So far Bitcoin is a bust as new payment systems go. That might come as a surprise given all the attention this digital currency has gotten, the many tens of millions of dollars in funding various Bitcoin-related ventures have received, and the volumes written on it every day.Â
To see what I mean, it’s useful to compare Bitcoin with a successful payment system that launched around the same time. Chart 1 shows the number of transactions for Bitcoin, which launched globally in early 2009, and mPesa, a mobile money payment system introduced in Kenya in mid-2007. The chart shows the number of transactions from the beginning of each system, taken as t=0, forward.Â
Five years after launch, mPesa followed the classic ignition path for successful platform businesses, while Bitcoin followed the classic ignition path for platform failures. By the end of the five years, mPesa in Kenya alone had roughly 20 times more monthly transactions than Bitcoin had globally.
Bitcoin Vs. mPesa: No Comparison
Chart 1 shows that the number of transactions on mPesa increased, reached an inflection point around the end of its first year, and from there grew explosively. That’s classic ignition.Â
The chart also shows that the number of transactions on Bitcoin grew but then leveled out. Five years in, there is no evidence “yet “ of an inflection point or an explosive growth phase. That’s classic, well, to be charitable, not-ignition.
Source:Â Compilation, with data fromÂ blockchainÂ for bitcoins and Central Bank of Kenya for mPesa
Since the use of bitcoins globally is such a small fraction of the use of mPesa in Kenya, it’s quite hard to see what’s really going on with Bitcoin in Chart 1. So here in Chart 2, I show the evolution of bitcoin transactions by themselves.Â
The number of transactions obviously increased dramatically from zero in 2009, but when you start at zero you can only increase dramatically. Bitcoin then hit a couple of successive plateaus in 2012 and 2013.Â
In the analysis for Charts 1 and 2, I’ve focused on the number of transactions. For mPesa, we can be pretty confident that those transactions really involve remittances and paying for things. There’s nothing to speculate on. For Bitcoin, we can’t really be sure that the transactions are traditional payment system transactions for remittances or regular payments.
Bitcoin A Payment System? Get Real
Given the amount of speculation going on (see below), much of the volume likely involves trading between those who’ve decided to take the money and run and those who think the value could still go up. Therefore, it is likely that Charts 1 and 2 overstate the success of Bitcoin as a real payment system.
Source:Â PYMNTS.com compilation with data fromÂ Blockchain
All successful platforms have an initial phase that looks like mPesa’s, as I’ve spoken about previously in my work onÂ ignition. Bitcoin and mPesa are two-sided platforms that require senders and receivers of funds to join the platform and to transact with each other. Typically, platforms that succeed grow slowly, reach an inflection point, and then go through a phase of explosive growth after which their growth levels off or at least calms down.Â
This point is uniformly true for successful payment systems. If you look at the start of Diners Club in 1950, the start of Discover Card in 1985, or any of the successful mobile-payments systems (there aren’t many), their trajectories all look similar to mPesa’s.Â
Although there isn’t systematic evidence on this, in my experience platforms that don’t get to an inflection point relatively quickly, and go through a phase of explosive growth, simply implode “ sort of caving in under their own weight after being stuck in the mud for so long. That’s what happened to all the B2B exchanges in the early 2000s. Almost all of them just died after sputtering along for a bit.
It’s not hard to understand why. Platforms only ignite if enough people on both sides of the platform find enough value to continue to use them to facilitate interaction. So, if members of one side of the platform can’t find enough partners on the other side, they’ll begin to lose interest and eventually stop using it at all. (For more detail see my article onÂ how catalysts ignite).
Bitcoin’s Not Doomed “ YetÂ
These observations don’t mean that Bitcoin couldn’t ignite eventually. The Bitcoin enthusiasts seem to think that Bitcoin is going to get off the ground by making a quantum jump. Bitcoin got some decent use in the dark Web, and an ecosystem developed to support that. The idea is that it is going to jump from that trajectory to a new trajectory in the white Web.Â
That quantum leap is possible. But it would seem quite difficult given the extra regulatory and legal scrutiny Bitcoin is getting as a result of its wayward beginnings and the whiff of criminality around it.Â
The fact that Bitcoin transactions aren’t growing explosively probably comes as a surprise to many readers. That’s because what the media and many Bitcoin proponents have focused on is Chart 3, which shows the tremendous increase in the value of the Bitcoin currency. There is a debate on whether this reflects a speculative bubble or not.
Source:Â Own compilation with data fromÂ BlockchainÂ and Bureau of Labor Statistics.
Nevertheless, I think people need to be pretty careful about coming down hard on one side or other of the bubble-or-not fence. Unfortunately, the problem with bubbles is no one really knows for sure that it is a bubble until it has burst. Asset prices can go up for sound reasons. Some people used to say Google was a bubble, but then that company started printing real money and lots of it.Â
Bitcoin prices could rise because the market is rationally predicting that Bitcoin will ignite as a payment system. As a result, the currency that underlies it Â¬“ and that is designed to be a fixed amount, making it inherently scarce Â¬“ rises as well. They could also rise because of irrational exuberance, or because people like to bet that they can outsmart the bubble and make a fortune before it bursts.Â
As an investor I would, however, be much more confident in the value of the Bitcoin currency if there was evidence that more than five years after its start it was about ready to, or in fact already had, ignited. What do you think: will Bitcoin sputter along and die like most new payment systems, or make a quantum jump to explosive growth?