A Final Look Back: The State Of Bitcoin Heading Into 2015

2014 In Review

The year 2014 has been one of maturity and growth for Bitcoin. The protocol is only five years old, but despite its relative youth, the sophistication of companies built around the Bitcoin protocol is rapidly increasing. Beyond technological advances, what has been most promising is the extraordinary progress in the quality of human capital driving Bitcoin. Entrepreneurs in the space have deepened their understanding and capabilities of working with global banking and payment systems, and veterans of other areas of the financial industry have also jumped aboard and are rapidly learning the ins and outs of Bitcoin.

Thinking back to this time last year, most people in the Bitcoin industry were unable to express compelling arguments as to why Bitcoin should be used over other payment methods. This communications challenge made it difficult for outsiders to put their faith in Bitcoin as a justifiably useful instrument. Within a single year, the conversation has shifted from monetary freedom as Bitcoin’s primary advantage to focus more on the blockchain as a distinctly revolutionary technology. Companies and individuals have placed an important emphasis on espousing the virtues of the protocol instead of just the currency. As entrepreneurs have dedicated a substantial portion of time in 2014 to assessing Bitcoin’s value proposition versus other payment methods out of necessity for their businesses, we are beginning to see early displays of its market impact. Successful conversion on the business level has stimulated growth in network usage, which is up over 50% by all metrics since August.

Investment

An indicator of Bitcoin’s potential value to the economy can be observed in the amount of venture capital being invested in the space. Viewed through this lens, 2014 was a breakthrough year. According to Venture Scanner, $424 million was invested in Bitcoin companies this year through December 1, 2014. That total is more than three times higher than the $94 million that was invested in 2013. The statistic also only includes announced investments–the actual amount is probably much higher. This growing investment in the space suggests that sophisticated investors see profitable use-cases for Bitcoin through the business models being pitched, and it also arms the industry with funding to see disruption through to success. Well-capitalized companies will continue growing their user bases in 2015, pulling transactions away from the financial system’s traditional payment rails.

Progress made on the US and global regulatory front played an important role in fueling investor confidence in Bitcoin investments. There is now far less uncertainty–and thus further confidence– in Bitcoin’s regulatory future than there was just one year ago. Both federal and state agencies have begun explaining potential licensing requirements, which provides clarity on how Bitcoin companies can operate legally in each jurisdiction. In the United States, there is no longer a question of whether Bitcoin will survive–something that we heard repeatedly from investors in 2013. Instead, we await final guidance on application submission procedures for state licenses. Additional progress from state regulators this coming should bring closure to this concern altogether.

Low Hanging Fruits

Heading into 2015, the international remittance market is “low-hanging fruit” for the Bitcoin industry. The 10% fees charged for small money transfers clearly highlights the economic friction in a $500 billion market. While incumbent companies that currently dominate the market are mounting defensive stances, the fact is that Bitcoin can provide the same solution to consumers at a fraction of the cost, especially via Bitcoin ATMs. Cost savings are not the only benefit, however. Superior compliance monitoring can be achieved through Bitcoin ATMs, making the technology competitive with current infrastructure on almost every level. There are over 300 Bitcoin ATMs in operation today, almost all of which were installed this year. Next year we can expect thousands of new Bitcoin ATMs to be deployed, and with other companies enabling cash-to-Bitcoin transfers at convenience stores, there will be improved remittance options available at new locations across the world. The sender-side market for Bitcoin remittances has developed, from scratch, in less than a year, and the receiver-side market will expand in 2015, completing the loop.

One of the exciting changes that took place in 2014 was a transformation in how people view Bitcoin’s position in the tech stack. This past year introduced a growing conversation on the future of Bitcoin as a protocol. Serving as an open standard for internet payments, Bitcoin has the capability to serve as the behind-the-scenes payment rails to virtually any money transfer. At this point in time, Bitcoin is purchased, held, and spent as a currency. In its current form, Bitcoin has shown to be highly beneficial for merchants, and yet it lacks a strong consumer value proposition, especially in comparison to rewards-based credit cards. To mitigate this advantage, we can expect to see the introduction of rewards programs for Bitcoin purchases in the years ahead. There will be friction in consumer adoption beyond remittances until Bitcoin wallet providers offer similar value associated with credit card payments.

Future Outlook

2015 will see important breakthroughs in the Bitcoin industry. Availability of state licensing will open in the United States, bringing further acceptance by domestic banks. Next, Bitcoin companies throughout the space are transitioning from their development stage to become fully operational. In 2015, companies in our industry will begin growing their businesses and will actually make money, which will in turn increase network usage, disrupt traditional payment methods, and fuel additional investment. Finally, this coming year will see the “tokenization” of the dollar and other fiat currencies through blockchain technology, routing more and more money transfers into the cryptographic realm.

We are only five years into a digital payments revolution, but it feels like the page is turning towards a new chapter in the industry’s lifecycle. The year 2014 established a solid foundation for Bitcoin’s longevity. A universal transformation in payment standards cannot happen overnight, but substantial progress is visibly taking place. The year 2015 will introduce new opportunities that serve as catalysts for exponential industry growth.