When Bitcoin was still in its infancy, it was in dire need of a narrative. Its users and proponents needed a way to explain why Bitcoin would catch on, why it would be necessary, and, most of all, prove it works.
Phase 1: Cypherpunk
In the very beginning, this narrative was widely theoretical, driven by ideology and extreme uncertainty. When Bitcoins barely had any value, there was a need to establish a position that could help convince people that bits and bytes on a hard drive could be something valuable.
Bitcoin was born from a cypherpunk desire to use encryption and technology for political gain. The Genesis Block—the first block in Bitcoin’s blockchain—contains the cheeky message “Chancellor on brink of second bailout for banks.”
The narrative that Bitcoin is an alternative financial system without the need for government subsidies is still very much alive but is no longer able to attract new users and enthusiasts. The pool of people religiously critical of traditional banking policies is now exhausted and proven to be relatively small.
Phase 2: Drugs
In early 2011, the infamous dark website, The Silk Road became a convenient way to buy drugs online and have them delivered to your door. It was likely the first popular site where people could use Bitcoins in a way that they couldn’t use credit cards or cash. Especially in areas of the United States, where buy drugs on the street carried the significant risk of being shot, this was a big deal.
By the time Wired featured the platform in their magazine in June 2011, Bitcoin had already increased in value beyond US$1 per coin and was heading for a phenomenal bubble, peaking over US$30 just a week later.
To this day Bitcoin remains associated with drugs and anonymous payments in general, a narrative that’s proven difficult to shake off.
Phase 3: Payments
When Bitcoin’s value shot up from just under US$100 to US$1000 for the first time in late 2013, it seemed that the global takeover of the financial system would be just around the corner.
Major firms such as Microsoft, Expedia, Dell, and Dish rushed to incorporate Bitcoin payments into their systems. Bitcoin payment processors, like Bitpay, received the most attention, even sponsoring the 2014 St Petersburg Bowl.
Today, though almost no companies have abandoned their Bitcoin integration, it only accounts for minuscule sales, and only a few markets have seen sizeable Bitcoin adoption, including online privacy tools and online gaming.
Phase 4: Remittances
From payments, the narrative of “Bitcoin’s killer app” moved on to remittances. Over half a trillion US Dollars are sent between borders around the world every year, a number that’s sharply rising due to increased worker mobility and rising wages. These remittances will often move through informal channels at high fees and slow speeds.
Many companies have been able to capture this market through the use of Bitcoin, though none has been successful at a relevant scale. However, it’s possible Bitcoin is used for many remittances, as it’s incredibly hard to measure what people use Bitcoins for directly on the blockchain.
Phase 5: China
In 2015, China saw a rise in the trade of Bitcoin. So much that at one point Goldman Sachs estimated that 80% of all Bitcoins were exchanged for Renminbi.
Bitcoin is repeatedly promoted not just as a way for Chinese people to speculate outside of the heavily restrictive and manipulated state-sanctioned markets, but also to effortlessly move money in and out of the country, circumventing capital controls and anti-money laundering directives.
Whether this is true on any significant scale remains unknown, but the narrative alone surely made the People’s Bank of China uncomfortable, and in January 2017 more restrictions were placed on Bitcoin exchanges. In September 2017 these restrictions were expanded, forcing some exchanges to close down entirely. Whether this means a total ban on Bitcoin in China is still uncertain, but China is no longer the driver of adoption and investment for cryptocurrencies.
With most narratives either disproved or abandoned, Bitcoin is currently seeking its next big thing. Though the failed narratives aren’t necessarily a bad thing and they certainly don’t point to a failure for Bitcoin itself.
Payment processing is still very much alive in Bitcoin, although it’s no longer be considered the “next big thing.” Saving a few percentage points on credit card fees only warrants implementation of new technology once hundreds of millions of users can potentially use the system.
Currently, a few narratives compete to become the next dominant one. Bitcoin has certainly established itself as a stable infrastructure with relatively steady positive returns. Volatility has significantly declined, while most fiat currencies have lost value.
The idea of Bitcoin as “digital gold” is picking up, as well as that of a means for international businesses to trade.