Our blog contains short snippets of our research from our full emerging technology web-based reports. We release new content weekly, so check back often for the latest insights.
In the world of finance, some of the most important regulatory regimes are Know Your Customer (KYC) and Anti-Money Laundering (AML) rules. While their implementation is often incredibly difficult, the basic idea driving these regulations is simple: make sure you're not taking money from drug lords or sending money to terrorists.
In order to make it easier to slice and dice the large amount of data we've collected on bitcoin startups, we called in our friends over at Maptiv8 to help us make our market scan more dynamic and easier to filter and sort.
Yesterday, Overstock announced that it would now accept Bitcoin in over 100 countries worldwide. This is a pretty big deal in validating a potentially compelling use case of bitcoin — international payments.
Given the plethora of data we have in our bitcoin sector scan, I thought it would be interesting to see some funding metrics, like the total funding by category and percent of companies funded within a category. A quick note before we look at the chart: some companies fit into multiple categories, which effects the data. For example, Xapo is a company that offers a bitcoin wallet and debit card, which places them into both the Bitcoin Wallets and Bitcoin Financial Services category. Their $40M total funding to date therefore appears in both categories. Looking at the data, a few interesting points pop out:Focus on access to bitcoin: It probably shouldn't come as a surprise, but a lot of the early venture money has gone into companies that allow people to interact with bitcoin in some way. Exchanges help people switch between fiat and crypto-currencies, Wallets help people securely store their digital assets, and Payments help merchants and consumers transact in the real world. Bootstrapping is possible: One would normally assume that hardware-centric companies, such as those who build bitcoin mining rigs, would have relatively intensive capital requirements. However, as we can see on the chart above, the tremendous amount of hash power running the bitcoin protocol hasn't lead to a lot of financing announcements. Perhaps the organic adoption rate of bitcoin and pre-order revenue (via crowd-funding mechanisms) has allowed these Mining companies to bootstrap themselves? Bitcoin Big Data as an outlier: There are currently very few companies that offer solutions to easily search and analyze the blockchain in rigorous ways, but around 50% of them have received venture funding. One way to look at this is that the small number of data points has lead to an outlier result, the other is that VCs know something the public doesn't. In my opinion, I think understanding the blockchain really well is a precursor to such things as "smart contracts", which is where bitcoin could really shine, but I'll let the reader draw their own conclusions.Read More
As we continue to cover the bitcoin space, two things happened this week that seem worth discussing in more detail: Korbit raises $3MKorbit, a South Korean-based bitcoin exchange, wallet, and merchant payment solution, got $3M in a Series A financing. As I mentioned last week, we’re still seeing how bitcoin companies will breakdown between international conglomerates and local power players, and this is just another piece in that puzzle.Another interesting component of the Korbit raise is that SoftBank Ventures Korea (SBVK) was one of the investors. Calling South Korean venture investors conservative might be the understatement of the year. And who can blame them when the startup scene there is so nascent? But I think this deal does a good job of (a) generally showing the acceptance of bitcoin and (b) specifically showing the foresight of SBVK in seeding the creation of a Korean startup ecosystem. North Carolina believes they already have the authority to regulate bitcoinIn contrast to New York, which is looking to develop new regulations to handle crypto-currencies, North Carolina authorities believe they already have the regulations they need, and might just simply offer clarifying guidance. I think this shows how regulatory agencies are slowly developing a better understanding of bitcoin and how it’s currently being used as a currency. If I’m moving something around that has value, be it dollars, pork bellies, or bitcoin, the government has some ability to regulate those transactions. Now, obviously it’s fair game to debate how smart or effective those regulations are, but the mere fact of having regulations on bitcoin shouldn’t surprise anyone.Read More
Everyone knows that key features for bitcoin include the blockchain and public ledger. People know they can utilize these functions to glean market insights or develop whole new applications, but it was mostly theoretical given the huge learning curve to understand how to parse the data. But, some recent news this week might show how that is all changing.The first item was the acquisition of Blockr.io by Coinbase. Blockr.io provides data and analysis on a whole variety of crypto-currency blockchains, from bitcoin to Megacoin. Users can dig through a block, search for specific addresses, or view handy charts. I suspect that Coinbase believes that a better understanding of the blockchain will be paramount moving forward, and as they stated on their website “Blockr.io parses the bitcoin blockchain and presents the data to users in an easy to read way”.Taking this a step further is the company Chain, which is looking to build an easy-to-use API on top of the bitcoin blockchain, making it easier for others to quickly develop new products. I kind of think of them as a sort of Platform-as-a-Service (PaaS), standardizing the repeatable tasks in the “guts” of the protocol, and enabling others to focus on their specific applications. The big news for them this week is that they raised a $9.5M Series A, bringing their total funding to $13.7M. Negotiating deals like these obviously take time, so I’m sure both of them happening within the same week is somewhat of a coincidence. But, I think they’re indicative of a growing interest towards moving bitcoin beyond being just a currency.Taking a step back, it’s important to remember that the fundamental problem solved by bitcoin is how to create trust in a trustless system (sometimes referred to as the Byzantine Generals’ or Two Generals’ problem). And a better understanding and organization of the blockchain is the first step in developing things like smart contracts and distributed corporations. In other words, the changes brought about by the bitcoin protocol have only just begun. Check out more of my bitcoin market coverage.Read More
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 developNetwork Effects: You use Microsoft Office because everyone else uses itBrand Recognition: Coca Cola is everywhere even though they tailor to local tastesTechnical Knowhow: British Petroleum (BP) really knows how to get at oilSome examples of why industries with smaller players developDiffering Regulations: Healthcare laws vary widely country to countrySpecialized Needs: Religious/ethnic minorities may require special food/servicesBrand Differentiation: Wine labels are for specific operations from specific regions 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.Read More
News about bitcoin and other crypto-currencies is everywhere. But, as halfway decent MBA-student would say, you gotta worry about substitute solutions. In the case of crypto currencies like bitcoin, one such potential substitute would be a digital currency that is fully controlled by a central bank.
Since its inception, the best known vulnerability of the bitcoin protocol has been the “51% attack”. This attack occurs when one party controls more than half of all processing power on the protocol, effectively giving them control over the entire blockchain. At this point, the majority holder could rewrite previous blocks, allowing them to double-spend bitcoins. Even though this scenario was considered unlikely (due to the downside risk it posed to bitcoin pricing), it’s exactly what happened.
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