Competition in the Bitcoin Space and the Future

Hi Everyone,

This week markets dropped slightly from about $635/BTC to $630/BTC.  Intermittent swings brought us as low as $615/BTC and as high as $640/BTC.  Volatility this week has been notably low given the number of pieces of exciting news.  This may suggest that regulatory news and industry news (short of goxings) no longer has a strong effect on price.  Macro news like the ECB taking the deposit rate negative a month ago may still have an effect:

News this week:
  • New York's Department of Financial Services have released proposed "BitLicense" regulations.  Marco Santori gives his take on them:  Regulations look strict; they may push innovation overseas if not amended and if other states follow New York's lead.
  • GHash.IO commits to capping its hashrate at 40% of the network total hashrate:  Given their trackrecord, some believe this to be an empty promise:
  • TradeBlock (formerly The Genesis Block), a Y Combinator blockchain analytics company, raises $2.8m from Andreesen, Barry Silbert and a few others:
  • Shopify, already using Bitpay for merchant services, also integrates with Coinbase giving merchants a choice between the two:
  • Circle releases its wallet to positive reviews giving Coinbase direct competition:
  • Elliptic Vault raises $2m giving Xapo direct competition:  From what I can see so far, Xapo is cheaper and has a higher coverage limit through their captive insurance company.
Competition between bitcoin companies is heating up this week.  This is, of course, healthy for the ecosystem as it drives prices (fees) down and generates value to the consumer. It's also bad news for the incumbent but, in the bigger picture, competition is inevitable in spaces where profit margins are high and barriers to entry are low.  These companies were likely expecting competition sooner or later.

Here is one way it could play out in the next few years.  As bitcoin enjoys higher and higher prices due to adoption, speculation, and shifting sentiment and bitcoin companies pull in serious profits, more startups will enter the space to get a piece of the action and a bubble forms and then pops.  Final market share breakdown for each segment of the bitcoin space (wallet, exchange, merchant services, etc.) will likely follow some power law distribution where most of the profits are captured by the top few companies and very little remains for the rest.  For every Google, there are a couple of AltaVistas.  As each segment of the bitcoin space becomes saturated, mergers and acquisitions will likely follow between the players who survive giving the merged conglomerates better price-setting power and better economies of scale (on the costs side).  All the while, the investors and VCs which back the right metaphorical horses get paid off handsomely.  Among those investors, some deliberately picked horses they thought were strong while others sprayed their money around giving them a diversified basket of seedling companies.

Yet that whole narrative is an old narrative applied to a new situation.  If cryptocurrency truly is a phenomenon on the same plane as the internet revolution of the 1990's and 2000's, it's possible that the narrative itself changes.  In other words, just as no one could have predicted how the internet would play out in 1993, maybe no one can predict how this whole cryptocurrency phenomenon will play out.  It's possible that entirely unexpected industries will be morphed by blockchain technology and the best innovations and products will be created by disenfranchised hackers and cryptographers, not investor-backed companies.

The first scenario likely plays out if the applications layer of bitcoin holds most of the value as opposed to the second scenario playing out if most of the value is in the technical developments in blockchain technology and cryptocurrency lateral to bitcoin.  In the first case, capital is quite useful for consumer product development and improving time-to-market.  In the other case, capital is not as useful for generating technical innovations and finding novel uses for fringe tech.  Is bitcoin English to some future Esperanto or is bitcoin AltaVista to some future Google?  Personally, I lean toward the first scenario playing out but I would not be surprised either way.

Kevin & Team Buttercoin
Bitcoin Trading Made Easy | 

Buttercoin currently in Private Beta, if you'd like access right now apply here: