Disruptive Technologies
Introduction
Kodak once had 145,000 employees, a market share near 90 percent, [1] and profit margins so good
an executive once bragged that any products more lucrative than film were likely illegal. [2] No firm
was closer to photographers. No brand was more synonymous with photographs. Emotionally
moving images were known as “Kodak moments.” And yet a firm with so much going for it was
crushed by the shift that occurred when photography went from being based on chemistry to being
based on bits. Today Kodak is bankrupt, it’s selling off assets to stay alive, and its workforce is about
one-fourteenth what it used to be. [3]
The fall of Kodak isn’t unique. Many once-large firms fail to make the transition as new technologies
emerge to redefine markets. And while these patterns are seen in everything from earthmoving
equipment to mini-mills, the tech industry is perhaps the most fertile ground for disruptive
innovation. The market-creating price elasticity of fast/cheap technologies acts as a catalyst for the
fall of giants.
The Characteristics of Disruptive Technologies
The term disruptive technologies is a tricky one, because so many technologies create market shocks and catalyze
growth. Lots of press reports refer to firms and technologies as disruptive. But there is a very precise theory of
disruptive technologies (also referred to as disruptive innovation—we’ll use both terms here) offered by Harvard
professor Clayton Christensen that illustrates giant-killing market shocks, allows us to see why so many once
dominant firms have failed, and can shed light on practices that may help firms recognize and respond to
threats.
In Christensen’s view, true disruptive technologies have two characteristics that make them so threatening.
First, they come to market with a set of performance attributes that existing customers don’t value. Second,
over time the performance attributes improve to the point where they invade established markets. [4] (SeeFigure
6.1 "The Giant Killer".)
These attributes are found in many innovations that have brought about the shift from analog to digital. The
first digital cameras were terrible: photo quality was laughably bad (the first were only black and white), they
could only store a few images and did so very slowly, they were bulky, and they had poor battery life. It’s not
like most customers were lined up saying “Hey, give me more of that!” Much the same could be said about the
poor performance of early digital music, digital video, mobile phones, tablet computing, and Internet telephony
(Voice over IP, or VoIP), just to name a few examples. But today all of these digital products are having a
market-disrupting impact. Digital cameras have all but wiped out film use, the record store is dead, mobile
phones for many are their only phone, tablets are selling faster than laptops, Internet phone service is often
indistinguishable from conventional calls, and Skype can be considered the world’s largest long-distance phone
company. [5] All of these changes were enabled by fast/cheap technologies, largely by the trends we see in the
chart from the prior chapter labeledFigure 5.1 "Advancing Rates of Technology (Silicon, Storage, Telecom)".
Figure 6.1 The Giant Killer
Incumbent technologies satisfy a sweet spot of consumer needs. Incumbent technologies often improve over time,
occasionally even overshooting the performance needs of the market. Disruptive technologies come to market with
performance attributes not demanded by existing customers, but they improve over time until the innovation can
invade established markets. Disruptive innovations don’t need to perform better than incumbents; they simply need
to perform well enough to appeal to their customers (and often do so at a lower price).
Source: Adapted from C. Christensen, The Innovator’s Dilemma (Boston, MA: Harvard Business School Press, 2013).
Why Big Firms Fail
Those running big firms fail to see disruptive innovations as a threat not because they are dumb but, in many
ways, because they do what executives at large, shareholder-dependent firms should do: they listen to their
customers and focus on the bottom line. And because of the first characteristic mentioned, the majority of a
firm’s current customers don’t want the initially poor-performing new technology. The most disruptive
technologies also often have worse margins than the initially dominant incumbent offerings. Since these
markets don’t look attractive, big firms don’t dedicate resources to developing the potential technology or
nurturing the needs of a new customer base. Your best engineers are likely going to be assigned to work on
cash-cow offerings, not questionable new stuff. This results in a sort of blindness created by an otherwise
rational focus on customer demands and financial performance.
By the time the new market demonstrates itself, start-ups have been at it for quite some time. They have
amassed expertise and often benefit from increasing scale and a growing customer base. The brands of firms
leading in developing disruptive innovations may also now be synonymous with the new tech. If this happens,
big firms are forced to play catch-up, and few ever close the gap with the new leaders.
Don’t Fly Blind: Improve Your Radar
So how can a firm recognize potentially disruptive innovations? Paying attention to the trajectory of fast/cheap
technology advancement and new and emerging technologies is critical. Seeing the future involves removing
short-sighted, customer-focused, and bottom-line-obsessed blinders. Having conversations with those on the
experimental edge of advancements is key. Top-tier scientific researchers and venture capitalists can be
particularly good sources for information on new trends.
Increasing conversations across product groups and between managers and technologists can also be helpful.
It’s common for many firms to regularly rotate staff (both management and engineering) to improve idea
sharing and innovation. Facebook, for example, requires employees to leave their teams for new assignments at
least once every eighteen months. [6]
Note that many disruptive firms were started by former employees of the disrupted giants. The founders of
Adobe, for example, came from Xerox; Apple’s founders worked for Hewlett-Packard; Marc Benioff worked for
Oracle before founding software-as-a-service giant Salesforce.com. Employees who feel so passionate about a
trajectory for future technology that they are willing to leave the firm and risk it all on a new endeavor may be a
signal that a development is worth paying attention to.
Yahoo! and the Squandered Mobile Opportunity
A BusinessWeek cover story on Yahoo! CEO Marissa Mayer’s challenges stated that at the time Mayer took over,
Yahoo! was a particularly weak player in mobile because it “ran into a classic Innovator’s Dilemma” [7] (the name
sometimes is ascribed to disruptive innovation theory, which is the title of one Clayton Christensen’s books).
Yahoo!’s success had been built on the desktop, browser-based web. While the firm had built a mobile team, the
mobile group was disbanded by a former CEO who struggled to justify keeping talented engineers on
underperforming projects. The mobile team leader left the company, while other members of the pioneering
mobile unit were scattered to other teams and had trouble convincing browser-centric managers that mobile
was the future. In many ways, Yahoo!’s mobile team was premature, but more importantly, it didn’t have an
executive champion to protect and nurture the team during the pioneering phase when financial results
couldn’t be realized. It couldn’t show substantial results, so managers were reassigned while upstarts built
multibillion-dollar businesses on increasingly powerful computers we carried in our pockets. Imagine if
Yahoo!’s mobile team had been protected and allowed to experiment and grow. Could Flickr have morphed into
Instagram? Could Yahoo! Messenger have become WhatsApp?
Potential Disruptor Spotted: Now What?
But all these conversations will simply expand a manager’s radar. They don’t necessarily offer insight on how to
deal with potentially disruptive innovations once spotted. Navigating this next step is really tough. There’s no
guarantee that a potentially disruptive innovation will in fact become dominant. Trying to nurture new
technology in-house is also a challenge. Top tech talent will often never be assigned to experimental products,
or they may be pulled off emerging efforts to work on the firm’s most lucrative offerings if the next version of a
major product is delayed or in need of staff. And as disruptive technologies emerge, by definition they will
eventually take market share away from a firm’s higher-margin incumbent offerings. The result of the
transition could include losses, contracting revenues, and lower profits—a tough thing for many shareholders to
swallow.
Christensen suggests a few tactics to navigate the challenges. One is that a firm can build a portfolio of options
on emerging technologies, investing in firms, start-ups, or internal efforts that can focus solely on what may or
may not turn out to be the next big thing. An option is a right, but not the obligation, to make an investment, so
if a firm has a stake in a start-up, it may consider acquiring the firm; or if it supports a separate division, it can
invest more resources if that division shows promise. It’s also important that these experimental efforts are
nurtured in a way that is sufficiently separate from the parent—geographical distance helps, and it’s critical to
offer staff working on the innovation a high degree of autonomy. Christensen uses the analogy of the creosote
bush to explain what often happens to new efforts in big firms that don’t break out potentially disruptive
innovations. The desert-dwelling creosote bush excretes and drops a toxin that kills nearby rival plants that
might otherwise siphon away resources like water or soil nutrients. Threatened managers can act just like the
bush—they’ll pull high-quality engineers off emerging projects if a firm’s top offerings need staff to grow.
Lucrative old tech has a credible case for big budget allocations and is first in line when planning corporate
priorities. But by nurturing potentially disruptive innovations in protected units (or even as separate firms),
engineers and managers focusing on new markets can operate without distraction or interference from
resource-coveting or threatened staff on other projects. This kind of separation can be vital for start-ups, but
some firms maintain arms-length autonomy even as their investment in potential disruptors grows quite large.
East-coast storage giant EMC is the majority owner of Silicon Valley’s multibillion-dollar VMware but has left
the latter largely free to innovate, nurture its customer base, and grow its own brands, even as some of the
firm’s products and partners threaten parent core products.
Intuit Pilots a Course through Disruption
One firm that appears to be successfully navigating the rough waters of disruptive innovation is Intuit. The
highly profitable, multibillion-dollar firm is the leader in several packaged software categories, including
personal finance (Quicken), small business (QuickBooks), and tax prep (TurboTax) software. But the future is
in the cloud, and for conventional packaged software firms, this could be threatening. Acquisitions are one way
Intuit has dealt with disruption. Mint.com is a personal finance offering delivered over the Web and in an app
that wasn’t just cheaper than Intuit’s Quicken product—it was offered for free. (Mint makes money by making
recommendations of ways to improve your finances—and takes a cut from these promotions.) Intuit decided to
buy the upstart rival even though it was clearly cannibalizing Intuit’s efforts. It even killed an internally
developed but less successful rival product following the acquisition. Mint today remains as a separate brand
and is helping inform the rest of the firm on how to succeed with alternatives to packaged software. The firm’s
TurboTax now has cloud-based offerings and a free SnapTax app—take a photo of your W2 and the app fills out
your taxes for you automatically (you pay to electronically file). And engineers are able to use 10 percent of their
work time to explore new, experimental ideas. [8] While so many firms have been thwarted by listening to
existing customers and clinging to old models that are about to become obsolete, Intuit has managed to find
growth through disruption. So-called connected services that either run in the cloud or enhance existing
offerings make up over 65 percent of the firm’s revenues. [9]
Intel and AMD’s Low-Margin, Low-Power Threats
One firm threatened by disruptive innovation brought about by the advancement of Moore’s Law is, ironically,
processor giant Intel. The firm’s most lucrative chips are the ones in servers—they cost a lot and have great
margins. But a market in which Intel never had much success is now threatening to invade the server space.
Chips based on Intel rival ARM power nearly all of the smartphones on the planet. Samsung, Apple, Motorola,
LG, and Blackberry all use chips with ARM smarts. Unlike Intel, ARM doesn’t manufacture chips itself—instead
it licenses its hyperefficient designs to rivals who tweak them in their own offerings. ARM designs are especially
attractive to smartphone manufacturers because they are far more power efficient than the chips Intel sells for
PCs, laptops, and servers. The Intel chips were never designed for power efficiency; they evolved from markets
where computers were always plugged in. As Moore’s Law advances, ARM chips (once computational
weaklings) are now fast enough to invade the established market for server chips. This has left Intel scrambling
to create low-power chip offerings in an attempt to attack ARM in smartphones and satisfy the needs of its
traditional customer base. Unlike Intel-compatible rival AMD, ARM chips can’t run Intel software, so all of a
firm’s old code would need to be rewritten to work on any ARM-powered servers, laptops, or desktops. But the
chips are also cheaper, threatening Intel margins.
HP offers a line of servers that will use ARM logic, and AMD, an Intel rival that has long made chips compatible
with Intel’s, has a new line of server chips based on the incompatible but power-stingy ARM logic. Meanwhile,
Intel has developed lower-power chips to attack the smartphone market where ARM dominates. Another Intel
chip architecture named Quark aims even lower, targeting the Internet of Things. To demonstrate possibilities,
Intel’s CEO has been wearing a “smart shirt” embedded with sensors that monitor heartbeat and other
vitals. [10] Who wins remains to be seen, but Intel’s battle cry comes from the title of a book written by former
CEO Andy Grove—Only the Paranoid Survive. An adherent to the power of the Disruptive Innovation framework
(Grove and Christensen once appeared together on the cover of Forbes magazine), Grove states, “[The] models
didn’t give us any answers, but they gave us a common language and a common way to frame the problem so
that we could reach consensus around a counterintuitive course of action.” [11]
Sometimes there aren’t any easy answers for transitioning a firm that lies in the path of disruptive innovation.
The newspaper industry has been gutted by Internet alternatives to key products, and online ad revenue for
newspapers isn’t enough to offset the loss of traditional sources of income. As an example of how bad things
have been for newspapers, consider the San Jose Mercury News, the paper of record in Silicon Valley. In a span of
five years, the Merc saw revenue from classified ads drop from $118 million to $18 million. Says Scott Herhold,
a Mercury News columnist, “Craigslist has disemboweled us.” [12] We can relate this chapter to the five-forces
model covered previously: Fast/cheap technology fueled the Internet and created a superior substitute for
newspaper classifieds—ads that were unlimited in length, could sport photos, link to an e-mail address, and be
modified or taken down at a moment’s notice, and were, in many cases, free. There aren’t any easy answers for
saving an industry when massive chunks of revenue evaporate overnight.
For every Kodak that suffers collapse, new wealth can be created for those who ride the wave of disruptive
innovation. Consider the thirteen guys behind Instagram. In about eighteen months, they built a billion-dollar
business that now has over 100 million users worldwide. Word to the wise—for your best bet at being a tech
victor and not a tech victim, keep your disruption-detecting radar dialed up high and watch the trajectory of
fast/cheap technology curves.
KEY TAKEAWAYS Many dominant firms have seen their market share evaporate due to the rise of a phenomenon known as disruptive technologies (also known as disruptive innovations). While this phenomenon occurs in a wide variety of industries, it often occurs when the forces of fast/cheap technology enable new offerings from new competitors. Disruptive technologies (also called disruptive innovations) come to market with a set of performance attributes that existing customers do not demand; however, performance improves over time to the point where these new innovations can invade established markets. Managers fail to respond to the threat of disruptive technologies, because existing customers aren’t requesting these innovations and the new innovations would often deliver worse financial performance (lower margins, smaller revenues). Several techniques can help a firm improve its monitoring ability to recognize and surface potentially disruptive technologies. These include seeking external conversations with pioneers on the frontier of innovation
(researchers and venture capitalists) and internal conversations with the firm’s engineers and strategists who have a keen and creative eye on technical developments that the firm has not yet exploited. Once identified, the firm can invest in a portfolio of technology options—start-ups or in-house efforts otherwise isolated from the firm’s core business and management distraction. Options give the firm the right (but not the obligation) to continue and increase funding as a technology shows promise. Having innovation separated from core businesses is key to encourage new market and technology development focus while isolating the firm from a “creosote bush” type of resource sapping from potentially competing cashcow efforts. Piloting a firm through disruptive innovation is extremely difficult, as the new effort will cannibalize existing markets, may arrive with lower margins, and can compress revenues.
6.2 Bitcoin: A Disruptive Innovation for Money and More?
LEARNING OBJECTIVES 1. Understand what bitcoin is, to whom it appeals and why, its strengths, and its limitations. 2. Gain additional insights into evaluating the trajectory of technology and its disruptive capacity.
Bitcoin is the transaction method favored by cybercriminals and illegal trade networks like the now shuttered
Silk Road illegal drugs bazaar. [1] It’s not backed by gold or government and appeared seemingly out of thin air
as the result of mathematics performed by so-called “miners.” It’s been a wildly volatile currency, where an
amount that could purchase a couple of pizzas today would be worth over $6 million a little over three years
later. [2] Its one-time largest exchange handled millions in digital value, yet it was originally conceived as the
“Magic: The Gathering Online card eXchange” (Mt. Gox), and that service suffered a massive breach where the
digital equivalent of roughly $450 million disappeared. [3] Yet despite all this, many think bitcoin might upend
money as we know it enough so that venture capitalists have been pouring their coin into bitcoin start-ups,
totaling as much as $134 million by early 2014. [4]
Figure 6.2
The B symbol with two bars is used to refer to bitcoin.
Many don’t even know what to call bitcoin. Is it a cryptocurrency, a digital currency, digital money, or a virtual
currency? [5] The US government has ruled that bitcoin is property (US Marshals have auctioned off bitcoins
seized from crooks). [6] While Goldman Sachs and UBS have been dismissive of bitcoin’s future, [7] Deloitte has
written that the negative hype has underestimated the technology’s potential to revolution not just payments
but all sorts of asset transactions. [8] The Bank of England has issued a report describing bitcoin as a “significant
innovation” that could have “far-reaching implications." [9] How It Works
Bitcoins are transferred from person to person like cash. Instead of using a bank as a middleman, transactions
are recorded in a public ledger (known as a blockchain in bitcoin speak) and verified by a pool of users
called miners. The miners get an incentive for being involved: they can donate their computer power in
exchange for the opportunity to earn additional bitcoins, and sometimes, some modest transaction fees (this
means bitcoin is peer-produced finance. For more on peer production, see Chapter 10 "The Sharing Economy,
Collaborative Consumption, and Creating More Efficient Markets through Technology"). While the ledger records
transactions, no one can use your bitcoins without a special password (called a private keyand usually stored in
what is referred to as a user’s bitcoin wallet, which is really just an encrypted holding place). The technology
behind this is open-source and considered rock solid. Passwords are virtually impossible to guess; and
verification makes sure no one spends the same bitcoins in two places at once. Benefits
Much of bitcoin’s appeal comes from the fact that bitcoins are transferred from person to person like cash,
rather than using an intermediary like banks or credit card companies. Getting rid of card companies cuts out
transaction fees (usually by 10 to 20 cents), which can top 3 percent. Overstock.com was one of the first large
online retailers to accept bitcoin. Its profit margins? Just 2 percent. Needless to say, Overstock’s CEO is a
bitcoin enthusiast. [10] Bitcoin also opens up the possibility of micropayments (or small digital payments) that are
now impractical because of fees (think of everything from gum to bus fare to small donations).
Bitcoin could also be a boon for international commerce, especially for cross-border remittance and in expanding
e-commerce in emerging markets. Family members working abroad often send funds home via services like
Western Union or MoneyGram, but these can cost $10 to $17 for a $200 transfer and take up to five days to
clear in some countries. [11] A bitcoin transfer would be immediate and could theoretically eliminate all
transaction fees, although several firms are charging small fees to ease transactions and quickly get money
moved from national currency to bitcoin and back. They’re going after a big market, as global remittances total
over half a trillion dollars. [12] Bitcoin might also lubricate the wheels of commerce between nations where credit
card companies and firms like PayPal don’t operate, and where internationally accepted cards are tough to
obtain. Less than one-third of the population in emerging markets have any sort of credit card, but bitcoin
could provide a vehicle to open this market up to online purchases.
Civil libertarians like the idea of transactions happening without the prying eyes of data miners inside card
companies, having their transaction history shared by others, or the government. As Wired points out,
bitcoin straddles the line between transparency and privacy. All transactions are recorded in the open, via the
blockchain, but individuals can be anonymous. You can create your anonymous private key and have someone
transfer funds to you or earn bitcoin via mining and no one can see who you are. While governments can try to
shut down or legislate bitcoin activity within their borders, there’s no bitcoin organization that controls money
flows. It’s been noted that following the revelations in WikiLeaks, Visa, Mastercard, and PayPal refused
donations to WikiLeaks. In that aftermath, Bitcoin became the go-to vehicle for those supporting WikiLeaks'
efforts. [13] There’s was no central organization to “freeze” a bitcoin account or a central technical resource to
impound or shut down. If a bitcoin transaction is not permitted in your country, go abroad and you’ve got full
access to everything in your wallet.
A paper by Deloitte University sees bitcoin as far more than a replacement for money. At its core, bitcoin is a
protocol for exchanging value over the Internet without an intermediary. This has the potential to disrupt all
sorts of systems that rely on intermediaries, including the transfer of property, execution of contracts, and
identity management. The paper’s authors envision fractional bitcoin being attached to things like vehicles,
where repair history and accidents can be referenced to an ownership-representing bitcoin fragment in the way
that registry paperwork happens now, and where vehicle title can be transferred by passing bitcoin from one
person to another—no lawyers, no notaries, no vehicle registration required. [14] Such innovation is less about
the currency-aspect of bitcoin, and all about the blockchain. As the Wall Street Journal points out, “almost any
document can be digitized, codified, and inserted into the blockchain, a record that is indelible, cannot be
tampered with, and whose authenticity is verified by the consensus of a community of computer users rather
than by the discretionary order of a centralized authority.” [15] To get a sense of how seriously some in the
finance industry view this emerging technology, consider that the Nasdaq stock exchange has tested Bitcoin’s
blockchain for transactions in its private market subsidiary, stating the exchange could eventually use the
technology for Nasdaq trades in the public market. [16] If blockchain transactions are to emerge as mainstream,
governments would likely want to link to such systems when ownership needs to be verified, but all this is
technically possible to build, and if it works, the disruption across industries would be massive. [17] Concerns
Bitcoin’s future could be bright, or it could fizzle as another overhyped, underperforming technology. There are
several challenges bitcoin needs to overcome before it makes it in the mainstream.
Consumer benefit needs to be stronger. While international remittance customers and those otherwise left out of
the banking and credit card system can see immediate benefit from bitcoin, most of the population isn’t
impacted by this market. For most, bitcoin is a difficult to understand and often difficult to usetechnology that
offers little benefit. Slick apps and firms offering streamlining support services that allow, for example, the easy
and quick conversion from dollars (or other currencies) to bitcoin and back will help, but unless this offers
consumer value beyond the credit card, few will bother to switch from plastic.
Bitcoin also has a reputation problem. Being embraced by drug dealers, tax evaders, and fringe libertarians
doesn’t instill a lot of confidence. And it doesn’t help that bitcoin was created by a mysterious, unknown entity
referred to as Satoshi Nakamoto. [18]
Security concerns also pose a problem. While bitcoin software is considered to be solid, it’s not a guarantee that
other entities are as secure. The multimillion dollar theft from Mt. Gox is a prime example. [19] The wallets that
hold your private key are also potentially vulnerable. If your computer is wiped out by a virus and you haven’t
written down your password or saved a backup copy in another secure and accessible location, you’re hosed; it’s
like money burned up in a fire. Hackers that steal passwords—whether they’re on your computer or the cloud—
effectively have access to anything in your bitcoin wallet; they can walk away with all your cash and it’s unlikely
that there’ll be a way to recover the loot.
Many firms that hope to strengthen the bitcoin industry (wallet builders, exchanges, and payment processors)
have struggled under an ambiguous cloud of not knowing how they will be regulated and what legal issues apply
to them. [20] China has banned bitcoin, [21] but California has moved forward to legalize the use of alternative
currencies. [22] New York has announced bitcoin-friendly initiatives. [23] The US government has also created
regulations around bitcoin that make it less amorphous and safer for investors, while the IRS ruled that
bitcoins are property. [24] Trends seem to be moving in the right direction, but financial institutions don’t work
well in environments of uncertainty, and clear operating guidelines and legal protections will be vital for bitcoin
to thrive.
Volatility is also an issue. During a recent, less-than-twelve-month period, the value of a single bitcoin went
from less than $100 to over $1,000 before losing half its value again. This kind of volatility makes bitcoin less
useful as a dollar-like currency, limiting its appeal to speculators that often seem like get-rich-quick schemers
or the much smaller legitimate market that is looking for in-and-out transactions such as cross-border
payments. Some also worry about a bitcoin valuation bubble. [25] Fixes are possible and several have been
proposed, but issuing a fix involves a massive upgrade of software, and certain factions of the community
(including many in the large network of small-time bitcoin miners) are wary of the impact of any change. [26]
Increased transaction volume should help stabilize the market, increase liquidity, and bring some stability to the
currency, but bitcoin has a long way to go. By mid-2014, bitcoin was seeing about 60,000 transactions per day,
compared with the 150 million daily transactions that Visa processes. [27] And to get to that kind of volume,
bitcoin will need more infrastructure support. During roughly this same period, Visa was handling 10,000
transactions in a second, while the entire bitcoin miner network could only handle seven. That’s not seven
thousand, that’s one hand plus two fingers—a single digit. [28] What Do You Think?
If all this sounds sketchy to you, consider how currencies have evolved. We’ve moved from precious materials
(gold, silver, etc.) to a currency backed by precious materials (the gold standard), to one based largely on laws
and governmental trust, to one allowing physical cash to be replaced by hand-signed paper receipts (checks),
and then to bits—that is, credit cards and money transfers. Now, many of us use smartphone apps to snap
photos of checks and have them electronically deposited into banks, rip up the check when you’re done, and
transaction is completed. With this evolution as context, does bitcoin seem like such an unlikely next step?
There are alternatives to bitcoin. You may have seen that NASCAR is sponsored by Dogecoin (the fact that this
bitcoin rival was named after an Internet meme dog doesn’t help credibility among the financially
conservative). But bitcoin does have the early mover’s advantage of getting the network effect of buyers and
sellers working in its favor. However, Bitcoin is by far the most popular and had the highest valuation of any
alternative currency network. [29]
What’s your take? Do you see credible opportunity here? Disruptive threat? Or flash-in-the-pan hype that’ll
fizzle and go nowhere?
KEY TAKEAWAYS An open-source, decentralized payment system (sometimes controversially referred to as a digital, virtual, or cryptocurrency) that operates in a peer-to-peer environment without bank or central authority. Bitcoins are created and can be earned by miners who participate in verifying and recording transactions in a public ledger (the blockchain). Various exchanges have been developed to make it easier for consumers to trade conventional currency for bitcoin and vice versa. An increasingly long list of retailers and other providers have begun accepting bitcoin as cash. Since bitcoin provides technologies to exchange value over the Internet without an intermediary, the mechanism may one day move beyond cash-substitute uses and may evolve to facilitate the exchange of other types of property (autos, real estate, intellectual property, etc.). If the latter evolution takes place, bitcoin has the potential to disrupt not only financial institutions but also aspects of the legal system, government regulation, and more. Lower or no transaction costs appeal to retailers, and those wishing to exchange currency across borders. Bitcoin could lower retailer transaction costs, create an opportunity for the digital purchase of goods with small value (micropayments), and open up markets where credit card access is limited. Civil libertarians also like the fact that bitcoin transactions can happen without revealing the sorts of personal data that credit card companies and other financial institutions are gathering. Since it’s a peer-to-peer transaction, there is no central authority that can freeze accounts or impose other policies on users. Limited consumer benefit, difficulty of use, reputation problems, security concerns, ambiguous regulation, volatility, transaction volume, and the scalability of current infrastructure are all concerns that may limit bitcoin’s mainstream appeal.