Bitcoin’s Potential for Disruptive Innovation

Journalist:
Andrew Quentson @Aquentson
October 12, 2014

A new study concludes that the general public sees Bitcoin‘s benefits of low to no transaction fees and higher privacy as outweighing the risks and overall positive, paving the way for disruptive innovation and potential mass adoption.

“Continuous research and development is improving [Bitcoin’s] performance. For example, the transaction malleability bug is being addressed by Bitcoin’s software developers in order to improve security and hence trust in the cryptocurrency. Companies such as Circle are continually developing their offerings to improve performance and ease of use / convenience. Finally, organisations such as Elliptic are now providing consumer protection against losses and theft. This indicates that over time, there is potential that Bitcoin will improve its performance to a level that it will start to attract high value mainstream customers.”

The study identifies ten barriers to market adoption and surprisingly concludes that none are an impediment as the general public showed an overall lack of concern over the identified barriers with security, convenience and consumer protection rated highest.

The findings are surprising as following the much publicized downfall of MT Gox, numerous warnings were issued by government agencies addressing the potential risks of using bitcoin with security identified by the bitcoin community as the most important priority. Improvements however have been made and new exchanges now offer insured deposits as well as credit or debit card purchases of bitcoins, but bitcoin still falls far short of the security and convenience offered by the mainstream payment alternatives.

This is to be expected, according to the study, as all disruptive innovation is initially inferior and appeals to a niche market. However, through research and development, gradual improvements are made to the point where the product becomes appealing to the general public, leading to disruptive innovation.

Bitcoin’s Main Benefits: Cheap Value Transfer, Privacy, Decentralized

The study on Bitcoin’s potential for innovative disruption finds low to no transaction fees as the main benefit of bitcoin and concludes that it is likely to initially appeal to price conscious customers at the low end of the market who might trade convenience for cheaper value transfer as well as opening completely new markets due to its unique feature of private transactions and lack of third party control over transactions.

“Bitcoin satisfies the Low End / New Market [Disruptive Innovation] characteristic of initially appealing to the low end, most price conscious customers. For example, by charging merchants (who must keep costs low to maximise profits) lower fees, Bitcoin has the potential to cause Low End disruption to the payment processor market. Similarly, low fees also enable micropayments, which are not possible via traditional payment processors due to prohibitive costs.

Also read: Bitcoin Micropayments Can Save The Arts

Furthermore, although traditional payment processors have significant global payment networks in place, these primarily cover the developed world (Federal Reserve, 2014, p. 10) rather than developing countries. Consequently, use of Bitcoin could result in New Market disruption against payment processors…”

No central control over the currency by banks or governments is the second most valued benefit of Bitcoin with privacy a close third. Both of these features are a completely new offering to the market, opening up previously unavailable opportunities.

The Next Google?

Bitcoin is still in its infancy and often compared to the internet in the 90s when it was difficult to use and hard to understand for the general public. Gradual improvements led to mass adoption and the internet has now become a vital part of daily life for most of the western world.

Bitcoin is still waiting for its version of Facebook, Amazon, Ebay or Google as hundreds of millions of dollars are spent on Bitcoin research and development with Venture Capitalists and entrepreneurs dreaming of hitting the jackpot by harnessing Bitcoin’s unique benefits of cheap value transfer, privacy and decentralized transactions.

According to Coindesk’s Third Quarter State of Bitcoin Report, another $100 million have been invested in bitcoin companies in the past three months. There has been an increase of 1 million more new wallets, 50,000 new unique bitcoin addresses and 13,000 new merchants. Total Venture Capital backed investment in bitcoin companies for 2014 is higher than VC investment on Internet companies in 1995.

The Bitcoin price however, although it has started to recover following the slaying of the mythical bearwhale, has not yet caught up with the light speed development and improvement of Bitcoin’s fundamentals such as new adoption as shown by new wallets and unique addresses, increased venture capital funding and new merchants and remains far below the all-time high of $1,200.

Images from Shutterstock.

Last modified (UTC): October 12, 2014 16:54

Andrew Quentson @Aquentson

Feel free to contact me at andrewquentson@gmail.com with any information you may have.