Technology is subversive. Every few years, a new technology threatens the status quo of one industry or another, and a familiar sequence of events follows. Consumers, users, and some savvy technologists win. The folks dominating the status quo—typically rich, powerful, well-connected folks—start to hurt. But dominant players don’t like to lose, so they fight back using every weapon in their arsenal. As a result, while the first chapter in the life of a new technology is its happy launch, the second chapter is invariably a ferocious backlash. This year’s unfolding second chapter involves Bitcoin, an enticingly anonymous “cryptocurrency” designed to wrest the international currency system from the hands of central bankers.
Bitcoin’s popularity grew steadily over its first four-and-a-half years. Its value, however, was not quite as steady. In June 2011, Bitcoins lost almost 70% of their value in a week before bottoming out in November—roughly 94% below their June peak. Shorter gyrations in 2012 showed Bitcoins losing over a third of their value over two days in January and about half their value over a comparable stretch in August. But it was 2013 that turned out to be Bitcoin’s year. From an opening below $15, Bitcoins rose to more than $90 by the end of March—though not without a couple of plunges and recoveries along the way. On April 10th they hit a high of $266, before rapidly losing half their value. That activity, and the attention it garnered, paved the way for Chapter 2.
Second chapters in technology tales are rarely upbeat. They tend to feature wounded giants targeting youthful upstarts. In perhaps the best known of these tales, the giants of the recording industry awoke to discover that Napster threatened their lucrative control of music distribution. They fought smart and hard on many fronts: they lobbied Congress for favorable changes to copyright law; they launched a massive PR campaign; and they filed numerous lawsuits against children. Their onslaught was brutal and effective. Chapter 2 of the digital music tale ended with the demise of Napster, as the recording industry and approved “responsible” technologists danced together into Chapter 3.
In Chapter 2 of the cryptocurrency tale, Bitcoin must face a force far larger and immensely more powerful than mere lobbyists. The status quo that cryptocurrencies threaten is the international monetary system. Its opponents are therefore the current custodians of that system—namely the governments of the world. Bitcoin was never subtle about the challenge it posed. The very first sentence of the abstract in Nakamoto’s 2008 paper promised to “allow online payments to be sent directly from one party to another without going through a financial institution.” The paper then described a way to originate—that is to “mine,” or perhaps more accurately to “mint”—Bitcoins. Yet history teaches that sovereigns of all stripes guard two prerogatives with particular zeal: the right to wage war and the right to mint currency. Bitcoin thus explicitly threatened one of the two fundamental, defining powers of government.
As long as Bitcoin remained the province of a few software developers, the threat was not serious. But the activity and excitement of early 2013 made Bitcoin too hard to ignore. Within the space of a few months: Thailand declared Bitcoins illegal; Germany clarified the legal, regulatory, and tax status of Bitcoin transactions; U.S. authorities seized Bitcoin accounts; a Federal Judge ruled that Bitcoins fell within the SEC’s regulatory authority; and Congress began investigating Bitcoin—with a particular emphasis on its implications to Homeland Security. By Labor Day 2013, the Bitcoin Backlash was well under way.
The future of this tale is both predictable and instructive. As I detailed inDigital Phoenix(MIT Press, 2005), digitization will engulf different parts of our world at different times. Yet each transition will follow a predictable path—as the music industry showed us early and clearly. Understanding and spotting this path is critical to appreciating how our world is changing. It lays the groundwork for telling winners from losers, for shaping public policy, and perhaps most importantly for devising business strategy. So as we watch the cryptocurrency tale play itself out, here’s a quick tip: Smart money always bets on government in the short term and technology in the long term. And smart businesses craft strategies that follow the smart money.