Simon Johnson is a Ronald A. Kurtz Professor of Entrepreneurship, MIT Sloan School of Management.
The following article originally appeared in Consensus Magazine, distributed exclusively to attendees of CoinDesk’s Consensus 2019 event.
The promise and potential of bitcoin as a technology is frequently described in terms of a platform. On top of bitcoin’s permissionless blockchain, the argument goes, all kinds of things could be built to reduce the power and profit of trusted intermediaries. If you fear and resent monopolies, particularly those that are becoming more obnoxious as the digital age progresses, this is an alluring future.
It may also be an illusion. Not only are the use cases so far rather limited, but increasingly implementations – upon closer inspection – turn out to be “permissioned” blockchains, which are actually some form of relatively centralized shared database controlled by trusted intermediaries.
The terminology and rhetoric may have changed, for activities such as organizing supply chains or clearing financial transactions, but the reality looks remarkably similar to what existed before bitcoin was invented. Bitcoin’s arrival, and the disruptive potential it vaguely represented seemed to goad various industries into exploring an old form of distributed database technology. But this is hardly a revolution.
Will bitcoin ever have a more meaningful impact on society than this?
Before we ponder that more deeply, let’s pause and reflect on what definitely already exists. Bitcoin has proved to be a remarkably robust means of making certain kinds of payments. It is also a store of value, albeit one that is highly volatile. Of course, bitcoin has also spawned a variety of other cryptocurrencies, which range from being reasonable propositions to completely unappealing.
In speculating on whether bitcoin and its imitators can progress beyond these modest beginnings, one important historical analogy is useful: the development of railways in the UK. Some initial railways were highly profitable (e.g., the Liverpool-Manchester line) and others were miracles of engineering (the Great Western) but in various senses less successful. Many of them were more humdrum. There was excessive competition in what became known as “The Gauge War,” as well as crazy moments of speculation and plenty of outright fraud. It was the first big capitalist boom, and it set the tone for pretty much everything else that followed.
A case study in disruption
What did railways really accomplish? There were three major impacts, some but not all of which were clear at the beginning.
First, railways broke the grip that canals had on the movement of heavy goods. Turnpikes, or toll roads, were fine for small-scale movement of passengers, but anything heavier needed to go by barge. Not surprisingly, canal owners were generally opposed to railway development, spawning fights that went on for years. This pitched battle was obvious to everyone who understood the transportation element in the pricing of coal and other traded goods.
Second, railways encouraged people to travel. The number of people traveling by rail, for example between Liverpool and Manchester, quickly surpassed the number who had been brave enough to take a stagecoach.
Third, railways created new jobs, but they also destroyed livelihoods. The people who ran and otherwise benefited from turnpikes did not do well. Over several decades, railways were a net positive on the jobs front – including many occupations that were relatively well-paid (although other jobs were most definitely dangerous and underpaid by any reasonable metric). The scale and scope of the economic and social impact was impressive – and likely a surprise to most people.
Most canals eventually went out of business, but what’s striking is how long it took. Some waterways remain financially viable at least until the end of the nineteenth century – roughly 60 years after the railway proof of concept was fully established – even though canal owners had done nothing new or clever to assure their survival.
A canal is a canal; there’s not much you can do to invest or upgrade this kind of physical infrastructure. The response on the side of the roads was quite different.
Over time, road surfaces improved a great deal. And the internal combustion engine, which gave rise to the automobile, proved to be a technological shift just as profound as putting a steam engine on wheels. Nothing lasts forever, as the owners of railway company stock discovered.
Take all of this back to bitcoin and assume that only the narrow version survives – solely a payments system. This could still be a major potential competitive threat to all forms of financial gatekeeper, but only insofar as bitcoin can outcompete its rivals among other means of digital payments. Various companies in this arena are trying to build railroads – some focused on functionality, others aiming for more elegant solutions.
But for the customer, it’s just about getting from A to B fastest at the lowest cost.
You really don’t care how Venmo works, or what happens when you use Apple Pay in a cab or receive a confirmation from PayPal, or even how your credit card works in a foreign chip & PIN sign system. All you care about is: did you know what the price was going to be, and could you settle in a way acceptable to both the payee and you. Various entities are holding risk within that payments system, but not you – at least not in a way that gives you any concern.
Bitcoin’s opportunity lies in how well it too can enable more seamless, low-cost digital transactions for people. (I don’t see bitcoin as a rival for cash, which will rise or fall in various societies, depending on whether people like immediate anonymous settlement – and how they feel about carrying around physical bundles with that characteristic.)
We go with what works
How will this shake out? Let’s take a lesson from Isambard Kingdom Brunel, builder of the Great Western Railway. Impressive engineering is good, but interoperability trumps it.
Brunel’s railway had a broader gauge than most other British lines, but it was eventually forced to adopt those standard gauges to connect with other lines. In the end, the network effect prevails – we go with what works more often and in more places.
Bitcoin may have helped spark the railroad age but there is no guarantee it will win. In fact, currently, it looks more like the Great Western – gets the job done, but at relatively high cost in a small community of users, and with features that can only be regarded as strange.
(The oddest part of the Great Western operation was a century-long contract (!) that required all London-Bristol trains to stop in Swindon, where there were monopoly providers of refreshments to that line. Lesson for crypto developers: long confirmation times and erratic spikes in transaction fees may seem attractive to some engineers; to ordinary customers these are discouraging.)
Bitcoin could still win the competition to provide better, cheaper, more reliable payments. Recent steps promised by Bakkt, for example, can be regarded as encouraging if they bring bitcoin closer to being used in mainstream commerce (e.g., for Starbucks). And every time I hear about the Lightning Network from a colleague at MIT, I also feel that the system is moving in the right direction toward low-cost, peer-to-peer payments.
Still, remember, the railway customer does not care if the railway will strengthen or undermine existing landowners or shake up the structure of power. Similarly, whether particular intermediaries will rise or fall is generally a matter of some indifference.
All that matters is: will the trains run on time, and how much does it cost to buy a ticket?
Can Bitcoin Surge As Fast As It Did In 2017?
In 2017, Bitcoin successfully hit $19,783, a figure which till date, is still the asset’s all-time high. The mark is still being used in comparison with the coin’s current price especially by naysayers who believe the glory days are not only over but probably will not be seen again.
However, what‘s most important is that back then, Bitcoin reached the $8,000 mark and less than a fortnight later (11 days precisely), it gained $2,000, hitting the $10,000 mark.
At the moment, Bitcoin is struggling to reach and surpass the $8,000 mark, a price it had previously surprised, several days ago. So, what’s the likelihood that we will see a similar bull run?
Bitcoin was at $7,800 in November 2017. However, a little less than a month later, it had its biggest surge, hitting its all-time high in December. So, ever since the price rally began this year, analysts and experts have been trying their best to figure out the possibility of a similar bull run.
When Bitcoin started to break through earlier set resistance levels up until it reached $8,000, many analysts were sure that it was definitive proof of the end of the crypto winter that had plagued the sector since last year. This assertion was understandable considering the fact that it was about $3,150 in December last year and in about 6 months, shot up to $8,000.
“Reminder that BTC generally generates all of its performance within 10D of any year. –ex the top 10 days, BTC is down 25% annually since 2013.”
Another researcher, Alex Saunders, has also stated that the $8,300 is significant because less than two weeks after Bitcoin hit that mark in 2017, it was able to reach its all-time high.
How Soon Can We Expect Another Surge?
At the moment, pretty much everyone agrees that the market will do fine. Some have expressed that pullbacks are almost inevitable but they aren’t and shouldn’t be a deterrent as the price would definitely correct itself after a few of those. However, there is no general agreement as to when exactly another surge will occur.
A cryptocurrency trader and investor has however predicted that Bitcoin would move fast. In a tweet The Rhythm Trader (@Rhythmtrader) said:
Last bull market, this is how fast bitcoin moved:
$8000 – $10000: 11 days
$10000 – $12000: 7 days
$12000 – $14000: 1 day
$14000 – $16000: 1 day
$16000 – $18000: 8 days
Now consider the fundamentals today vs 2017.
I've never been more bullish.
— The Rhythm Trader (@Rhythmtrader) May 20, 2019
Report: Bitcoin (BTC) Futures Trading Approaching All-Time High in May
According to a new report published by The Block, the month of May is on pace to set a new all-time high in Bitcoin futures trading for the CME Group.
In a note sent to clients on May 21, the Chicago-based firm and backer to one of the largest Bitcoin futures trading exchanges, claims that May is “shaping up to be the strongest month ever for CME Bitcoin Futures.” The firm also reports a record day of trading on May 13, with 33,677 contracts being traded for the equivalent of $1.3 billion in BTC. Daily volume for Bitcoin future trading has also spiked during the month of May to 14000, up from 9900 in April.
CME Group continued,
“Since launch in December 2017 we have traded over 1.6MM contracts (+8MM equivalent bitcoin) representing over $50BN in notional value ($4.2BN per month).”
Beyond daily volume for futures trading, new account creation is also on the rise for the group. CME reports that the number of accounts for Bitcoin futures trading has climbed to an all-time high 2500, which the group interprets as a booming desire for traders to hedge on the risk of BTC,
“The number of unique accounts continues to grow showing that the marketplace is increasingly using BTC futures to hedge bitcoin risk and/or access exposure.”
Despite the seemingly bullish market for Bitcoin and cryptocurrency, with the price of BTC up close to 100 percent since the start of April, traders remain divided over the future valuation for the coin. BTC Futures, such as those offered by the CME Group’s exchange, have become a popular alternative for traders looking to speculate on the market movement for Bitcoin. Futures contracts have long been one of the more dominant products for the traditional financial markets.
Users can open long or short positions on BTC futures, depending upon where they see the price of the currency moving. With Bitcoin hovering near the $8000 mark for its second day in a row, both the bears and bulls are holding their breath over the next price movement for BTC. Some analysts are now calling for the currency to fall back to $6K before making another run at the all-time high. Considering the massive gains and bullish rally Bitcoin went on since the start of April, after more than 12 months of declining price and ‘crypto winter,’ some investors are anticipating a correction.
However, others see Bitcoin entering a perfect storm of market conditions for renewed investment. Given the economic uncertainty being generated over deteriorating negotiations between President Trump and President Xi, a looming U.S.-China trade war has bullish indicators for the price of cryptocurrency.
In addition, the mounting adoption of cryptocurrency by major industry players such social media giant Facebook and investment bank JP Morgan Chase have given a vote of confidence for BTC that was not present during 2017’s bull run. While FOMO will continue to drive the price of crypto, in both directions, the growing futures market provides another avenue for would-be speculators.
Top 5 Tips Prior to Engaging in OTC Bitcoin Trading
When it comes to dealing with Bitcoin trading, there are numerous options one can easily explore. Whether it is through regular exchanges, OTC trading, or peer-to-peer trading, any and everyone option can be worth exploring. However, those who want to experiment with OTC Bitcoin trading need to keep some very basic tips in mind at all times. No one wants to lose money in a way that could have easily been avoided.
- 1 Private OTC Chat Rooms are a No-no
- 2 Never Deal With Just Individuals
- 3 Proper OTC Desks are Easy to Find
- 4 If it’s too Good to be True…
- 5 Don’t Invest Money one Can’t Afford to Lose
Private OTC Chat Rooms are a No-no
On the surface, there won’t be too many people who bat an eye where private OTC Bitcoin trading groups are concerned. Similar to pump signal groups or altcoin discussion groups, OTC trading is not necessarily a business activity out in the open at all times. Over the past few years, there have been plenty of legitimate private OTC groups, albeit the number of potential scammers should never be overlooked either. Since these criminals know people simply want to buy BTC at a competitive price, they will try to obtain customer funds without handing over any BTC.
Whereas most people would automatically assume such businesses are shut down pretty quickly, the reality is often different. Since these trades involve private groups, the information is usually not shared with the rest of the world. This is primarily because users know all too well they opted for a less-than-legal option and must pay the price for trying to take a shortcut. That doesn’t mean fake private OTC Bitcoin trading groups aren’t shut down in the end, though, but it seems unlikely any stolen money will ever be recovered.
Never Deal With Just Individuals
Over the past few years, the number of people who own Bitcoin has seemingly increased. As such, one would expect the OTC market to grow by leaps and bounds. Anyone is free to buy and sell Bitcoin at their own pace, as long as they don’t try to make millions of dollars from doing so. When traders deal with very high volumes of Bitcoin and fiat, they will need to obtain a money transmitter license sooner rather than later.
This is why private individuals offering OTC Bitcoin trading services are best avoided. It is very uncommon for any of these individuals to be officially licensed. As such, these users often tend to scam others and run off with their hard-earned money. While it may seem convenient to deal with an individual rather than a proper company, the results will often be disappointing or even worse.
Proper OTC Desks are Easy to Find
As the popularity of Bitcoin continues to grow by leaps and bounds, there are more and more legitimate and registered companies who engage in OTC Bitcoin trading. Some of the well-known names include Japan’s Coincheck, Kraken, Huobi, and Itbit. These are just three examples of how many companies users can go through for all of their Bitcoin needs. It might involve a bit more work to get everything set up accordingly, but it greatly reduces the risk of losing any money in the process.
Speaking of finding a legitimate Bitcoin OTC trading provider, there are more and more companies joining the fray. This further expands the number of options users have to legitimately obtain Bitcoin through methods which suit their needs the best. To properly engage in this type of business activity, users should always conduct their thorough research before making any decision. It takes effort to get in on the Bitcoin action, after all.
If it’s too Good to be True…
It is better to avoid such offers altogether. No one will openly reject an option to buy Bitcoin slightly below market prices, but any price difference that seems too good to be true is almost always a scam. Offers like these will become a lot more apparent when the next Bitcoin bull run commences and FOMO starts kicking in accordingly. It is very difficult to buy Bitcoin at the real market price, primarily because the value fluctuates quite a bit every single day.
Moreover, any relatively shady business which explains why a user or company is engaged in OTC Bitcoin trading will usually indicate a scam looms ahead. Similar to the point above, conducting thorough research can usually prevent users from losing their money. A somewhat dubious background story combined with a too cheap Bitcoin price is usually a major red flag. Even so, there will be people who fall for these kinds of schemes simply because greed gets the best of them.
Don’t Invest Money one Can’t Afford to Lose
The golden rule as far as overall investing is concerned is to never spend money on such markets if the funds can’t be written off when things go awry. The same principle applies to OTC Bitcoin trading, as Bitcoin’s price is very volatile. Given the current value per BTC, there is a lot of money involved when one tries to obtain a full Bitcoin. As such, do not try to chase potential profits if the money is not there to spend on extras like these in the first place.
Disclaimer: This is not trading or investment advice. The above article is for entertainment and education purposes only. Please do your own research before purchasing or investing into any cryptocurrency.