Why Bitcoin Failed
Just one week ago, I had a lengthy conversation with a local convenience store owner while buying milk and juice. He had recently raised his credit card minimum to $10. He was frustrated in equal parts by the high transaction fees he was forced to pay on low-dollar items, and the large number of customers who no longer carried cash. When I explained to him that Bitcoin was an electronic payment system that can eliminate or drastically reduce merchant transaction fees, he got excited. I asked him if he would choose to have an ATM in the corner of his store where consumers could purchase Bitcoin using a credit or debit card; his answer was emphatically yes.
The problem, is Bitcoin isn’t being used in place of cash.
When a currency loses 50% of its value within the space of two weeks, and with a 24-hour low of $160, is down to just over 12.8% of its peak value of $1242, it is no longer able to function as a currency. It is a commodity only.
For all the day traders who will be scratching their heads and wondering what happened in the weeks to come, here are a few key reasons for the decline in Bitcoin’s value:
(HINT) It’s not security. Exchanges like Mt. Gox and Bitstamp get hacked, just like banks get robbed. This has nothing to do with the underlying security of a technology that functions like cash. The problem is, not enough people understood that.
Which brings us to…
1. Poor Usability. In terms of ease of use and help resources available, the Bitcoin (BTC) wallets I have used range from truly abysmal to just about comparable to your average online banking or credit card site. This is a heart-rending shame because BTC has the potential to be a one-click currency: as seamless and easy as “liking” on Facebook, or paying for a pack of gum with cash. No need to spend precious time rummaging through your wallet and entering long strings of credit card numbers. Coinbase made some strides in this direction, but implementation was uneven and still required too many mouse clicks.
2. No Ability to Tax and Spend. Unlike a government printing fiat currency, Bitcoin could never marshal its resources effectively. According to the Equation of Exchange, one of the core principles of classical economics, currencies grow in value as circulation increases; the number of times a currency changes hands is the best predictor of a currency’s long term value, not its high- or low-water mark among currency traders. Assets remain embarrassingly over-concentrated (according to one estimate, less than 300,000 people hold Bitcoin worldwide) which undermine the currency’s chances of reaching a mass audience. The Lamborghini dealerships, porn stars, and electronics retailers who received Bitcoin as a form of payment did not, by and large, turn around and pay that Bitcoin to someone else — they exchanged it for fiat, as soon as they were able.
3. Poor Branding and Marketing. Both online and offline, numerous foundations, conferences, and centers sprang up to evangelize the Bitcoin gospel — but most catered to other techies and investors, not to the general public. Most of the general public associate Bitcoin with criminals. The rest assume it is difficult to use. Where were the celebrity endorsements, the product placements, and the sweepstakes and giveaways that would have gotten Bitcoin into general circulation? Where was even a single, large-scale mass market advertising campaign? The $7B market cap Bitcoin enjoyed one year ago should be seen ss a window of opportunity, not a reason for arrogance.
Yet there is still hope.
The technological innovation that BTC represents cannot be understated. Best of all, the idea percolated far enough into the global media and investor community that the disruptive potential of peer-to-peer currency is now widely understood. Cryptocurrency will be back again.
Whether by Bitcoin or another name, its needs to attract not simply the technological whiz kids but also talented professionals who understand marketing, branding, usability — and fairness.