Posts Tagged: Electronic money

The challenge facing Bitcoin start-ups

There is not doubt that Bitcoin / the blockchain is a revolutionary technology. Once implemented, the blockchain might be able to disrupt many verticals that are built around managing the transfer of ownership by replacing a centralized approach with a decentralized (and hence usually more efficient) approach.

While the blockchain can be applied to a range of verticals, from passports to wills, vacation rental keys and movie tickets, most of the start-up activity to date has focused on using Bitcoin for payments. After some initial excitement, anecdotal evidence shows that Bitcoin transaction levels are declining. This is partly due to the fact that it is not quite clear what problem Bitcoin solves for the North American consumer wanting to buy something online or in a store (credit cards actually work very well in this case), partly due to the strong existing network effects of current payment systems. Ben Thompson had a great post (The Problem with Payments) a few days ago outlining why it is so hard to build a payment solution outside of the existing system in the US.

In order to succeed in a market with existing strong network effects (such as the payment structure in North America), you need to focus on an underserved niche where your product provides something that hasn’t been possible before. Then if you get enough traction in the niche, you might be able to expand into the mainstream market over time.

PayPal is a perfect example. The company managed to succeed because it helped eBay buyers and sellers complete their transactions in a more efficient and trustworthy way during a time when P2P commerce was exploding. PayPal later went on to actually replace many credit card payments as users became accustomed to the service and had money in their PayPal wallets that they were ready to spend.

So instead of trying to replace credit cards and other established payment methods, Bitcoin start-ups should think more about where Bitcoin has a competitive advantage. Traditionally, this has been in cash-based businesses (gambling, “getting money out of China”) where Bitcoin has seen some impressive initial traction. However, more interesting areas are those where current payment fees are very high (e.g. remittances), consumers are underserved (the “unbanked”), or existing payment infrastructure is weak (e.g. in some developing countries). And the real opportunity might even lie in completely new use cases.

The block chain is a powerful technology but getting traction beyond initial excitement from early adopters might be challenging given the strong network effects of the existing structures that the Blockchain tries to replace. We all see the end goal but getting there is a tricky question. I am rooting for the entrepreneurs that will figure out how to put the blockchain into real action.

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Bitcoin: its future as a platform and protocol

The bitcoin logo

The bitcoin logo (Photo credit: Wikipedia)

I recently started to spend some more time on the Bitcoin ecosystem and while I have not yet fully wrapped my head around all of the opportunities and challenges (or even developed an investment thesis), I wanted to write down some early thoughts and observations.

Thoughts on the current ecosystem

The recent Bitcoin rally might be just the tip of the iceberg, as the crypto-currency may rise to even higher prices driven by destabilized national currency systems, greed and speculation, as well as illegal activity (i.e. the best way to get money out of China). Simon Winder has an interesting analysis how high Bitcoin can go.

While the majority of mainstream attention has focused on Bitcoin as a currency, Bitcoin may have a more interesting future as a protocol (see Albert Wenger’s post “Bitcoin as a Protocol”). At its core, Bitcoin provides a digital ledger that’s continually updated and synchronized in real time. Any participant can make an entry in the ledger, recording transactions from one participant to another participant. In this way, Bitcoin provides an unalterable framework for Proof of Ownership that can be used not only as currency, but also in a range of interesting applications like voting, property, contracts, domains, and securities.

It is still very early days for the platform but the two biggest opportunities for Bitcoin seem to be right now:

  1. Disrupting traditional institutions that we used to rely on for trust-related services, such as banks, registrars, etc. The app Proof of Existence uses the Bitcoin network as an ultra-secure notary service. But imagine even broader use cases (as outlined here) such as:
    • A will that automatically unlocks (without attorney intervention) when the heirs agree that the parent has passed away
    • A wire escrow that goes through when any arbiter agrees that the seller sent the goods to the buyer
    • A wallet that is socially secured by friends or family
    • A crowdfunding project that pays out after reaching various milestones, based on the approval of the backers

2. Drive down transaction fees: This infographic compares the cost of sending $1K from the U.S. to Europe (for example, as a down payment for a vacation rental). Here’s the breakdown on transaction costs: Bitcoin – $15, Credit card – $50, and bank wire – $40-80.

The future of Bitcoin

Numerous questions are yet to be answered surrounding Bitcoin’s future as a currency and as a platform. The speculative and volatile nature of Bitcoin currency might be good for the short-term as it has generated tons of awareness in the mainstream media. However, will this volatility ultimately hurt the adoption of the overall Bitcoin platform in the long run? Bitcoin might only succeed if people start using it for daily transactions and a high volatility of the underlying currency would hurt that adoption.

Likewise, will heavy-handed regulation make it hard for Bitcoin start-ups to survive in the U.S. and will there be new Bitcoin ecosystems emerging outside of the Valley? We’ve already seen several new start-ups setting up shop in Canada to escape U.S. regulations, including the world’s first Bitcoin ATM in Vancouver.

I also wonder if the virtual/crypto currency space is a winner-takes-it-all market, or will we see many other alternatives emerge? Already today there’s Litecoin, Peercoin, and Primecoin, to name a few. Will we see numerous virtual currencies co-exist, perhaps segmented along geographical/regional or industry/markets? In a recent post, Simon Winder compared Bitcoin to Friendster – a first mover, but imperfect. The question then is, who will be MySpace, who will be Facebook?


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