CoinDesk’s latest State of Bitcoin and Blockchain report, sponsored by Coinalytics, summarizes the key trends, data and events from the third quarter of 2015. This article highlights a few of the 88 new slides found in the report.
Blockchain captures the zeitgeist
The Q3 2015 report marks CoinDesk’s eighth in the series and much has changed since we released the first State of Bitcoin in February 2014. Arguably the most significant change, which was highlighted in last quarter’s report, has been the dramatic shift in focus from bitcoin’s use as an alternative currency and store of value to the possibilities surrounding the underlying distributed ledger technology, or blockchain.
There has long been significant interest in the many different uses for blockchain technology. However, the ‘non-currency’ use cases (eg securities settlement) have, until recently, generally commanded less total mindshare than ‘currency’ use-cases (eg merchant acceptance and payment processing).
In acknowledgment of the increasing emphasis placed on distributed ledger technology, we have retitled our report the ‘State of Bitcoin and Blockchain’ and added a new section specifically focused on the latest developments in distributed ledger technology.
Bitcoin startups pivot
Alongside the interest shown during Q3 in distributed ledger tech by traditional financial institutions (and the added competition this will bring), several bitcoin startups announced new blockchain initiatives. For instance, US exchange itBit revealed its bankchain product, and Ripple announced its Interledger initiative to connect various distributed ledgers.
Indeed, with the reduction in exchange trading volume, and relatively slow pickup in areas such as payments and bitcoin remittance (Slide 55) it has been clear for some time now that many startups would either need to pivot or perish.
In anticipation that more bitcoin companies will incorporate blockchain-oriented products and services we have created a new industry classification framework that distinguishes between three different business models: ‘currency’, ‘non-currency’ and ‘hybrid’ (Slide 65).
‘Currency’ companies are wallets, exchanges, payment processors and other financial services companies that principally focus on bitcoin as an alternative payment rail or investment asset.
In contrast, ‘non-currency’ companies focus on infrastructure and the use of blockchain technology for information management. Hybrids like itBit, which runs both a currency exchange as well its own blockchain product and service, combine both business models.
Looking at the industry through this new framework shows that, to date, less than a third of all venture capital has been invested in blockchain startups (non-currency and hybrid) (Slide 66).
Bitcoin price volatility returns
After a relatively quiet Q2, bitcoin’s price once again made news, and over half of the top 10 most viewed stories on CoinDesk during Q3 were related to price (Slide 19).
Bitcoin’s price spiked in the early part of Q3 due to macroeconomic concerns in Greece and China but then briefly fell below $200 in August, hitting a new six-month low.
The return of price volatility coincided with a 17% quarter-over-quarter increase in bitcoin exchange trading volume (Slide 13). However, trading volumes still remain well below previous levels.
Pace of VC investment slows
Total bitcoin venture capital increased 11% to $921m in Q3. While all time bitcoin investment is on track to surpass $1bn in 2015, there has been a slowdown in the pace of investment (Slide 30).
It is unclear at this stage if there is any particularly noteworthy reason behind the observed slowdown in investment; it may reflect something significant such as the venture capital community’s concerns over the speed of adoption, or something insignificant like seasonal factors.
One positive investment development to note is that more traditional financial services firms are investing in the space. For example, in September payments giant Visa made its first publicly announced investment when it joined Chain’s $30m Series B, which, along with BitFury’s $20m Series C, were this quarter’s two biggest deals.
Rising competition has also led to an increase in the number of acquisitions and bankruptcies, with consolidation particularly active in the exchange and mining sectors due to cost and competitive pressures (Slide 39).
Shakeout in payment processor sector
Payment processor and wallet startups have seen little-to-zero venture capital investment over the last several quarters (Slide 37).
Bitcoin’s failure to gain significant traction as a medium of exchange for non-illicit transactions is roiling the payment processing sector. For example, BitPay, which is one of the most well-financed startups in the space, announced significant staff cuts and that it will no longer offer its ‘free and unlimited’ introductory service to new merchants looking to accept bitcoin as payment.
However, it is important to note that the challenges associated with the adoption of new payment methods are not unique to bitcoin. For example, Apple Pay has also struggled to sustain its early momentum and gain wider use despite the tremendous publicity surrounding the announcement of Apple Pay and success of the iPhone 6 (Slide 52).