Bitcoin business opportunities 2018

This study fills this gap. We explore drivers behind the global uptake of digital infrastructure enabling the use of the most prominent digital currency to date; Bitcoin spelled with capital B when referring to the system, and with lower-case b when referring to the unit of account, in keeping with convention in the computer science literature. We believe these types of Bitcoin infrastructure Footnote 3 to provide an informative lens and context for exploring the drivers behind the recent growth of the cryptocurrency.

In particular, we believe that that by studying patterns of adoption of these two different types of infrastructure, we obtain complimentary perspectives of the drivers behind the growth of Bitcoin as a system. We chose to focus on Bitcoin since it is presently the most well-known and widespread cryptocurrency. Footnote 4 Most cryptocurrencies are recorded as clones or as variations of the Bitcoin technology e.

Bitcoin has also been shown to play an important role for the emergence of new digital entrepreneurial ecosystems, consisting of Initial Coin Offering ICO issuers, payment processors, exchanges, wallets, financial services, mining hardware, and developers Sameeh Bitcoin, or emulations of Bitcoin, play a central role in this development The Economist The central role of bitcoin is illustrated by the findings of Masiak et al. In this light, the development of Bitcoin infrastructure might be expected to play a role in enabling the expansion of digital financing and entrepreneurship rapidly emerging through cryptocurrencies.

Our results provide some support for the view that bitcoin adoption is driven by perceived failings of traditional financial systems see, e. In particular, we find more adoption where distrust in banks and the financial system are greater, as well as in countries experiencing inflation crises. Meanwhile, the spread of Bitcoin infrastructure seems to be complimentary to existing financial systems, as we observe less adoption where bank rents and share of the unbanked are highest.

In line with expectations that interest in bitcoin as a speculative investment is a partial driver of adoption of bitcoin e. We furthermore show that bitcoin adoption is greatest where the risk of narcotics-related money laundering is greatest, as well as where perceptions of the rule of law is strongest. This latter finding may hint at a shift to pseudonymous online cryptocurrency crime where offline law enforcement is strong.

While a number of studies make strides in researching the adoption of bitcoins—qualitatively by surveying experts Ermakova et al. Our study is also the first to empirically analyze the growth of Bitcoin infrastructure. We thereby contribute to a nascent body of research that delves into exploring the adoption of financial technologies Xue et al.

We improve upon current research on adoption of digital currencies by empirically examining actual digital currency support over time in a panel data set. We have location data, covering the entire world, enabling the use of geospatial data analysis to investigate the role of socio-economic and institutional factors, in parallel to technological and economic factors, in driving their adoption. Recent literature has emphasized the need to integrate the social, economic, and cultural elements when studying entrepreneurial ecosystems Spigel Our unique context of cryptocurrency infrastructure allows us to do so.

By increasing our understanding of what socio-economic and institutional factors that are associated with the adoption of the infrastructure behind virtual currencies, the study offers important insights to scholars seeking to understand the growth of cryptocurrencies to date. These results are also of potential interest to monetary authorities as well as for developers and entrepreneurs in the virtual currency ecosystem, including financial institutions, e-commerce payment system providers or technology companies, which are exploring or planning to issue or accept virtual currencies.

The remainder of this article is organized as follows. In section 2, we discuss a conceptual framework for our analyses. Section 3 provides a thorough description of our novel data, starting with an overview of the Bitcoin infrastructure studied. Sections 4 describes our methodology, and Section 5 explains our results. We conclude and discuss implications of our findings in Section 6.

Conceptual framework In considering what socio-economic and institutional factors may be related to the intensity of Bitcoin infrastructure adoption, we build on a view of decisions to set up and operate Bitcoin infrastructure as being related to a combination of extrinsic and intrinsic motivations. The launch of the Bitcoin system was embedded in idealistic notions of providing means to replace existing financial structures, and nurturing an alternative monetary and financial system that would enable greater anonymity, privacy, and autonomy Bashir et al.

Individuals setting up Bitcoin nodes to grow the peer-to-peer network would often do so as an expression of support for Bitcoin as a system and financial phenomenon. Meanwhile, those running a node do so to verify that their own transactions are secure, while it may also be related to bitcoin mining activities, where individuals seek to earn bitcoins. The growth of Bitcoin infrastructure can be expected to be directly linked not only to support and positive attitudes, but also to the actual use of bitcoin e.

We expect that in the relatively early stage of development that we are studying, the use of bitcoin as a currency and the support for the Bitcoin system are to be understood as interdependent entities. That is, we expect that positive attitudes towards the cryptocurrency will translate into more use, and we expect greater use to spread the interest for and general awareness of Bitcoin, i.

In developing hypotheses about the adoption of Bitcoin infrastructure, we hence consider what set of socio-economic and institutional factors may be associated with greater support and use of the cryptocurrency. Active support for Bitcoin may hence be understood as being fundamentally related to opportunities enabled from these differentiating technologies; making it an attractive substitute to traditional currencies for groups of users Athey et al.

Opportunities arising due to the differentiating technology underlying Bitcoin stem from its ability to remove the need for a trusted third party or disintermediation, and due to its cryptographic technology, that enables pseudonymity in online transactions Cohen Footnote 6 Preferences for remaining anonymous in financial transactions may be associated with entirely ideological views.

In an empirical examination of the related phenomenon of ICOs, Fisch et al. However, preferences for anonymity also arise due to specific intentions to evade legal authorities. Against this background, it would seem valid to expect that the global spread of bitcoin has been driven both by its potential role as a partial substitute role for traditional financial services and currencies, and by its potential role as facilitator of illicit activity. In what follows, we consider these two alternative accounts for what drives adoption of infrastructure for the supply and demand of bitcoins.

Meanwhile, Glaser et al. As an investment it increases opportunities for portfolio risk management owing to its very limited correlation with other asset returns such as fiat currencies, stocks, bonds and commodities such as gold Baur et al. While previous academic studies have attributed less e. To the extent that the adoption of Bitcoin infrastructure is related to the stock of bitcoin holders, geographical variation in Bitcoin infrastructure adoption may be related to geographical differences in the intensity of speculative trading.

This is since node infrastructure are primarily set up to support bitcoins as an exchange and payment system. Bitcoin may substitute for real or perceived failings of established financial systems, due to opportunities of disintermediation and decentralization technologies. We first consider bitcoin as a substitute for fiat currencies in inflation crises. We subsequently consider less acute failings of established financial systems, in discussing whether Bitcoin can be considered a viable potential substitute to poorly functioning national banking markets.

Finally, we consider a more ideological perspective of interest in Bitcoin as being driven by the spread of general attitudes of distrust in banks and the established financial system. When discussing banking market development, we also acknowledge that financial development may also be expected to drive the interest in cryptocurrencies.

If this mechanisms dominates, support for Bitcoin and the growth of Bitcoin infrastructure will be stronger—not weaker—in countries with well-developed banking markets. Inflation In its capacity as a global currency which is not tied to any particular economy, bitcoin has the potential to act as a hedging opportunity against country-specific risk.

In particular, buying bitcoins offers a novel opportunity to hedge against very high inflation, in parallel to how gold and other assets have been known to function in the past Arnold and Auer Luther finds that currency transitions have often occurred during episodes of hyperinflation, exemplified by many Bolivians and Peruvians who switched to US dollars, perceived to be safer, during such national episodes in the s.

People affected by very high inflation may therefore become more actively interested in holding and using bitcoin, and in supporting Bitcoin as an alternative financial system. Cryptocurrencies have indeed been touted by advocates as a means to a less crisis-prone financial system Maurer et al.

There are also reports that countries experiencing high inflation have seen surges in interest in bitcoins. This is visible in the example of Venezuela, where inflation soared, trust in the national government policy and currency plummeted and interest in bitcoins increased, evidenced by the popularity of bitcoin mining Kliber et al.

Another noted example is Cyprus during its — financial crisis Subramanian and Chino We hence expect that high inflation levels or inflation crises may systematically affect the adoption of the two types of Bitcoin infrastructure bitnodes, bitcoin merchants.

Hypothesis 1: The occurrence of inflation crises is associated with increased adoption of Bitcoin infrastructure. Banking market development and competition There is a potential for financial technologies to substitute for deficient provision of traditional banking services, as evidenced, e. Digital currencies have been hailed as a promising means to reach businesses and people in remote and marginalized areas Lagarde Around the world, most existing payment systems e.

It is conceivable that digital currencies could serve as a payment system of choice for the unbanked i. Whereas payment of a minor fee for access to services of an online trading platform is sufficient for a digital currency transaction Dwyer , banking systems impose fees on businesses and individuals, in the form of depository and transactional fees.

Philippon finds that the unit cost of financial intermediation has remained consistently and surprisingly expensive from to Conventional transactions impose costs ranging from a small percentage e. By removing the intermediary, the development of Bitcoin has the potential to do away with these costs. Bitcoin offers a welcome alternative when high transaction costs of traditional transactions either disincentives the transaction altogether or diminish its benefits Dierksmeier and Seele Lacking access to a financial institution or the needed documentation to use one, such individuals have to rely on storing cash, endangering themselves and limiting them to transact with those within their physical reach Dierksmeier and Seele As long as access to a mobile phone with SMS technologies or Internet connection exists on any device, a whole world of transaction and investment possibilities becomes available Raymaekers Besides the penetration of banking, underdeveloped competition in the banking market may be another factor driving interest in Bitcoin as a payment system.

Low competition within the financial system is expected to be associated with high rents and limited innovation by incumbents, aggravating the frictions of traditional banking services in terms of costs, service availability, and service scope. Therefore, low competition may in principle drive consumers to adopt alternative financial technologies for reasons parallel to those developed above.

Moreover, low competition in the banking market stimulates investment in fintech Thakor Interest in Bitcoin may follow in the wake of such activity. In summary, we suggest the following set of hypotheses: Hypothesis 2a: The lower the population of financially included adults, the greater the adoption of Bitcoin infrastructure. Hypothesis 2b: The lower the level of competition in banking markets, the greater the adoption of Bitcoin infrastructure. On the other hand, it is also possible that financial development is a prerequisite for interest in cryptocurrencies.

Lacking experience with traditional Internet banking services, people may not be prepared to deal in cryptocurrency. A lack of familiarity with financial intermediaries and their services may also lead to little interest in exploring their alternatives. Such a view would suggest that digital infrastructure aimed at disrupting banking may develop most strongly in environments with the most well-developed banking markets.

Financial literacy and sophistication is a pre-requisite for taking advantage of financial innovations Campbell and engaging in complex financial products, such as stock market investments van Rooij et al. Financial literacy has been shown to underlie financial inclusion and increase the use of financial services Grohmann et al.

The use of electronic payments has been found to be associated with financial inclusion c. Thakor Emerging research points to complementarities between banking markets and fintech development Hornuf et al. For example, Gazel and Schwienbacher find locations with more bank headquarters and financial competition attract more fintech clusters. Such a development can generate externalities in the form of greater know-how of financial technologies, and thereby also interest in cryptocurrencies such as bitcoin.

Bitcoin AKA Cancer-Pills has become an investment bubble, with the complementary forces of human herd behavior, greed, fear of missing out, and a lack of understanding of past financial bubbles amplifying it.

To better understand this mania, we need to look at why bitcoin was invented in the first place. As the legend goes, in an anonymous developer published a white paper under the fake name Satoshi Nakamoto. The author was evidently a software and math person.

But the paper also has some in-built ideology: the assumption that giving national governments the ability to monitor flows of money in the financial system and use it as a form of law enforcement is wrong. Read more This financial libertarian streak is at the core of bitcoin. Government-issued currencies have value because they represent human trust and cooperation. There is no wealth and no trade without these two things, so you might as well go all in and trust people.

An electronic signboard of a Bithumb cryptocurrency exchange in Seoul, South Korea. To be widely accepted as legal tender for all debts, public and private. Bitcoin has none of these things, and even safely storing it is difficult. Bitcoin exchanges such as Mt Gox in Japan, Bitfinex and various other wallets and exchanges have been hacked. The second point is crucial. Bitcoin is only valuable if it truly becomes a critical world currency.

Right now, speculators are the only people driving up the price. A speculative cult currency like bitcoin is only valuable when you cash it out to a real currency, like the US dollar, and use it to buy something useful like a nice house or a business.

When the supply of foolish speculators dries up the value evaporates — often very quickly. A currency should also not be artificially sparse. It needs to expand with the supply of goods and services in the world, otherwise we end up with deflation and hoarding. It helps to have the Federal Reserve system and other central banks guiding the system.

Full anonymity and government evasion will not be one of its features. The cryptocurrency bubble is really a repetition of the past.

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