The challenge facing Bitcoin start-ups

By boris, May 06, 2014

There is not doubt that Bitcoin / the blockchain is a revolutionary technology. Once implemented, the blockchain might be able to disrupt many verticals that are built around managing the transfer of ownership by replacing a centralized approach with a decentralized (and hence usually more efficient) approach.

While the blockchain can be applied to a range of verticals, from passports to wills, vacation rental keys and movie tickets, most of the start-up activity to date has focused on using Bitcoin for payments. After some initial excitement, anecdotal evidence shows that Bitcoin transaction levels are declining. This is partly due to the fact that it is not quite clear what problem Bitcoin solves for the North American consumer wanting to buy something online or in a store (credit cards actually work very well in this case), partly due to the strong existing network effects of current payment systems. Ben Thompson had a great post (The Problem with Payments) a few days ago outlining why it is so hard to build a payment solution outside of the existing system in the US.

In order to succeed in a market with existing strong network effects (such as the payment structure in North America), you need to focus on an underserved niche where your product provides something that hasn’t been possible before. Then if you get enough traction in the niche, you might be able to expand into the mainstream market over time.

PayPal is a perfect example. The company managed to succeed because it helped eBay buyers and sellers complete their transactions in a more efficient and trustworthy way during a time when P2P commerce was exploding. PayPal later went on to actually replace many credit card payments as users became accustomed to the service and had money in their PayPal wallets that they were ready to spend.

So instead of trying to replace credit cards and other established payment methods, Bitcoin start-ups should think more about where Bitcoin has a competitive advantage. Traditionally, this has been in cash-based businesses (gambling, “getting money out of China”) where Bitcoin has seen some impressive initial traction. However, more interesting areas are those where current payment fees are very high (e.g. remittances), consumers are underserved (the “unbanked”), or existing payment infrastructure is weak (e.g. in some developing countries). And the real opportunity might even lie in completely new use cases.

The block chain is a powerful technology but getting traction beyond initial excitement from early adopters might be challenging given the strong network effects of the existing structures that the Blockchain tries to replace. We all see the end goal but getting there is a tricky question. I am rooting for the entrepreneurs that will figure out how to put the blockchain into real action.

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  • http://www.setfive.com/ Ashish Datta

    Spot on. At face value, Bitcoin provides a powerful way to empower the “unbanked”. From P2P lending to being able to offer a charge card backed by a Bitcoin wallet, it seems like it could provide huge value add assuming regulators don’t unfairly intervene.

    The Blockchain as a technology is definitely interesting. Something that isn’t clear is if Bitcoin doesn’t stabilize then how would you incentivize mining for alternative blockchains? (https://en.bitcoin.it/wiki/Alternative_chain#Incentivising_non-resource_based_chains)

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  • bwertz

    Some alternative blockchains require less mining power but definitely a concern

  • http://www.rebeccarachmany.com/ Rebecca Rachmany

    Fundamentally, Bitcoin would proport to be an alternative to government-issued currency. In today’s world, plenty of people would argue that such an alternative is needed. Most of those people are hoarding physical gold. If Bitcoin can maintain its value (a big if), it could provide that. That’s why you see Bitcoin today held by outlyers, that is people who are concerned about the global economy and geeky enough to take a totally different type of risk.

  • bwertz

    I honestly think that Bitcoin as a “store of value” use case is not very attractive in the long term, especially in the largest (and hence most stable) economies like the US

  • http://www.rebeccarachmany.com/ Rebecca Rachmany

    While there is definitely room for doubt about the stability of the US and European economies, you don’t see me holding any Bitcoin, precisely for the reason that Bitcoin looks even less stable.

  • http://www.zipzapinc.com Alan Safahi

    Boris,

    Great post and I agree with your basic premise.

    I don’t believe e-commerce in the developed countries is the best use case for Bitcoin (unless major retailers start offering discounts of 3-5% for people using Bitcoins which could very well happen as a customer acquisition ploy and to reduce costs associated with credit card fees, chargebacks and frauds).

    I believe remittance is absolutely the best use case for bitcoin: Large market ($540B/yr), inefficiently served by existing players (Western Union, MoneyGram, etc) with unfair costs (9%-25%).

    The next best use case, IMHO, is micro transactions (in both developed and underdeveloped nations).

    There are many other pockets of opportunities for Bitcoin as a currency but I am much more excited about bitcoin as a platform, some of which you mentioned in your great post.

    Regardless of how high Bitcoin will go or how success bitcoin platform companies will be, one fact is undeniable: we need to continue building the infrastructure for digital currencies to make on-ramp and off-ramp easier for consumers.

    Just as in the gold rush days, where few miners actually struck gold, the real winners were the infrastructure companies that provides the picks and shovels (Sears & Roebuck, Levi Strauss). My team and I at ZipZap, Inc. play a small part in building this infrastructure for digital currencies around the globe. We encourage others to do the same and build the railways upon which remittance, micro transactions, e-commerce and a number of other crypto related businesses can be successfully created.

  • bwertz

    Thanks for your comment – agree with both of those opportunities.

  • http://www.startupmanagement.org/ William Mougayar

    Great perspective. Couple of points:

    1. I made the argument last month that Bitcoin needs to do payments well for it to succeed http://startupmanagement.org/2014/03/10/let-payments-become-bitcoins-first-beachhead/, but the reality is that all “payment players” are actually gatekeepers. That’s what you’re also implying, especially in developed markets.

    2. It is possible that with the advent of decentralized apps that use the blockchain technology, bitcoins will get an uplift, because it is the de-facto currency for most of these new apps. The blockchain needs apps. That’s its promise.

  • bwertz

    Good point re new apps that use Bitcoin as their de-facto currency – might be really promising.

  • Rob Goehring

    Great points Alan! (I hope your trip was good!)

  • A. Traviss Corry

    I agree wholeheartedly with these points. Competitive advantage is what Bitcoin Startups should be looking for. The stage is set for blocktchain technologies to sprout apps beyond just payment systems. I hope we won’t be hearing the term “Bitcoin Startups” much longer. I look forward to the time when the industry is educated enough to start understanding the potential of the blockchain and decentralization itself. I was honoured to host and judge the recent IN CRYPTO WE TRUST HACKATHON where Amir Taaki launched Dark Market. Wow. What a concept. A decentralized marketplace on the blockchain – with built-in token system as well as crypto-payment options. I see this sort of concept is where the real potential lies.