Charlie Woolnough is a co-founder of CoinCorner, a consumer-focused bitcoin services business. In this article, he gives his view on the current state of the bitcoin industry and what companies in the space should expect from next year.
The bitcoin industry is still years away from maturity. Unfortunately, many business were launched on the back of overly optimistic industry growth projections. The hard reality is, there just isn't currently enough volume to support all the exchanges, payment gateways and wallet providers that have sprung up, let alone the number of secondary service providers, such as bitcoin compliance solutions, that have been created to support the first wave of service providers.
Many of these businesses will need to take radical steps to survive the next few years while consumer adoption catches up with service provider expectation. We are already seeing signs of this where those businesses that haven't been able to reach critical mass are forced to close, resize, pivot or merge with competitors.
Expect to see this trend accelerate in the next 12-18 months. Even those companies that have raised large amounts of investment aren't immune to the situation. Indeed, they will now have a different type of pressure to deal with – the pressure of investor expectation and the fight to avoid the dreaded 'down round' if they need to secure further funds to continue operating, which many will.
Bitcoin businesses will need to learn very quickly that they have to grow with the industry rather than ahead of it. Consumer education and the public promotion of bitcoin is admirable, not to mention required, but we are still several years away from sports sponsorship being an optimal use of company funds.
Well-backed businesses with patient investors or those that are owner-operated with a low cost base will be best placed to survive.
Blockchain needs bitcoin (or at least its user base)
A lot of investors are now chasing so-called 'blockchain ideas'. However, it's not always entirely clear how a lot of these ideas will generate revenue or gain user traction any time soon. A sensible approach would be for blockchain businesses that are targeting consumers to partner with more established bitcoin businesses that are already operating in the space and have reached a critical mass of users.
At least then they would have ready access to a consumer base that has some appetite for more nascent blockchain-related services. It's hard to imagine people who haven't already experimented with bitcoin suddenly rushing to register assets on the blockchain, for example.
Surely it's those people that have adopted and experimented with bitcoin that will be the most likely early adopters of blockchain services as well. For many, bitcoin will become the gateway to the blockchain. It's how people will get comfortable with the technology.
The banking issue
It has been said many times that bitcoin needs a killer app to become mainstream. However, don't we have that already in the form of extremely cheap peer-to-peer payments? What is needed is a more seamless consumer experience between traditional finance and bitcoin.
Bitcoin is currently functioning in spite of an awkward relationship with banks. If this relationship could be improved then bitcoin could thrive. How can we ever hope to get greater consumer adoption for bitcoin when many users' first experience is the loss of £25 for an international bank transfer or a 3% credit card fee for the pleasure of acquiring their first bitcoin. It's self-defeating and means only diehards and those keen on experimentation will make the leap from fiat to crypto currency.
So, how do we bridge the gap between banking and bitcoin? Unsurprisingly, the answer lies in banking's favourite arena of regulation and compliance.
Regulation is required to give banks the certainty they need to provide banking facilities to the sector. How a bitcoin business then satisfies a bank that they are in compliance with any relevant regulation is the next big hurdle. This is where regulators need to realise that applying traditional compliance metrics to bitcoin is pointless.
A new paradigm is needed that recognises and embraces the unique characteristics of bitcoin. As a result, bitcoin compliance and those who create products that are able to help get banks comfortable with bitcoin, is critical to the development and growth of the sector. Herein lies the acid test: if the bitcoin compliance providers can't create a product that banks approve of, they won't get many clients.
It will be interesting if the Isle of Man's new Designated Business Act, which comes into force in the next few weeks and requires crypto businesses to register with the island's financial regulator, does anything to enhance bank's appetite for the sector.
Ten predictions for 2016
- Bitcoin companies with just one business line will increasingly become disintermediated by those that offer multiple services.
- Investor clamour for all things blockchain will return full circle as blockchain start-ups begin to partner with more established bitcoin businesses.
- Sadly more bitcoin business will close or consolidate.
- Bitcoin adoption will continue to move slowly forward – mass consumer adoption is still in the future.
- The relationships between banks and bitcoin business will begin to thaw as more sophisticated bitcoin compliance solutions come to the market.
- We will see fewer and fewer pure bitcoin start-ups – those that already exist now have too much of a head start.
- Bitcoin legislation will begin to evolve at a faster pace and will help give the sector added credibility.
- There will be more fraud related to altcoins.
- Investment in the sector will plateau until consumer adoption dramatically increases.
- The price of bitcoin will remain relatively static around the $200-$300 range.
Ultimately, bitcoin will survive and gain greater public adoption – the technology is simply too compelling to ignore. However, whether many of the companies currently operating in the space will survive long enough to reach the promised land remains to be seen.
Lean business models and frugality are the order of the day for bitcoin companies in 2016. A loyal and growing customer base will surely help as well.
To learn more about what happened in the bitcoin and blockchain space in the third quarter of this year, see our latest State of Bitcoin and Blockchain Report.