A recent Skype interview with Heather Schlegel (and her online short film Fly Me to the Moon) has changed the way I conceptualize Bitcoin in the economy. Through these last few months, my understanding of Bitcoin has been putting it in the center of the monetary universe. That view is too narrow. Inspired by Schlegel’s vision of more diverse ways to share value, a comparison to the introduction and growth of credit cards shows the clearer scope of Bitcoin’s potential future impact.
Credit cards were developed by an enterprising (and forgetful) diner in 1950. By 1970, 16% of American households, primarily upper and middle-upper class, had a credit card. That is a less than 1% per year growth rate among an exclusive demographic. By 2001, about 75% had at least one card, growing at an average 2% of the population per year. Small businesses played an understated role in this growth, using credit cards to finance their business investments. Credit cards improved on cash by giving easy access to loans, providing security, and carrying value more easily.
Credit cards are now practically ubiquitous, but they are not the only way to transact. Credit cards are easier, more convenient, and more secure, yet cash still circulates regularly.
How does this compare to Bitcoin?
Bitcoin was developed by Satoshi Nakamoto as a reaction to the centralization of our financial system and the dominance of just a few actors. We’re just 5 years into the life of Bitcoin, and usage rates are incredibly low compared to the Earth’s population, just a fraction of a percent. If Bitcoin follows a similar diffusion pattern as credit cards, it is reasonable to think that Bitcoin (or its progeny) will be widely adopted in far fewer than 50 years. Bitcoin improves on value transactions by creating a parallel economy, providing more security, and will likely become as easy to use as a credit card, or easier.
Even in a world 50 years from now where Bitcoin is as ubiquitous as credit cards are today, Bitcoin will not be alone. Cash and forms of credit will likely still exist because they have qualities that Bitcoin does not. Each transaction technology has its own benefits beyond the monetary value it represents:
- Cash offers insured accounts and benefits from government regulation and protection.
- Cash is simple and tangible.
- Credit cards offer access to lines of credit or loans, are compact, and offer a different kind of security than cash. (Credit cards, if lost, can be canceled, unlike cash).
- Bitcoin is insulated against government manipulation, offers a predictable inflation rate, and minimizes transaction costs.
- Bitcoin is secure in a way different than cash or credit. Like cash, if lost, Bitcoins are gone forever. Bitcoin is also separated from government, losing its protections there. However, Bitcoin transactions protect the user from being known, and use encryption to protect accounts.
When benefits are outlined, it becomes clear that no single transaction technology can meet all needs. Bitcoin follows this rule, and we shouldn’t expect that it will replace everything. It will hold a potentially large, or even majority, market share in the transaction market, but it will never be the only option. (Of course, credit cards and cash could evolve, too. For example, a government could “print” an electronic money to increase its ease of use.)
When I focus exclusively on Bitcoin and its impacts, the view of the financial future either looks perfectly shining or extremely ominous. When I learned to step back, Bitcoin seems like a more natural progression in the social construction of currency and transactions. As we become more accustomed to the idea of decentralized digital currencies, more people will step back and see the larger role they can play in our daily lives.
Credit diffusion data and image from The Growth and Diffusion of Credit Cards in Society by David S. Evans .