Where Are We Really With Bitcoin?

There is a plethora of articles written about Bitcoin every week. I find it difficult to see all of its legs at once, whether it be one article or a few. Some people have asked me this question - "Where are we really with Bitcoin?" I thought of answering it today with the following article and the infographic below. You would have read about Bitcoin startups, product launches, investments flowing into this sector and many more developments. You would probably have also read about the negative side of things - theft, closure of exchanges, and the bitcoin price taking a hit. I am sure by now, if you have interest in this field, you would know how keen Marc Andreessen and Goldman Sachs are in this currency. But if you are like me you must be trying to regularly look at that big picture, that signal from the noise. To attempt that, I wanted to analyze what was going on with Bitcoin (as a market), considering the numerous aspects/viewpoints that I have come across. I wanted to add data from research around specific parameters from news, interviews, discussions, industry perspectives, etc. and so this is what I have got (do check the infographic and last few lines):

The Consumer Perspective

Bitcoin service offerings (exchanges, wallets, apps, etc.) for end consumers have grown massively in number, especially considering the number of bitcoin wallets out there.

- currently has 3 million bitcoin wallets. In January, Blockchain had crossed the 100,000 mark in number of users.

- Coinbase has 2.5 million bitcoin wallets with the number of users being 2 million.

- It is estimated that overall there are about 6.6 million bitcoin wallets (Source: Coindesk) that had been set up by the end of 2014. And there are about $78 million worth of Bitcoin transactions occurring every day.

Caveat: Not all the wallets are actively used and the number of transactions consists of a lot of tiny ones as well.

The Merchant Perspective

The number of merchants accepting bitcoin for payments globally has increased from around 21,000 in January to over 100,000 currently. Numerous cases indicate growth in merchant adoption:

Rakuten recently announced that it plans to enable customers to choose Bitcoin as a payment option by integrating Bitnet’s payment-processing platform on a number of its marketplaces across multiple geographies.

New York City collects more than $600 million in revenue annually from payment of parking tickets. The New York City Department of Finance had issued a Request for Information to find mobile solutions for the payment of parking tickets. Among these mobile payments were Bitcoin.

Time Inc. has partnered with Coinbase, the popular bitcoin wallet, to become the first major magazine publisher to accept bitcoin payments. The initiative was launched with Fortune, Health, This Old House, and Travel + Leisure; all are now accepting Bitcoin among the wide variety of payment options for subscriptions.

CardinalCommerce, a leading player and pioneer in the remote payments industry, and Bitnet, one of the world’s leading digital commerce platforms, have joined forces to offer merchants the ability to accept online payments using bitcoin, effective immediately.

I think, on one hand, it's good news to see merchants adding another way to accept payments, but the real test of Bitcoin will be to see an increase in the share of the pie (at the merchant).

The Regulatory Environment

The popular virtual currency, with the support of its proponents, is gaining traction in global markets as a viable form of currency (or at least that's the intention). The big opportunity right now and also a subject of debate are the approvals by governments and central financial bodies. Countries like Australia, Canada, Denmark and Germany have given Bitcoin the green signal and have even gone ahead by clarifying tax treatment of Bitcoin.

But not everything is looking positive. You must read these:

- [update] The Financial Crimes Enforcement Network (FinCEN), working in coordination with the U.S. Attorney’s Office assessed a $700k civil money penalty against Ripple yesterday. The document says that Ripple Labs willfully violated several requirements of the Bank Secrecy Act (BSA) by acting as a money services business (MSB) and selling its virtual currency, known as XRP, without registering with FinCEN, and by failing to implement and maintain an adequate anti-money laundering (AML) program designed to protect its products from use by money launderers or terrorist financiers.

- The Russian government is concerned about illegal usage of Bitcoin and has even blacklisted certain Bitcoin websites. The European Union’s security watchdog has issued a call for evidence to ascertain whether the blockchain technology is viable to enter the financial mainstream. And these are valid concerns for many reasons. The European Securities and Markets Authority is keeping a close eye on Bitcoin, and is monitoring investments in the sector. Some U.S. states like California and New York are coming up with new regulations and license requirements that could affect peer-to-peer Bitcoin exchanges.

The Security Aspect

Bitcoin still has to gain mainstream adoption. In order to reach that goal, a number of Bitcoin players are making efforts towards adopting highly effective security measures. Some of the Bitcoin startups are really trying to attack the problem head on and some companies have already come up with secure bitcoin mobile wallet solutions.

BitStash offers three tiers of secure storage for the user. Besides the mobile wallet, the Bluetooth-connected hardware acts as a device wallet, and the third component involves a true cold storage wallet on a LUKS-encrypted USB drive for offline storage.

HyprKey utilizes its self-developed HYPR-3 three-factor authentication protocol to protect digital currency users from fraud. This involves creating a biometric authentication bridge between the user and the mobile wallet.

Xapo is trying to bring the combined power of a bitcoin vault and a bitcoin wallet together, the vault being the the required security aspect. The vault actually employs cold storage methods where users’ bitcoins are segmented and stored offline in a number of cold storage vaults.

Aegis has developed its digital currency wallet by leveraging the highest standards in cryptography and information security, utilizing security algorithms and secure protocols. It gives users an option to encrypt their wallet by using an NFC tag.

I am personally very interested in this segment. Fraud, authentication and security of Bitcoin (wallets, exchanges and everything) are huge challenges at each step of the value chain and a large opportunity at the same time.

Expected Bitcoin Traction by Segments

Keys aspects behind the traction:

  • Adoption of Bitcoin in remittance could increase because of the current issue with high transaction fees for mainstream currencies.
  • Adoption of Bitcoin in merchant payments could increase because of the current burden of high interchange fees.
  • Bitcoin is currently witnessing a lot of transactions from illegal activities and this trend will probably increase.

Irrespective of how things emerge in the application areas, I believe that the support industries will be the biggest beneficiaries in the short term. Watch out for companies and people involved in:

  • Mining/ASIC manufacturing
  • Compliance/Security/Legal
  • Software