spreads from Venezuela to other countries such as Argentina and Peru, the markets will have a story to relate to. There are 180 currencies listed as legal tender, of which only 8 are considered as “major” by the FX market. Contagion spreads rapidly.

When we see that contagion spread to developed markets with Fiat currencies that are perceived to be strong today, then we will have reached mainstream adoption. Again we need to look at edge cases aka those who feel excluded by Legacy Finance.

When Bitcoin gets traction in developed markets, it will be via those who feel excluded by Legacy Finance

This is Act 2 in the Creative Destruction 7 Act play. Act 2 is when we see Straws in the Wind. It takes guts to see a few straws blowing about and bet that this is caused by an invisible wind. The signs of change are far from obvious but “the answer my friend is blowing in the wind”.

The reason change comes from the excluded is obvious. Their needs are not being met by Legacy Finance. We see that happening today in Venezuela. When the issue is feeding your family, the clunky UI and risks of Bitcoin do not seem a big deal. Using Bitcoin gets onto your Must Do Today action list.

Are there markets like this in the developed world? Are there enough people excluded by Legacy Finance in the developed world to make sure that the Bitcoin contagion spreads to the developed world? I believe the answer is yes and that we can see this answer blowing in the wind of three niche markets in developed world that have excluded by Legacy Finance:

 

  • Financially excluded because they are poor. The Western underbanked, excluded from or ripped off by Legacy Finance market providers will see the appeal of Bitcoin. When told by Legacy Finance that “Bitcoin is bad for you” they may take the view that if Legacy Finance does not like it, then it must be good.

 

  • Excluded by Banks because they are Small Business. Daily Fintech has dedicated one day a week (Wednesday) to Small Business finance because Small Business owners are a good example of the Excluded – banks did not want them because they were neither Corporate or Consumer (the two models that Banks understood). This is why Square is such a big player in Bitcoin. Small Business owners who want to avoid problems with credit card networks (see here for more) will be motivated to accept Bitcoin and spend in Bitcoin.

Traders are from Venus, Investors are from Mars and Martians need to study Venezuela

The difference between traders and investors looks small on the surface – it is simply the length of the holding period. In reality, the approach is fundamentally and completely different.

Bitcoin traders look at price charts. Bitcoin investors look at how people are using Bitcoin.

Given that real Bitcoin usage today is quite limited, Bitcoin investors have historically looked at what products are being built today that will enable new forms of usage in the future. To give an example from an earlier era, an investor would look at an early version of Hotmail and extrapolate that mass use of email via browsers was possible.

The hope story on Bitcoin is getting a bit long in the tooth. The market needs to see real usage traction, not just products with potential use. For that we need to look outside the developed world.

So Bitcoin investors need to understand how Bitcoin could serve the Excluded

Traders need a story. Bitcoin as a one-legged stool (digital gold store of value) is not enough to power the next bull market. To reach the mainstream investor, Legacy Finance Institutions will need more than the how (things like Custody), they will also need a usage story. They will need to show why Bitcoin will change the world and how that is already happening.

Traders will still trade and their liquidity is essential. Some of the traders who got into Bitcoin during the last bull/bear cycle will get back into active trading during the next bull/bear cycle. Many will do this via Institutions, others will use startups.

Profit comes from serving the excluded said Captain Obvious

Question: which market looks more attractive?

  • A. Markets where customers have many options. You will need to persuade them to switch from their current way of doing things and the advantages you offer are not really life-changing.

 

  • B. Markets where customers have few, if any, good options. If you can deliver them a solution it will be  life-changing for them and they will take whatever steps are needed to get your solution.

You probably answered B, yet most solutions target A. A big reason is that most developers today work in developed markets (where Customer A is located) and we find it easy to build solutions for people who are like us.

Investors who understand Bitcoin users will do best

That is another Captain Obvious statement and yet most investors work in developed markets and feel comfortable investing in solutions for those markets.

We can see this in some early Bitcoin entrepreneurs such as Wences Casares of Xapo who comes from Argentina.

Serving the Bottom of the Pyramid is a lot easier when the marginal cost is zero and payment cost is close to zero

The Bottom of the Pyramid (BOP) is a socio-economic concept that allows us to group that vast segment  – in excess of about four billion  – of the world’s poorest citizens constituting an invisible and unserved market blocked by challenging barriers that prevent them from realising their human potential for their own benefit, those of their families, and that of society’s at large.

Technically, a member of the BOP is part of the largest but poorest groups of the world’s population, who live with less than $2.50 a day and are excluded from the modernity of our globalised civilised societies, including consumption and choice as well as access to organised financial services. Some estimates based on the broadest segment of the BOP put its demand as consumers at about $5 trillion in Purchasing Power Parity terms, making it a desirable objective for creative and leading visionary businesses throughout the world. One of the undeniable successes in this process is the explosion of the Microfinance industry witnessed in many parts of the world.

The first person to really focus on BOP was C.K. Prahalad (1941-2010), who in the process has inspired influential leaders and countless ordinary citizens sharing his vision, to joint efforts for the unleashing of their creative and productive potential as part of an inclusive capitalist system, free of paternalism toward the poor. Source

The iconic use case was Unilever with their single serving soap packages in India. That took real innovation.

Serving the Bottom of the Pyramid is a lot easier when the marginal cost is zero, for obvious reasons. You can deliver at the price point needed in the market without having a margin problem with cost of goods sold .

The advent of fast, low cost micropayments via offchain technology such Lightning Network also make it much easier to profitably serve the Bottom of the Pyramid. Credit Cards obviously don’t work in that market and physical cash has hidden costs (theft, time, handling etc).

Blue and Red Ocean strategies of Legacy Finance Institutions in the Blockchain Economy

The Cypherpunks, Anarchists & Libertarians who kick-started the Bitcoin Blockchain engine tend to relegate Legacy Finance Institutions to the dustbin of history. Clearly Bitcoin is a big bang disruption for Legacy Finance and many will suffer a Blockbuster/Borders/HMV/Kodak type fate.

We see two fundamental strategies for dealing with this kind of big bang disruption:

 

  • Red ocean. Beat your current Legacy Finance competitors, even at risk of disrupting your current business, by aggressively offering Bitcoin related services 

Institutions need help from a range of service providers such as strategy to code to legal. Serving the Institutions will always be a profitable business.

Watch what is happening in the Exotic Fiat Currency Countries

The bridge from hyperinflation “broken Fiat” Currency Countries to developed markets will be via “exotic Fiat” Currency Countries.

The 8 most traded currencies are

U.S. Dollar (USD)

European Euro (EUR)

Japanese Yen (JPY)

British Pound (GBP)

Swiss Franc (CHF)

Canadian Dollar (CAD)

Australian Dollar (AUD)

South African Rand (ZAR)

There are 180 current currencies across the world, as recognized by the United Nations. That is a lot of what FX traders call the “exotic” currencies.

Watch the currencies/countries that are physically and or culturally close to “broken Fiat” currency countries. For example, If Bitcoin spreads from Venezuela to Argentina and Peru, the markets will have a story to relate to and other countries may copy this way to avoid the horrors of hyperinflation.

Image Source.

Bernard Lunn is a Fintech deal-maker, investor, entrepreneur and advisor. He is the author of The Blockchain Economy and CEO of Daily Fintech.

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