Bitcoin has big challenges ahead, but it also has big promise. While the economic rationale from leveraging Bitcoin commercially is sound, the success of Bitcoin will ultimately be driven by its traction in a single market – the Black Market.
Many speculate that Bitcoin will gain mass adoption in volatile economies. That said, the largest economy that has a pain point Bitcoin can address is the one you don’t see every day. The Black Market may seem like the stuff of movies, but it’s real. And it’s big. From narcotics to software piracy, a lot of money is exchanging hands without governments being involved. Economists have long debated the size of this market. Author Robert Neuwirth estimates this market to be $10 Trillion in size. That’s trillion – with a ‘T’. The largest national economy in the world by nominal GDP, the United States, is valued at $15.7 Trillion dollars. That would make the Black Market economy the second largest in the world.
By definition, the participants in this economy need anonymous currency. Today, they use mediums like cash and gold. Wouldn’t it be great if they had a digital equivalent? Enter Bitcoin. If Bitcoin can capture 10% market penetration by making life easier for System D residents, that will make the market for Bitcoin nearly $1 Trillion US. This is nearly 1000X times the size of the existing market for Bitcoin today. More interestingly, perhaps, is that market would be almost as large as the sum total of all US Dollars in circulation today.
According to Neuwirth, this shadow economy – sometimes called System D – employs over 1.8 billion people world-wide. This is nearly half of the working population. If you assume that the participants in System D will interact with other folks in the ‘light economy’ that means Bitcoin will also have a lot weight behind it from legal vendors hoping to cash in from customers ‘living’ in System D. This could push Bitcoin over the edge and make the market for these digital bits larger than that of the US Dollar.
It will be interesting to watch how Bitcoin adoption plays out in this market. Today the Bitcoin market is nearly $1.4 billion – roughly the size of the economy of Belize. It has a ways to go in value before it hits the mainstream, but if I were Ben Bernake, I’d definitely keep an eye on it.