OpenBazaar May Drive Mainstream Adoption of Bitcoin

2015 was the year when the pundits declared that Bitcoin is bad and Blockchain is good. One B word was top of the hype cycle while the other B word was in the slough of despond. The only way for Bitcoin to climb to the plateau productivity is if more people get paid in Bitcoin – which will create the network effects of more people wanting to pay in Bitcoin and so to more merchants accepting Bitcoin and so…. More people getting paid in Bitcoin could turn a vicious cycle (currently plaguing the Bitcoin economy) into a virtuous cycle of network effects. OpenBazaar, with recent VC backing, may mean that more people get paid in Bitcoin, which is why, OpenBazaar may drive mainstream adoption of Bitcoin

Debunking the developing world Bitcoin story

While Bitcoin was failing to get mainstream adoption in the West, many Bitcoin enthusiasts grasped at the straw that the Rest of the world (formerly known as developing or emerging) would drive mainstream adoption of Bitcoin, but this looked like grasping at straws as we reported here in earlier research notes:

Bitcoin will save Argentina, or Argentina will save Bitcoin? 

And

For Bitcoin to get mass adoption in Underbanked, it has to be more like M-Pesa

The most critical metric in the Bitcoin economy

The Bitcoin economy started in a humble way on May 22, 2010 with the purchase of two Papa John’s pizzas. If the buyers had gone hungry and kept their Bitcoin, they would now be worth about US $4 million.

About 5 years after that, in June 2015, I did a Bitcoin Ecosystem health check, when I reported on what Blockhain.info was recording on Transaction Volume:

“I prefer to look at Estimated Transaction Volume in Bitcoin (rather than looking at in USD as this is distorted by Bitcoin exchange price). What does this chart tell us? If this were a stock market chart, the pundits would be talking about a “sideways drift market”. A school report would say, “could do better”. The doctor might advise making some dietary changes but would not pushing pills or operations. IOW, Ok but not great.”

I chose Estimated Transaction Volume because it is the best open source data that we can use as a proxy of merchant transaction volume in Bitcoin and I believe that merchant transaction volume is the most critical forward indicator of health of the Bitcoin economy. Market price is a lagging indicator and currently more related to exchange controls in China than anything to do with Bitcoin. Merchant transaction volume is a leading indicator of the health of the Bitcoin economy. If merchant transaction volume does not grow, the Bitcoin price will eventually collapse and investors looking for inflation resistant assets will move back to gold and other hard assets.

Kickstarting the Bitcoin economy

One of the most prescient VCs is Fred Wilson who had this to say:

“Bitcoin finally finds a killer app with the emergence of Open Bazaar protocol powered zero take rate marketplaces.”

As a Partner at Union Square Ventures (USV), Fred Wilson and his partners have put their money where their mouth is by investing in OB1 (the commercial arm of the open source Open Bazaar system). To quote Brad Burnham, another partner at Union Square Ventures:

“OB1 is a company formed to further the development of OpenBazaar, an open source project that is refining a protocol that will enable anyone, anywhere to sell products and services to anyone, anywhere in a fully decentralized marketplace. Because the marketplace is defined by a protocol and distributed across every participant’s server, the hosting costs are shared and there is no way for a central authority to leverage network effect market power to extract rents from the participants.”

OpenBazaar is a good example of ReDecentralization. It is a radical open source initiative and it is still unclear how OB1 will make money, but USV has invested in success stories such as Twitter and Tumblr where the route to monetization was unclear, so I am inclined to give them the benefit of the doubt and certainly applaud their courage and vision..

Bleeding edge Alert

OpenBazaar is “coming soon”. You can view the code on GitHub, but you cannot use it yet to buy and sell.

Developer Enthusiasm

At this bleeding edge stage, the only predictor of success is the level of enthusiasm from developers and that looks good:

• The Reddit page for OpenBazaar has over 3,800 subscribers.

• The Slack room for OpenBazaar has about 1,200 users.

Or throwing good money after bad?

So much for the Tigger enthusiasm case. What does gloomy old Eeyore have to say?

“VCs who have put so much money into Bitcoin already are desperate to do anything that will kickstart this moribund economy. This is throwing good money after bad”

Of course, neither Tigger nor Eeyore know how this will play out. We will have to wait for the market to give its judgment.

Can I sell my book through Open Bazaar?

Without wanting to be too parochial, I will be more convinced of OpenBazaar if it will help me sell more of my book. About a year ago I started an experiment to answer the question:

Could Bitcoin help me cut out the 40% that Amazon takes to sell my book?

Seeing that Amazon was taking a 40% intermediary fee opened my eyes. I stopped the experiment because I could not find a simple way to meet my needs. I was willing to accept payment in Bitcoin.

Shameless plug. It is a great read for anybody interested in sales and marketing in the digital age. I am currently working on a new edition. If you buy this edition using ye olde credit card on Amazon, please send me an email with proof of purchase and I will send you a digital PDF of the new edition as soon as it is available.

In related news, it is getting easier to pay in Bitcoin

Suppose you sold something on Open Bazaar. You now own some Bitcoin and have 3 options:

• Keep it in Bitcoin because you reckon that it as likely to appreciate in value as putting it into a savings account in your favored Fiat currency.

• Convert it to your favored Fiat currency so that you can buy stuff.

• Buy stuff directly with Bitcoin.

For the Bitcoin economy to thrive, more people have to choose the last option. Today you are limited to those merchants who have elected to be early adopters and accept Bitcoin. This is were Plutus, a London-based startup, is significant. Another bleeding edge alert, this is announced but not yet available. When Plutus is released, you will be able to pay with Bitcoin at every NFC-enabled merchant. This is riding a wave of adoption that is happening thanks in part to Apple Pay.

OpenBazaar could create more Bitcorati

My theory is that the Bitcoin economy is currently in Phase 2, which I label the Bitcorati phase:

• Phase 1. Illegal online transactions, made famous by Silk Road. This got some media attention and confirms the old saying that, “there is no such thing as bad press”.

• Phase 2. Attracting rich Bitcorati for legal products. This is the phase we are in today. The merchant logic here is very simple. If a rich person wants to pay me in some unusual currency, I am motivated to accept that currency. Enough people got rich speculating in Bitcoin or mining Bitcoin in the early days for this to be a real niche market. These Bitcorati are Bitcoin enthusiasts, so if they see two objects they desire equally and one says “we accept Bitcoin” then that rich Bitcorati will choose the merchant who accepts Bitcoin. This is fundamentally different from phase 1 because a) it is legal and b) we will start to see merchant success stories akin to the merchants who were early adopters on the Internet.

The problem is the limited size of the Bitcorati market. The number of people who were smart enough to mine or buy Bitcoin in the 2009 to 2011 era when the price was so low that they now have lots of discretionary spending money is tiny. Anybody buying after that paid hard cash directly or indirectly (via expensive mining rigs and electricity) and they need that back in Fiat asap. If lots of micro-entrepreneurs get paid in Bitcoin through OpenBazaar, this Bitcorati market will increase.