(For the purposes of this article Bitcoin will refer to the cumulative adoption of all cryptocurrencies.)

There comes a time to reflect on the progression of Bitcoin. By many measures Bitcoin has become a wild success. It has gone from being worth nothing 10 years ago, to achieving a market cap on the order of hundreds of billions of dollars. By other metrics it has been a complete failure. Bitcoin has achieved some level of awareness for 5+ years and there is still virtually no sign of sustainable adoption. Surely by this point we should be seeing a promising trajectory of early users. But we really haven’t.

Many will disagree with the last point. They will assert we have seen early adoption and the price appreciation proves it. I think we can all agree the price appreciation was completely based in speculation of future growth, and not grounded in today’s sustainable adoption. It can also be argued that speculation is adoption. This is true to some degree, but speculation is not a sustainable form of adoption. At a certain point, the speculative adoption of Bitcoin will revert to its starting point of zero if other forms of sustainable adoption do not follow.

We all understand Bitcoin is a superior form of money >if< universally adopted. The problem is how do we overcome the seemingly immovable network effect of fiat currency in route to that end-goal. We must ask ourselves, what is the incentive for the first 1 million, 10 million, 100 million users to leave the superior network effect of fiat, for the relatively terrible network effect of Bitcoin. The first 1 million users will not come for the dream of what Bitcoin will be like with 8 billion users. The first 1 million users will only come for tangible use cases they can use today. We cannot achieve 8 billion users, without first getting 1 million. What is the incentive for the first 1 million users to make the switch? This is the problem we must solve.

First we must understand what barriers Bitcoin use cases must overcome in route to the first 1 million sustainable users. From there we can work backwards and figure out which use cases we should focus on. (Sustainable users are users which actively transact in Bitcoin for economic profit, not ideological reasons).

Barriers To Adoption

1. Price Volatility — Volatility presents an uncertainty cost

2. Acquisition of Bitcoin — Inconvenience, 1%-3% fees, and in most cases no privacy

3. Acceptance of Bitcoin — The number of people which accept Bitcoin as payment

4. Understanding of Bitcoin — The time it takes the user to be comfortable using Bitcoin

5. Legality of Bitcoin — Current “Legal” restrictions on the use of Bitcoin and future “Legal” restrictions that will inevitably arise in the event of growing Bitcoin adoption.

As the number of Bitcoin users increase, the cost of barriers 1–4 will decrease. This creates a positive feedback loop such that the more users onboard, the more use cases are enabled — Otherwise known as the network effect. It should be noted there are many projects seeking to reduce the cost of all these barriers.

I think it is safe to assume these five barriers currently present 10%-20% additional cost (direct costs and inconvenience costs) for using Bitcoin over the alternative of fiat. In other words, in order to onboard the first 1 million users, Bitcoin must create use cases which are ~15% less expensive than their fiat counterparts, just to be on a level playing field. As the network effect increases, the cost of using Bitcoin will decrease.

The following outlines an incomplete list of use cases that will drive Bitcoin adoption. Following is my interpretation and arbitrary subjective estimation in the order for which they will drive adoption in terms of number of users. The order is important to discuss so that we are efficiently allocating resources on projects that can actually drive adoption.

1. Education/Altruism — Education/Altruism is the deep understanding of Bitcoin and its underlying anarchic philosophy. Bitcoin education is very important, but not in the way most people believe. Bitcoin education is important to the extent that a founding community can support and grow Bitcoin. It is the necessary tinder bundle to take Bitcoin from 0 to 1. This arguably has already happened, or is in the process of happening.

Many believe if only everyone understood the properties of sound money, then Bitcoin will see adoption. While education is important for creating the initial founding community, education is not a scalable means of adoption. Alice and Bob are never going to understand how Bitcoin works or why it is important. They will only adopt if it is superior for their immediate use cases.

2. Speculation — Speculation is the financial bet that Bitcoin will be worth more in the future than it is today. Speculation sends important market signals to the viability of Bitcoin. In some sense, Bitcoin is the first and only utility token. Speculation does to some extent fund the community. This arguably has already happened, or is in the process of happening.

3. Peer-to-Peer Trade — Peer-to-peer trade is the most important use case of Bitcoin in terms of adoption and utility. Peer-to-peer trade is an exchange in which two or more parties can trade without a direct middleman. This has the obvious benefit that we remove the cost of the middleman, but it also has the less obvious benefit that it removes the burden of the mafia from trade. The cost savings by removing both the middleman and mafia in most cases will exceed 30%. Even the most devout socialist chooses not to pay extortion when given the opportunity.

Peer-to-peer trade is incredibly important in solving the chicken and the egg problem of Bitcoin’s network effect because it can be facilitated in an illiquid environment and its cost savings drastically exceed the inconvenience cost of using Bitcoin. Additionally many markets can only be facilitated through peer-to-peer trade/Bitcoin. Peer-to-peer trade will be the primary catalyst for mass adoption of Bitcoin. It is the current bottleneck for which we are currently stuck at. Bitcoin will not move forward until we create a system for scalable peer-to-peer trade. Learn More

4. Decentralized Stablecoin — A decentralized stablecoin is of great importance in the transitional stage in the adoption of Bitcoin. It drastically reduces perhaps the largest cost of Bitcoin which is its volatility. In reducing volatility, other use cases have one less barrier to overcome. A decentralized stablecoin will only drive adoption to the extent that there are other use cases to spend Bitcoin. For this reason, a decentralized stablecoin requires a network effect of ~5 million users to drive adoption.

5. Unconfiscatable Asset — An unconfiscatable asset is one which has very limited custodian risk. Bitcoin as it stands now is an unconfiscatable asset, but its utility as an unconfiscatable asset is dwarfed by the price volatility. Bitcoin’s unconfiscatable property paired with a decentralized stablecoin model will pose a valuable use case. The unconfiscatable asset will not be a driver of adoption until there are enough users in need of such a use case. This requires a vibrant peer-to-peer economy such that many producers are in need of a safe place to store value earned which cannot safely be stored in traditional assets. For this reason, the unconfiscatable asset use case requires a network effect of ~7 million users in order to drive adoption.

6. Decentralized Exchange — Many see decentralized exchange as a valuable improvement. Decentralized exchange with regards to cryptocurrency is largely a zero sum game. Little value in terms of Bitcoin adoption can be created from it. Decentralized exchange can only increase adoption to the extent that real tangible assets are traded on the platform. Real tangible assets are subject to real world censorship from local mafias. This limits decentralized exchange to derivatives products. When the power of local mafias is reduced, spot exchange may be facilitated as well. For decentralized derivative exchange there needs to be sufficient liquidity in Bitcoin, sufficient demand for decentralized derivatives, and sustainable decentralized exchange protocols. For these reasons, decentralized exchange requires a network effect of ~50 million users in order to drive adoption.

6.1 DEX Gambling — Creating prediction markets on Bitcoin can serve as a valuable gateway to adoption. Legacy gambling services are a universally unpleasant and expensive venture. Gambling on Bitcoin can nearly eliminate the house edge and create a better user experience.

7. Decentralized Social Media — For 99% of people, censorship of social media platforms is either of no concern or of no perceived concern. For this reason, most decentralized social media platforms will not act as a driver of Bitcoin adoption. Only social media platforms which have financial incentive for content creators to switch from will be made obsolete. Most notably video/podcasting platforms. Additionally social media is reliant on a large amount of users to be viable. For this reason, decentralized social media requires a network effect of ~70 million users in order to drive adoption.

8. Uncorrelated Asset — An uncorrelated asset is an asset which does not move in price at the same time as the traditional financial markets. It is unclear if/when Bitcoin will be an uncorrelated asset. Uncorrelated assets enable portfolios to reduce risk. If Bitcoin is to become an uncorrelated asset, it will also need to reduce its volatility to be valuable to prospective portfolios. If it cannot reduce price volatility, then any advantage from being an uncorrelated asset will be dwarfed by the volatility. For this reason, the uncorrelated asset use case requires a network effect of ~90 million users in order to drive adoption.

9. Traditional Merchant Adoption — For merchant adoption to be a driver of Bitcoin adoption it must enable the user to save money over the alternative of paying in fiat. For most traditional merchant transactions, using Bitcoin presents at best case 3% cost savings over fiat. The best case 3% cost savings assumes all costs of using Bitcoin are zero. Bitcoin volatility and acquisition costs will easily dwarf any potential cost savings from merchant adoption for most of Bitcoin’s development. While many merchants will begin to accept Bitcoin early in its growth, it will be as a symptom of Bitcoin adoption, not as a driver of Bitcoin adoption. Merchant adoption will not drive Bitcoin adoption until the 3% cost savings can be realized. The 3% cost savings cannot be realized until Bitcoin has a substantial user base. For this reason, merchant adoption requires a network effect of ~200 million users to drive Bitcoin adoption.

10. Collapse of Fiat Currencies — Many seem to be waiting around for a collapse of fiat currency (hyperinflation) to be the inflection point for which people are incentivized to adopt Bitcoin. First, this is entirely out of our control and may not happen in our lifetime. Second, in the event fiat currency does collapse, it can simply be replaced with a new iteration of the fiat currency. This has been proven time and time again. Bitcoin can only benefit from the collapse of fiat currencies if it has some level of a network effect before the collapse has happened. Otherwise there is no tangible network for people to switch over to. We have seen this proven in the regions for which fiat currencies have collapsed in Bitcoin’s short life. For these reasons, collapse of fiat currency requires a network effect of ~900 million users to drive Bitcoin adoption.

11. Securities Tokens — On-chain securities tokens enable anyone to issue ownership in a common enterprise. The utility of on-chain securities tokens are limited to the ability of a business to issue them and not be targeted by the local mafia for doing so. It is unclear how this relationship will progress in the coming future of Bitcoin. If on-chain securities tokens do become a driver of Bitcoin adoption, it will not be until the power of the local mafia is reduced. For this reason, securities tokens require a network effect of ~1 billion users to in order to drive Bitcoin adoption.

12. Store of Value — Store of value designates Bitcoin’s reliability in holding a steady value in the face of economic volatility. There can only be a select few store of values in the world as there is no reason for anyone seeking the store of value property to seek a lesser alternative. Bitcoin as a store of value can only achieve broad appeal if Bitcoin volatility remains exceedingly low in comparison to other assets. For this reason, store of value requires a network effect of 2 billion users in order to drive Bitcoin adoption.

What isn’t going to increase adoption?

1. “Improving Protocol” — Many seem to believe that Bitcoin protocol is synonymous with price — “If only we improve the protocol, then adoption will increase.” Satoshi already invented Bitcoin. Ten years later there are many developers trying to solve problems that don’t exist. Bitcoin either scales as it exists in its current form, or it doesn’t. If developers have a say in changing the protocol, then how is this any different from legislators changing laws. If Bitcoin protocol is susceptible to change, then it will be subject to political influence. If Bitcoin is subject to political influence, then the Bitcoin experiment will have failed. Who is the magical deity that gets to decide what is “Improving” the Bitcoin protocol? You would think by now we have learned that no such magical deity exists on this planet, yet virtually every cryptocurrency project has proven this lesson has not been learned.

At the end of the day no one’s opinion on whether the protocol should be changed matters. If someone can change the protocol, then the Bitcoin model has a serious flaw. Time will tell if increased adoption hardens the protocol, but in any event, it is a serious concern.

2. “Utility Tokens” — Utility tokens are the idea that each market will have its own native token, thereby allowing each participant of the network to profit from its growth. This defeats the entire purpose of currency to begin with. The purpose of currency is to create a common language through which users can communicate. All utility tokens do is reduce liquidity of the language and create unneeded friction in payment. Utility tokens will not sustainably increase Bitcoin adoption in any form at any time. The only use case of “Utility Tokens” is for musical chair-styled gambling — which is a use case, just not a sustainable one.

So What?

It is important we have this discussion. Whether I am right or not, it is important we figure out what is holding back Bitcoin. Many will assert it is blocksize, Lightning Network, or user experience. The ultimate reason Bitcoin has little sustainable adoption is because there is no tangible use case for Bitcoin today. Even most Bitcoin enthusiasts don’t use their Bitcoin. If Bitcoin enthusiasts haven’t found a use case for Bitcoin, then how are Alice and Bob going to find a use case for Bitcoin. This is the problem we must solve.