One of the biggest questions surrounding Bitcoin is why it is worth anything at all. A popular candidate for answering this question is the influence of merchant adoption. Unfortunately for proponents of this theory, things haven’t been making sense lately.
In their Bitcoin-focused blog BitBeat, the Wall Street Journal stated:
“After last week’s news that Dell would start taking Bitcoin as payment on its website, bitcoins prices did…nothing. This was surprising to a few folks, us included, seeing as adoption by major retailers has been one of the big signposts of mainstream acceptance.”
They go on to cite a post from coinbrief.net which argues that “the most important pieces of news are those that cover major players in the Bitcoin community or cover breakthroughs—or setbacks—in mainstream adoption.”
All of these assertions are backed up with little evidence. The year 2014 has seen the greatest merchant adoption gains in the history of Bitcoin. The addition of Overstock.com in January seems to have set off a chain reaction of big-time players accepting the digital currency. Since CEO Patrick Byrne made the pivotal decision to partner with Coinbase, TigerDirect, Newegg, DISH, and Dell have all come on board as “mainstream” adopters. These companies total over US$65 billion in revenue between them all, eight times the current market cap of the entire Bitcoin economy.
So why is the price of a single Bitcoin 25% lower today than it was on the day of Overstock’s announcement?
The reality is that Bitcoin’s market cap has nothing to do with businesses accepting the currency. It has to do with people buying into the idea that a decentralized form of money with no central backing can work. The more people that believe in this possibility, the larger the network grows, the more valuable it becomes. Only after this realization happens do businesses make their move.
This is partly why Overstock made their decision at the end of the Winter 2013 bubble. The accelerated influx of new users brought in by the news coverage that follows day after day of significant price gains over the course of two months showed them that accepting Bitcoin would be a profitable business move. But there was more to the decision than just that.
Mr. Byrne’s move was largely philosophically based as well. Consider this quote from macroeconomist Robert Shapiro on Byrne:
“He’s trained in philosophy — which means he takes a larger view already — and he’s also struggled with his health...People who come through those challenges, particularly when they’re young, have a very different view of the world. They are less concerned with the bullshit — and more concerned with larger things.”
This was evident at Bryne’s keynote address for Bitcoin2014 where he waxed poetically on the history of economics and the importance of a cryptocurrency “revolution.” To him, accepting Bitcoin at his business wasn’t about just tapping into a new market. It was about furthering humanity by supporting an idea. As he told Wired:
“Someday, either zombies walk the Earth or something close to that. Bitcoin is the solution.”
In a way then, Overstock.com accepting Bitcoin was a convenient accident for the community. Byrne was just one more individual whose attention was caught by the idea of decentralized money at the end of last year. He just so happened to be the CEO of a well known Internet retailer as well.
This is why if Bitcoin is to succeed, the community must focus on education, not merchant adoption. Of course, this does not mean that those vendors who go out of their way to accept the currency should not be valued. They are an important part of the system. But not the driving force behind growth. It’s been this way since the beginning.
Consider the first Bitcoin purchase of all time. On May 18th of 2010 Laszlo Hanyecz, an early adopter and contributing programmer, was fed up that nobody was doing anything with their mined Bitcoins except hoarding them. So he offered 10,000 BTC (worth around $42 at the time, quite the tip) if someone would get him a pizza so he wouldn’t “have to order or prepare it” himself. Four days later, on May 22nd, Laszlo got his wish and the Bitcoin economy was born. Or so the popular narrative goes.
In truth the Bitcoin economy was around for more than a year before then. In block 170, Satoshi had sent Hal Finney a 10 BTC test transaction, and even before that the “Bitcoin economy” was there, just nothing was happening. One person, Satoshi, understood the idea enough to believe in it. Then more people caught on. Merchants didn’t have to accept it to make the currency legitimate. Remember, ten thousand BTC were already worth US$42 before anything had ever been bought with them. The idea is valuable on its own. You don’t need to be able to buy bed sheets online to know that.
The Wall Street Journal concludes their article with a resolution that if the Bitcoin price is to increase, “somebody’s got to go out and buy a pizza or something.” The reality is somebody needs to go out and teach the pizza story.