A bit of a heads up this is my first post ever! I'm currently a Master's student at the London School of Economics and below is my final paper for my consumer insights class. Basically this is the marketing view on the prospects of Bitcoin or another cryptocurrency becoming mainstream and used by the average consumer. Unfortunately I was limited to 2,000 words but feel free to provide any feedback, I'm always looking to learn!
Introduction:
At the time Bitcoin was created in 2009, it was valued at nothing more than a few pennies. Today the price has surged beyond $10,000 and continues to grow. Since then, Bitcoin has been pushed as a viable medium of exchange by a variety of independent developers, advocates of open-source data, Silicon Valley, and those who distrust governments and big banks to control our money system. Bitcoin is a “type of digital asset that can be bought sold or transferred between parties securely over the internet” (What Is Cryptocurrency). Outside of being strictly digital, the main differences between Bitcoin and any other fiat currency is that Bitcoin is decentralized and disintermediated (no government authority, 3rd party clearinghouse, or single point of failure - the ability to be hacked) thus making Bitcoin strictly peer-to-peer. Additionally, Bitcoin is pseudonymous, irreversible and is secured by the use of encryption.
Bitcoin is unique due to its application of blockchain technology which “is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value” (What Is Blockchain Technology). To put it more simply, think of blockchain like you would shared Google documents; there is no single centralized location where it is stored, it is free to view and easily verifiable. While there are many applications of Bitcoin and blockchain technology, the focus of this brief will be an evaluation of the marketability of Bitcoin (and other cryptocurrencies) as a rival to all fiat currencies using Cialdini’s principles of persuasion. Currently less than 1% of the world owns a cryptocurrency.
Principle: Consistency (Cialdini pg 43)
Consumers feel pressured to maintain stable beliefs, attitudes, and behaviors (Knappes).
Examination:
Similar to a stock, Bitcoin is bought, sold and traded on an exchange. However, cryptocurrency exchanges run 24/7 meaning that someone can trade at anytime and from anywhere (Aranda). This, in combination with Bitcoin’s extreme daily volatility, can lead to consistency problems. With no intrinsic value the argument can be made that Bitcoin’s price is based off of nothing. In others words, the early adopters and believers in Bitcoin artificially drove up the price because they had already bought into the idea and wanted to see it succeed. On the contrary, Bitcoin holds revolutionary, transactional and monetary properties that no other currency does. These properties include being secured by cryptography as opposed to people or trust, having a decentralized network, representing themselves not debts, and being permissionless (Levy - Cryptocurrency Fundamentals). As a result, the inference can be made that on the surface Bitcoin’s rise in price and popularity was largely due to consistency issues with early investors. However, when given the context of the 2008 financial crisis and the lack of trust in government institutions and banks at that time, Bitcoin represented an alternative which eliminated those trust and security issues and enabled a sharing economy.
Principle: Reciprocity (Cialdini pg 13).
Consumers often return larger favors than they receive (Knappes).
Examination:
Bitcoin is easily the most well known cryptocurrency in the world but there are well over 1,000 other cryptocurrencies out there. Each of these cryptocurrencies has its own unique design and purpose. When a coin gets launched into the marketplace it is called an ICO (Initial Coin Offering). Although they sound similar, an ICO has no relation to an IPO as they represent drastically different stages of a company lifecycle. Additionally, when you buy coins from an ICO you are not receiving equity but rather the basic opportunity to invest in a coin with the hopes of it multiplying in value (What is Cryptocurrency). When ICO’s do happen they typically happen at a “massive discount” or include “20-30% bonuses” which misleads amatuer investors. Because of the so-called “discount”, investors end up buying more than they normally would have only to lose most, if not all, of their initial investment. Another problem with ICO’s is that there is very little regulation and if you were to compare them with something like a startup, 99% are complete junk. For example, a recent ICO, Tezos, raised $232 million (Calacanis E759) and Filecoin raised $205 million (Calacanis E775). In other words, ICO’s are getting millions in capital funding before even releasing a product or service. For obvious reasons this is a problem. Even though it allows people to speculate on a grand vision that has not yet manifested, there is no accountability involved and these junk ICO’s are taking millions of dollars in funding and making it vanish into thin air by using the door-in-the-face technique by way of imaginary discounts and bonuses.
Principle: Scarcity (Cialdini pg 178)
Consumers want what they can’t have and want what may not be available to them in the future (Knappes).
Examination:
Each different cryptocurrency has its own predetermined supply. Some cryptocurrencies have an unlimited supply and some don’t. For instance, Bitcoin has a supply of 21,000,000 coins and has 16,500,000 coins already in circulation (Levy - Cryptocurrency Fundamentals). While the last Bitcoin is not expected to be mined for another hundred years there is still not enough to go around for everyone to have even one. To provide some perspective, the state of California has a population of 40,000,000 alone. When it comes to Bitcoin the scarcity principle is a double edged sword. It is not only scarce because of its limited supply but its ever-rising price is making it financially scarce for many as well (Cash: the Future of Money in the Bitcoin Age.). The good news is that you can buy even a small fraction of a Bitcoin. Still, is it reasonable to put a cap on the amount of currency supply not just for a country but for the entire globe? The short answer is no. Short-term scarcity for Bitcoin might be a good thing for some investment strategies but it’s long-term scarcity creates an outlook as a global currency that is bleak at best with all signs pointing to a disproportionate allocation of Bitcoin to those who got in early.
Principle: Social Validation (Cialdini pg 87)
The perceived validity of an idea increases as the number of people supporting the idea increases (Knappes).
Examination:
If there is any hope in the average investor or consumer accepting cryptocurrencies as commonplace, there must be a high level of perceived validity, especially considering they have no intrinsic value. Even though some of the most famous faces in the world of finance like Warren Buffet and Jamie Dimon have come out and spoken against Bitcoin it continues to grow strong. The real proof of concept will be if major companies in a variety of different industries begin to accept cryptocurrencies as payment, thus validating it (Calacanis E773). Currently many boutique real estate companies in major cities like New York, San Francisco and London accept Bitcoin as payment. Amazon recently purchased four separate cryptocurrency domain names stirring speculation and CME Group announced that they will be launching futures for Bitcoin by the end of 2017 (Levy - Blockchain and Bitcoin Fundamentals). As these things begin to compound on one another, more companies will begin to accept Bitcoin and more goods will be purchased using Bitcoin. Thus achieving validation.
Principle: Liking (Cialdini pg 126)
Consumers tend to comply with those who they like and know (Knappes).
Examination:
Since Bitcoin and other cryptocurrencies are not companies, brands, people or even websites, the principle of liking must be viewed through an abstract lens. People will judge based not only on how many people use Bitcoin but also on the relatability and familiarness of those people. Going even further, the values of contact and cooperation will have a large influence. For illustration, becoming familiar with something through repeated contact doesn’t necessarily cause greater liking. However, the main idea around Bitcoin and having an open blockchain is designed for the mutual benefit of all (Cash: the Future of Money in the Bitcoin Age). Every transaction that has ever taken place in the Bitcoin blockchain is available for everyone to see. No corporation or government has the same level of public traceability as the blockchain in terms of where money is moving to and from (Calacanis E777). This high level of contact and cooperation from aligning user interests using open-source platforms develops both trust and positive product evolution over time.
Principle: Authority (Cialdini pg 157)
Consumers tend to comply with those in authority (Knappes).
Examination:
Being that Bitcoin has no intrinsic value, no physical form, little to no government regulation and tax literature and its supply is not determined by a central bank, most people have a skeptical opinion and deem it as high-risk behavior. As a result, negative news about cryptocurrencies is magnified to extreme levels and often times result in eliciting fear in the average person (FinTech: Rethinking Financial Services in the Digital Age). Considering that people rarely seek information that challenges their norms, the idea of Bitcoin being used in everyday transactions and possibly one-day taking the place of the currencies we know/use is quite frankly drastic to an extreme level in the mind of the everyday consumer. On top of this, the meteoric rise in the price of Bitcoin and other cryptocurrencies like it have led to comparisons to the dot com mania of the late 1990’s. This has only furthered the thought that Bitcoin is highly speculative and some level of governance and regulation needs to be put in place before it reaches the everyday consumer (Aranda).
Conclusion and Implications:
Regardless of how you feel about the future of Bitcoin and other cryptocurrencies, most would agree that they have a serious marketing problem. The most basic improvement that could be made would be education. People simply don’t understand what it is, how it works or how to acquire it. This relates to both consistency and liking principles because consumers are going to continue to do what they're comfortable with. Most consumers like to have some level of knowledge on how things that impact their daily lives work. Additionally many consumers like to follow the trends of their peers or mirror certain behaviors. Due to the fact that the average consumer does not understand how cryptocurrencies work leads one to think that there is clearly an education gap. This on top of the negative stereotypes like the black market, money laundering, tax evasion and speculative investing represent a problem for cryptocurrencies that education could solve. Another area of improvement would be be in transparency. Which relates to the authority and reciprocity principles. There are predators out there that will try manipulate people who think that they can get rich quick by buying cryptocurrencies. As a result, asset protection and the introduction of stricter regulation (not necessary centralization) may be needed to move the idea forward. For example, what’s the difference between an ICO and a security? This question and others like it need to be answered in a way that’s easily understood for both practical and tax purposes. When governments provide clarity on how cryptocurrencies will be classified, validation and a feeling of greater security will be the result among the general public. Another important improvement involves scalability and relates to the principle of scarcity. Currently, Bitcoin can only process a handful of transactions per second. In comparison, major companies like Visa or Mastercard can process thousands. When you combine this with the fact that there is a limited supply of Bitcoin, a massive scalability problem arises. In other words, what is it going to take to pay for my daily cup of coffee with Bitcoin? Is it even possible to scale to this micro of a level? How to solve this problem may prove difficult and until it is solved it will be hard for consumers, corporations and governments to buy into the idea and apply it to both micro and macro level transactions. Finally, the main improvement and indicator of success will be acceptance of payment and liquidity. This relates to the social validation and liking principles. Once more companies begin to accept Bitcoin as payment it will become more universally accepted. Additionally, as Bitcoin and other cryptocurrencies become more liquid and easily transferred into local fiat currencies, consumers will begin to view them less as an investment and more as a everyday currency which has a wide variety of uses. Overall, the potential of Bitcoin and cryptocurrencies is very real but if the aforementioned marketing steps are not taken there will be an extreme hurdle in integrating them into mainstream society.
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