Bitcoin Value and Beyond. Are There Investment Opportunities in Digital Money?

The blockchain concept that defines Bitcoin will present investment opportunities not only in the crypto-currency space, but in other industries looking for solutions that are secure and frictionless.

That’s one of the findings of a new report on Digital Money from Difference Capital Vice President Dushan Batrovic.

“Overall, we are quite enthused about the prospects of the new technology in helping to reduce the roughly $50 billion in annual friction costs associated with just the eCommerce and global remittance markets,” says Batrovic. “In the longer term, we see lots of potential to repurpose the bitcoin distributed ledger (or blockchain) for a host of other applications outside of the currency markets.”

Batrovic says a central authority or clearing house has the ability legitimize a currency, but it also adds friction. The promise of frictionless transactions has been a shiny lure to would-be pioneers of crypto-currencies.

Any discussion of cryptographic currencies, says Batrovic, must begin with Bitcoin, which is now fourteen times as large as the next protocol. The volatile currency now has a market cap of about US$3.1 billion, and is accepted by more than 90,000 merchants, including Dell, DISH, Overstock and Zynga.

Batrovic says he is enthused about the possibility of other companies building on Bitcoin’s platform. He thinks an emerging Bitcoin ecosystem will present investor opportunities in several sub-sectors of the space.

Batrovic says Bitcoin has a number of things going for it, including low or no transaction fees, a controlled money supply, protection against identity theft, speed, and no fraud for merchants.

But the analyst warns there are drawbacks to Bitcoin, including the fact that transactions are irreversible, that there is no recourse if you lose your private key, there is volatility in value added services such as wallets, miners and exchanges, and, of course, there are the ever-present regulatory and tax issues.

Batrovic says he is enthused about the possibility of other companies building on Bitcoin’s platform. He thinks an emerging Bitcoin ecosystem will present investor opportunities in several sub-sectors of the space.

The analyst says there are opportunities in Wallets, where Coinbase has raised $75 million in VC financing in order to develop a range of of services including an exchange, processing and other merchant services.

He also thinks there will be a new hierarchy of exchanges in the wake of the collapse of Mt. Gox, which was the largest Bitcoin exchange. New contenders include Slovenia’s Bitstamp and Bitfinex, which has seen its trading volume grow of late.

Batrovic says there will be opportunities in Processing, where merchants will need to work with payment processors such as First Data, Global Payments and Moneris. Hopefuls in this space include bitpay, Coinkite, and GoCoin, he says.

The analyst sees the Mining aspect of Bitcoin, where players like Bitfury, CloudHashing, and CoinTerra compete to verify a block and earn 25 Bitcoins, as becoming commoditized and therefore presenting less opportunity than other parts of the ecosystem.

Finally, Batrovic says there is opportunity in Financial Services, which he describes as a “catch-all” term that includes all the companies creating value-added services such as ATMs, where ExpressCoin and Lamassu are notable players, crowdfunded lending platforms like LendingClub, and secure “vaults” companies like Elliptic and Xapo.

The real gem in the bitcoin ecosystem is the blockchain or distributed ledger because it creates a method by which to transact or simply hold data on the public web without an intermediary. If we step back from the currency aspect, why not use the blockchain to hold and transfer medical records…

Batrovic says some companies, like Coinbase, Circle, Coinplug, and 21 Inc. are expanding into multiple categories.

Batrovic notes that there are several notable Canadian players in the Bitcoin ecosystem, including Coinkite, a wallets and merchant services provider from Toronto, the Vancouver-based io, a bitcoin exchange platform, Ottawa’s BitAccess, which makes Bitcoin ATMs, Vancouver-based payments processor CoinPayments, CoinTrader, which has built an online trading platform and is also based in Vancouver, and Montreal and San Francisco-based Blockstream, which has a $21 million seed round all star investors including Khosla Ventures, Real Ventures, and from Reid Hoffman and Eric Schmidt.

But Batrovic circles back to the theme that he is excited about the possibilities for the blockchain or distributed ledger beyond currency.

“The real gem in the bitcoin ecosystem is the blockchain or distributed ledger because it creates a method by which to transact or simply hold data on the public web without an intermediary. If we step back from the currency aspect, why not use the blockchain to hold and transfer medical records? Or for land registration? Or for financial contracts? Or for real estate title transfers? We are quite intrigued by the opportunities to repurpose the blockchain. A few companies like Blockstream and Factom are promising to do just that.”

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