State of Bitcoin Q3 2014: Ecosystem Maturing Amid Price Pressure

(@coindesk) | Published on October 7, 2014 at 15:01 BST

State of Bitcoin Q3 2014 from CoinDesk

Download the full report in PDF form. View more of CoinDesk's Research Reports here.

We are pleased to release our latest quarterly State of Bitcoin update.

This article will run through some key findings from the new report, which focuses on data and events in the third quarter of 2014 up to the present day. 

Overall, this quarter could be characterized as a ‘Tale of Two Bitcoins’. 

On the one hand, significant bitcoin venture investment continued and much progress was made in furthering adoption, particularly in bitcoin's use as a medium of exchange.

On the other, there was a steady erosion in the price of bitcoin throughout the quarter (Slide 10), which was further punctuated by a sharp plunge of roughly 20% at the start of Q4.

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Slide 10: Significant Events and Price Response in Q3 2014

Price still a focus

Last quarter we noted how some noteworthy bitcoin observers felt that there has been too much emphasis placed on bitcoin’s price. However, out of the 10 most read stores on CoinDesk during the second quarter, four were about bitcoin’s price.

In the third quarter this interest has only increased, as almost twice as many of the top 10 CoinDesk stories were focused on bitcoin’s price (Slide 20).

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Slide 20: Top-10 Most Read CoinDesk Stories in Q3 2014

Given how the fourth quarter has begun we do not expect interest in bitcoin’s price to abate any time soon.

Q2 price gains lost in Q3

In the media business it is often said that bad news sells more than good, so perhaps the fact that bitcoin’s price fell nearly 40% in Q3 helps explain the greater relative interest in price in the most recent quarter. 

The third quarter also featured a remarkable price coincidence: after rising 39.4% in Q2, bitcoin’s price fell by a nearly identical amount in Q3 (Slide 9). 

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Slide 9: Comparison of Bitcoin’s Price Moves in Q2 and Q3

A wide range of theories have been put forth to explain bitcoin’s price decline, ranging from macroeconomic factors (such as a strong US dollar) and regulatory concerns (like the BitLicense), to a lack of speculative investment momentum (Slide 15).

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Slide 15: Significant Bitcoin Events and Price Response in Q2

One of the more widely debated and somewhat counterintuitive theories proposed by Citi and others on why bitcoin’s price saw a steady decline throughout Q3 is increasing merchant adoption.

This theory goes as follows: growing merchant acceptance by companies like Dell is creating selling pressure as these companies quickly liquidate bitcoins they accept for national currencies. 

However, right now there are arguably too few merchant transactions to have a significant influence on price (for example Overstock is only averaging $15k per day in bitcoin sales) while a single bitcoin exchange like Bitstamp can do upwards of several millions of dollars in bitcoin trading volume each day.

Additionally, while it’s true that in the short-term timing differences may lead to commerce supply-demand imbalances, over the medium-term bitcoin-to-fiat conversions by payment processors should be balanced by fiat-to-bitcoin conversions by bitcoin-spending consumers (Slide 13).

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Slide 13: The Virtuous Bitcoin Commerce Cycle

All-time bitcoin startup VC investment crosses $300 million

While Q3 did not match the second quarter’s $73m in venture investment, the third quarter saw a substantial $60m of new venture capital invested in bitcoin startups.

To date, including early Q4 deals such as Blockchain's $30.5 million round a total of $317m has now been invested in bitcoin startups since 2012; 71% of this figure ($224m) has come in 2014 alone (Slide 27).

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Slide 27: Bitcoin Venture Capital Investment Summary

2014 VC investment to exceed 1995 Internet

One of the more widely discussed elements of earlier State of Bitcoin reports has been our comparison of the level of investment in early Internet startups versus investment in early bitcoin startups. 

VCs such as Marc Andreessen have compared bitcoin’s overall potential, as well as its current stage of development, to the Internet circa 1993.

Our comparison was meant to assess whether VCs are backing up their lofty bitcoin statements with their wallets. And notwithstanding a number of methodological issues which we discussed previously with making this comparison (including inflation and changes over time in the cost of launching a startup), we feel the comparison is still interesting and useful.

We are currently projecting a total of $290m to be invested in bitcoin startups for the calendar year of 2014. This figure would well exceed the $250m invested in first sequence Internet startups in 1995 (Slide 32).

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Slide 32: Bitcoin vs early Internet VC investment ($s millions)

*Note: Only includes first sequence venture deals; late-stage 1995 Internet investments totaling $257.6m are excluded.

Sources: PricewaterhouseCoopers, National Venture Capital Association, CoinDesk, Dow Jones VentureSource, VentureScanner.

The 2014 run rate for publicly-disclosed VC investment in bitcoin startups would also equal nearly three times more than the total investment VCs made in bitcoin startups in 2013. 

In short, a ‘wall of money’ continues flowing towards bitcoin startups. This massive investment made by venture capitalists is shaping up to be one of the most important bitcoin stories for 2014.

More commerce and consumer traction

Bitcoin has seen much faster adoption as an alternative store of value, or object of speculation, than as a medium of exchange.

In the third quarter Dell became the largest retailer by far to begin accepting bitcoin for payment for anything on the Dell.com site (Slide 44).

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Slide 44: Largest Bitcoin Accepting Retailers

Companies like Dell and Purse.io also are giving consumers compelling reasons to actually spend bitcoins by offering savings off full retail price of anywhere between 10-30%. 

While we have shaved our end of year forecast slightly we are continuing to see strong growth in the number of merchants accepting bitcoin (Slide 42). 

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Slide 42: Bitcoin Accepting Merchants - Total Current and Forecasted 2014 Year End

There were 1.2 million new bitcoin wallets created in Q3, representing 21% growth quarter-over-quarter. We continue to forecast 8 million total bitcoin wallets by the end of 2014 (Slide 47).

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Slide 47: Bitcoin Wallets - Total Current and Forecasted 2014 Year End

If you enjoyed the State of Bitcoin Q3 2014 report, you can view more of CoinDesk's Research Reports hereWe thank you, our readers, for making CoinDesk the world’s leading source of bitcoin news, analysis and perspective, and we very much welcome your feedback and ideas on how we can make the State of Bitcoin even better.

Sincerely,

The CoinDesk Team

[1] You can access CoinDesk’s full spreadsheet of all bitcoin venture capital deals here.

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