A big question as any new industry develops is how will things break down geographically. Will large international brands dominate the space, or will local knowledge be important enough to give regional players an advantage? And as I cover the bitcoin space, I think this is one of the greatest unanswered questions in the bitcoin startup ecosystem.
Taking a quick step back, why might an industry tend towards larger or smaller players?
Some examples of why industries with larger players develop
Some examples of why industries with smaller players develop
The reason I’m thinking about this is that I recently came across a new bitcoin payments startup that is strongly focused on the Spanish market. Cripto-Pay, based out of Madrid, was founded in 2013 and employs 7 people. They offer an e-Commerce and Point-of-Sale (POS) solution that enables merchants to accept bitcoin as a form of payment. While they are still very early stage, they seem to know what they are doing.
Representing the large player in this discussion could be BitPay. That company has been around longer, is better funded, and has locked up a variety of large customers, such as Tiger Direct, Gyft, and Shopify. Their international bona fides is found on their website, which claims that they can localize into over 40 languages.
Assuming they want to grow their operations globally, will BitPay be able to muscle their way into the Spanish market? Will Cripto-Pay have enough of a head start to make an acquisition offer from BitPay the only viable way they could enter that market? Will Cripto-Pay be doing well enough as “the big fish in a small pond” to reject such as offer?
One way to potentially answer these questions for an industry is to look at how companies in the most mature segment of that industry take shape. In the case of bitcoin, the earliest participants are mining companies, both those hardware companies building mining rigs and software companies offering mining pool services. The industry started out highly fragmented, but has seen recent mergers and acquisitions (M&A) in the hardware space and dominant mining pools in the software space.
Another key question will be how the consumer interacts with the solution. Assuming we’re talking about bitcoin payments, if it’s fully integrated behind the scenes, having a branded solution won’t matter to the consumer. On the other hand, if I have to log into my pre-existing account to make a payment (like how PayPal made me log in even though I was on another website) then you may be able to create some customer pull and network effects.
Then, there are the current and future regulations to consider. The rise of bitcoin has lead to a host of regulatory efforts at various national and municipal levels. It remains unclear, to say the least, how these efforts will play out. Further complicating this area is the current lack of international coordination, similar to what occurs in traditional finance with the Basel Accords. The crux of the issue here is whether or not regulations will be similar enough to allow large external players to easily reach local compliance.
All in all, my belief is that bitcoin companies will start highly fragmented and then consolidate over time. The fragmentation phase will be driven by an inconsistent development of regional regulations and the importance of local relationships to get bitcoin penetration. The consolidation phase will be driven by a normalization of regulatory frameworks and customer-pull/network-effects from brands that have a lot of trust (trust in both the literal and figurative sense) and/or can capture economies of scale.
This is generally good news for VC or Angel investors in the bitcoin space, since even if the horse you bet on doesn’t end up as a top player within a category, they could still grab enough customers or really understand a specific geography to generate significant M&A interest.