Bitcoin as a Technology and Operations Management Case
Bitcoin, a first-of-its-kind digital currency devised in 2008, crossed $50 billion in total value for the first time this summer. It’s weathered severe volatility, technological obstacles, and government regulation to remain the dominant alternative currency. At Consensus 2017, the largest conference for bitcoin and its underlying infrastructure in the US, I was struck by the massive appetite for the technology and the breadth of participants relative to the year prior, beyond the core community of developers and entrepreneurs. In her keynote address on the New York Marriott Marquis main stage, Fidelity Investments CEO Abigail Johnson (HBS ’88) reflected the crowd’s enthusiasm: “I love this stuff – bitcoin, ethereum, blockchain technology – and what the future holds.”
The vision for bitcoin is a controversial topic. For every vocal proponent of bitcoin’s potential to uplift the unbanked and reinvent the monetary system, there is an equally outspoken skeptic. In stark contrast to Johnson’s optimism, other financial industry luminaries express distrust, and even disdain, for bitcoin. JP Morgan CEO Jamie Dimon (HBS ’82) reportedly described the digital currency as “a fraud” that “will blow up” and characterized its millionfold appreciation in seven years as “worse than tulip bulbs,” alluding to a 17th-century speculative bubble that abruptly collapsed. Ray Dalio (HBS ’73), founder of the world’s largest hedge fund Bridgewater Associates, took a similar stance concerning the speculative nature investments in bitcoin, citing limitations in systemwide transaction volume and difficulty of use as key risks.
At the heart of the debate surrounding bitcoin’s utility is a fundamental operations management and system design challenge. Detractors argue that bitcoin is facing an existential crisis as three core functions of an effective currency—medium of exchange, store of value, and unit of account—are increasingly unviable in light of the technology’s struggles to keep pace with rapid adoption. Delays in transaction processing and rising transaction costs threaten bitcoin’s convenience as a routine medium of exchange, and the need for structural changes creates apprehension among investors, resulting in volatility that precludes reliability as a store of value or unit of account.
The bitcoin network is capable of processing roughly 3 transactions per second, increasing to up to 6-7 transactions per second through a recent software update. Visa, by comparison, can handle upwards of 24,000 transactions per second. Capacity constraints have recently forced themselves to the forefront of bitcoin aficionados’ concerns, as growth in average daily bitcoin transactions grinded to a halt in the second quarter of 2017. Bitcoin transaction volume increased just over 1% quarter-over-quarter, only a fraction of the 14% quarterly growth rate experienced in the last 3 years. Simultaneously, transaction fees skyrocketed tenfold between year-end 2016 and the second quarter of 2017, from $0.24 per transaction to $2.41 per transaction, reflecting the network’s inability to process additional volume and impairing the technology’s value proposition of low-cost value transfer.
From an operations management perspective, system capacity in bitcoin transfers is limited by a bottleneck in the process of validating transactions.
