People talk about being methodical when managing risk, but most of that talk is hooey. It is not in human nature to be methodical about risk. Or rather, as Nobel laureate Daniel Kahneman has pointed out, humans use methods that are good for managing some kinds of risk, and terrible for managing others. Imagine trying to persuade somebody about the risks of share prices falling in 1928, the year before the Wall Street Crash. Or imagine reading the Basel II banking accords in 2004, and trying to convince the world that they were woefully inadequate. A lot of people take their risk management cues from the behaviour of others. That is human nature, and a kind of risk management: betting against everyone else invites the risk of missed opportunities. Hence, if nobody is serious about a prospective risk, you can end up in a situation where everybody is blind to it. And so, I would argue that Bitcoin, the virtual currency, is the most underestimated risk for the mobile industry.
Everybody knows that mobile money is going to be very big. It is pretty big already. Gartner said that global mobile payments would be worth USD235bn this year. But then, everybody knew the internet was going to be big, and that 3G was going to be big, but a lot of investors lost money as a consequence. When many people know something will be big, investors are sucked into chasing their slice of the pie. Marry this to ‘innovation’, and the result can be reckless overoptimism. In the 1920’s, innovative manufacturing techniques helped to blind investors to simple economic basics, such as the fact that car production had outstripped demand. More recently, financial innovation encouraged a lot of investment in houses for Americans who could not afford their mortgages. Already there are strong signs that the mobile payment industry is destined to go through a cycle of boom and bust. Last week, Henry Helgeson, CEO of Merchant Warehouse, wrote an authoritative piece for Forbes. As he pointed out, when you have a lot of firms doing similar things, most of them will fail.
So, we already have a situation where very many businesses will establish rival mobile payment offerings, leading to market confusion and division. Throw Bitcoin into that mix. Whilst Bitcoin might have had no chance against one or two near-universal and well-financed alternatives, it could potentially thrive in a marketplace with no dominant leaders. The minimalist Bitcoin sales pitch is attractive: it is electronic cash with near-zero transaction fees. Near-zero transaction fees sounds like a source of strategic competitive advantage, if you ask me. I am far from clear as to what real advantages other methods could offer, that justify their cost. Scale, customer familiarity and interoperability will be important features for any worldwide method for handling transactions. But then, nothing need stop Bitcoin from attaining those attributes. Bitcoin is already global and interoperable in the way that email is global and interoperable. Whilst email has its competitors, it has proven itself to be a very popular, and free, service. Email has reached a point where its use is so common, that we forget what a novelty it was, and how it was resisted by some. Might not the same be true for Bitcoin?
Education will be key to the competition between Bitcoin and conventional payments solutions. As the experience in Africa shows, if you give people a new capability and show them how to use it, they will rapidly adopt it, creating new norms. Bitcoin is at a disadvantage because there is no educational force behind it. Markets will pay more for services they know about and understand, than ones they do not. However, Bitcoin is becoming a lot more known. The value of a single Bitcoin has risen above USD1,000 and generated a few (relatively meaningless) headlines in the process. More importantly, recent US Senate Committee hearings established how US agencies consider Bitcoin to be a legitimate way to transact business. The Department of Justice described it as a “legal means of exchange”. Such pronouncements will make a difference to how the public perceive Bitcoin.
On the other hand, Bitcoin can also generate fear and loathing. Certain sections of the media are enamoured by stories where people lost millions by throwing away their hard drive. The BBC’s Rory Cellan-Jones is an excellent example of the kind of technology writer who is a crypto-technophobe, routinely sharing nonsense that might scare away prospective users of Bitcoin (and any other innovation which lacks a big business sponsor). He wrote how wiping his smartphone meant his money had…
“…disappeared into the void – and as Bitcoin is by its nature an unregulated currency with no central bank or ombudsmen, there was nobody to whom I could appeal for advice or recompense.”
However, he failed to point that even the most regulated currencies do not employ central bankers, or ombudsmen, to help when you forget to take your notes out of your trouser pocket before putting it in the washing machine, or in the event of you dropping your wallet on to a bonfire. And unlike cash, it is perfectly easy, and legal, to make a back-up of your Bitcoins.
The most serious risk relating to Bitcoins, which will impede its widespread adoption, is its volatility relative to other currencies. Because no government backs or requires the use of Bitcoins, and because it is not widely used for day-to-day transactions, there have been wild fluctuations in the exchange rate between Bitcoins and other currencies. This is hardly ideal if people want to use Bitcoins to buy their pizzas and train tickets, instead of hoarding them in the hope of a speculative rise. On the other hand, circumventing governments might also encourage people to adopt Bitcoins.
Most lurid headlines involve Bitcoin being used for internet black markets. However, a major driver of its popularity relates to activities that any decent person might engage in. Bitcoins can be used as an alternative store of wealth, when there are doubts about the government-backed currency, and they can be used to move money overseas, circumventing conventional banking controls. Both of these factors are relevant in China, which also has very large numbers of very sophisticated mobile users. As with mobile payments in Africa, the big early growth for Bitcoin may occur a long way from the myopic markets of Western journalists and business strategists. Bitcoin use in China has risen dramatically. 62% of Bitcoin transactions reportedly occur in China. BTC China has overtaken Japan’s Mt.Gox as the biggest Bitcoin exchange, by volume. And then there is Jackie Chan…
Your eyes do not deceive you. Jackie Chan, China’s greatest Kung Fu movie star, is advertising the latest Samsung phone, above a picture of Bitcoins. China Telecom accepts payment in Bitcoins for customers wanting to pre-order this latest gadget.
Very very large telcos in very very large countries accepting Bitcoins as payment for mobile phones… that sounds like the kind of development that might lead Bitcoin to be adopted far more widely, helping to turn Bitcoin into a serious threat to other forms of mobile money. As more people use Bitcoin, its value should become far less volatile. And if Bitcoin no longer suffers from rapid fluctuations in value, and becomes widely adopted in a major economy with a sophisticated base of mobile users, that will raise plenty of questions about the investments being made in other mobile money solutions. So, what do you think – is Bitcoin a grossly underestimated risk to mobile money? Or am I exaggerating…?