That was our dotcom bust. Now what?

Monday 26 October 2015

2014-15 saw the simultaneous hype and crash of bitcoin. What does the future hold?

I recently read an opinion piece by Charlie Woolnough, co-founder of UK exchange CoinCorner, about what 2016 holds for bitcoin.

Charlie makes the (entirely correct) observation that investment in bitcoin’s infrastructure - exchanges, payment gateways, wallet providers - has vastly outpaced real adoption. Consequently a lot of them have burned through VC funds at a rate of knots, but have little revenue stream to show for it, and will therefore be forced to ‘close, resize, pivot or merge with competitors’ to survive. It’s a trend we’re already seeing, and it’s only set to continue for the medium-term - Woolnough thinks 12-18 months.


Big bitcoin businesses have been working on a 'build it and they will come' model

It’s a situation not dissimilar to the dotcom boom and bust of the late 90s. The internet was in its infancy, cool, exciting and full of potential. A lot of investors assumed that was all that was necessary to make money, and threw cash at any company with a website. The hangover happened just months into the new millennium. A relative handful of companies survived and thrived. Many lost vast sums of investors’ money and disappeared.

Protocol and companies

That irrational optimism has been mirrored by bitcoin in two ways. First, in the frantic speculation over bitcoin itself that occurred at the end of 2013, pushing its price up into four figures. Unlike the internet, it’s possible to invest directly in the underlying protocol of bitcoin, as well as in companies built on it. But that bubble and bust, which played out over the course of 2014, masked another bubble - that of overinvestment into bitcoin businesses, which attracted hundreds of millions of dollars of VC funding.

It’s a potentially serious problem. What is the revenue model for a wallet provider, for example? Even those that combine their services with an exchange will have to fight for customers, competing against an ever-growing number of similar services.

Designed for the grassroots

My personal feeling - an idea that’s a work in progress, so don’t quote me - is that bitcoin and crypto in general isn’t really suited to big business. It’s inherently a grassroots technology. Its whole purpose, its raisin d’etre - apologies for having to slip into French to make the point - is to devolve and decentralise power to the end user, away from any kind of centralised party. And big businesses like big centralisation.

I’ll explore this more fully in another article. For now, it’s worth noting that low fees are one of bitcoin’s key attractions, along with a lack of central control. The initial flurry of VC money is being burned right now, and there will come a time soon when the companies that received it will need to ask for more - not to mention newcomers to the space. The question they will have to answer is not just how they will make money for investors, but whether they can make money for investors.

Some will make it. A lot won’t. My assumption is that, as Charlie Woolnough suggests, that ‘well-backed business with patient investors or those that are owner-operated with a low cost base will be best placed to survive.’

That’s my prediction for 2016. Bitcoin adoption will be pushed forward, but not by the big players. It will be the SMEs, the grassroots initiatives, the businesses that run on a shoestring, or tap into a creative use case for crypto - they will be the ones to thrive. Some of the big guys will make it, too, but unfortunately, they probably have some pain to go through first.

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