The battle over block size has consumed the Bitcoin community for a while now. At the core, the question comes down to this: Is Bitcoin a “store of value” (i.e., digital gold) or a “currency” (i.e., digital cash)? That determination informs the decision about bigger blocks vs. smaller blocks.
Bigger blocks contain more data, which yields smaller transaction fees and thus are more conducive to small payments, thus facilitating the use of Bitcoin as cash, relevant for any payments.
On the other hand, smaller blocks have less data contained within them, so space is at a premium and you pay a higher transaction fee to be included. As a result, it starts to make sense only for much larger transaction sizes. The bottom line is if you are transferring $10,000 worth of value, you’re fine with a $1.50 fee, but the same fee added onto a $3 cup of coffee seems a bit crazy.
If you are of the opinion that Bitcoin’s value rests primarily in its usefulness as an everyday currency — or digital cash — then you probably want a system that will have the lowest possible fees to move your funds around.
If you are of the opinion that Bitcoin’s value is more like that of gold — a long-term store of value — and aren’t concerned about the rising fees, then changes to the protocol that will increase the block size right way are probably lower on the priority list for you.
The ongoing debate has ebbed and flowed and gotten nasty at times, with no resolution in sight. At least, no Bitcoin community–driven resolution.
Yet while the community has focused on the argument, the market has gotten tired of waiting.
In effect, the decision has already been made and the market has spoken.
The market seems to have acknowledged and accepted the reality that it’s more expensive to move value around (higher fees) and combined that with a few other facts to reach the conclusion that Bitcoin’s true value is as “digital gold.”
After all, Bitcoin has
- the most robust and proven network,
- the most understood network (only 21 million coins will ever be mined) and
- growing global acceptance of Bitcoin as a way to protect assets for people in countries with weak economies.
The market realizes that the safety and security of Bitcoin and the associated higher fees mean that Bitcoin is best suited to be a “store of value,” that is, “digital gold.”
The transaction sizes show that people are comfortable paying higher fees to move larger amounts of money. For micropayments, it seems as if the jury is still out as to which currency will reign supreme. Whether it’s pure speculation or not as it relates to altcoins, the supreme use case for Bitcoin is, as Jimmy Song wrote, as store of value.
In this story of Bitcoin’s market dominance decline lies a marketing lesson that any organization, decentralized or otherwise, would do well to heed.
Bitcoin Is Losing Crypto-Market Share and Growth Is Slowing
Let’s look at what has happened since the beginning of the year, as of the time of this writing.
Yes, Bitcoin is on a tremendous upward swing of over 80 percent since January 1 (as of this writing). There’s no doubt it’s still valuable as an asset. I think it is here for the long haul. No “Bitcoin is dead” pronouncements from me.
But the other cryptocurrencies are on a bigger upward swing: Ethereum is up over 800 percent; Dash is up over 800 percent; Litecoin is up nearly 700 percent. And there are others.
As a result, Bitcoin’s share of all cryptocurrencies has fallen from 87 percent at the beginning of the year to just over 50 percent.
Meanwhile, the cryptocurrency market has grown in market cap from $17.6 billion to $52.6 billion. Of the $35 billion in new investments, $22.7 billion (64.89 percent) is non-Bitcoin. In other words, of the total market growth since January, two out of every three dollars invested in the cryptocurrency markets have gone into tokens not named Bitcoin.
The exact numbers change all the time, of course, but momentum for alternatives seems to be increasing, not decreasing.
Key Players Are Migrating or Diversifying
Earlier this month, Coinbase introduced support for Litecoin. The market-leading exchange is sending a clear message. There’s appetite for a crypto-token that is architected as digital cash. Litecoin is also important to the community because of the activation of SegWit and potentially Lightning, as a proving ground for these technologies and where innovation is happening faster.
Say what you will about ICOs, but the fact is that many of them happen on Ethereum. For example, one notable project, Storj, recently announced that they are moving to the Ethereum blockchain, not only because of its active developer ecosystem, but because transaction fees on the BItcoin blockchain are too high.
In short, leaders within their respective verticals are saying the same thing: there’s real life outside of Bitcoin.
Where else has a first-mover gained a sizable market advantage only to have it dissipate in the face of its own indecisiveness?
Two examples that immediately come to mind are Nokia and TiVo.
In 1997, Nokia had fully half of the global phone market. Today, it has virtually disappeared in most of the developed world, and has plummeted from 46 percent to 34 percent in Africa — and most of those owners don’t intend to get a new one.
Similarly, TiVo basically pioneered the concept of the DVR. It achieved the vaunted “verb” status, as in, “I’ll TiVo it.” At its height, the stock was trading at $124.75. In 2016, the company was acquired for $18 per share.
So what happened? How and why did these market leaders falter?
As one researcher put it, TiVo “lost sight of the customer,” and as another put it, Nokia lost sight of the market (which is essentially the same thing). In both cases, it led to long periods of indecision.
Olli-Pekka Kallasvuo, former CEO of Nokia, said that “nowhere in business history has a competitive environment changed so much as it did with the converging of several industries — to the point that no-one knows what to call the industry anymore. Mobile telephony converged with the mobile computer, the internet industry, the media industry and the applications industry — to mention a few … and today they’re all rolled into one.”
It sure feels as if the decentralization industry is approaching warp speed. Understanding the changing dynamics of the market and responding quickly to them becomes non-negotiable.
Clayton Christensen, the Harvard Business School professor, writes in his book “Competing Against Luck” that the single most important question you can ask to sustain innovation is: “What job did you hire that product to do?”
If you can get to that, you can build and evolve a product or service that has staying power.
What Can Be Learned?
It’s easy in the thrill of new technology to get caught up in the potential of it. Yet, ultimately, if you are trying to create something of true and enduring value, you need to be crystal-clear on a few things:
1. WHO exactly is your customer?
2. WHAT did they hire your product to do?
When Christensen says “hire,” it doesn’t necessarily mean “pay.” It can mean “use,” or “pay attention to,” or “vote.” Still, having a really deep understanding of the kind of person you are serving and WHY they think they need your product (not why you think they need your product) are genesis block-level elements of your marketing efforts.
Not taking the time (it need not be a lot) to answer these fundamental questions can put your project at risk.
We’ve seen huge capital outlays in response to debt crises in countries like Greece, Argentina and Turkey. In the face of a scandal or bad news, there are sell-offs in the stock market. In a decentralized world, the movement of capital away from a project can occur even faster.
As TiVo and Nokia learned, you can’t sit around and wait. The market changes on you too quickly.
The Road Ahead
Bitcoin has held the “top dog” spot for a long time and for many obvious reasons (strength of network, quality of developers, peer review process, brand recognition, etc.). It stands to be a key player for a long time in the crypto-universe.
Yet, the intensity of the fight in the Bitcoin scaling debate shows us that the question of “what did you hire this product for?” has two wide and varied answers.
The inability to satisfactorily answer these key questions has led to paralysis, which gives market competitors and alternatives a chance to differentiate and take market share.
And it risks allowing the market to define Bitcoin instead of Bitcoin defining itself.
This op-ed is a guest post by Jeremy Epstein. The views expressed are his own and do not necessarily represent those of Bitcoin Magazine.