Can Blockchain Live up to the Hype?
PitchBook releases 2016 Analyst Report: Bitcoin and Blockchain
SEATTLE — October 3, 2016 — Since 2013, $1.8 billion of institutional capital has gone into Bitcoin and Blockchain related companies across a total of 550 completed deals globally, according to recent analysis conducted by PitchBook Data. Investors’ interest in the space peaked during the first quarter of 2015, where $210 million was invested across 67 completed transactions, including investments by a16z, Union Square Ventures and Khosla Ventures into startups like Coinbase and 21. Since its peak, investments into Bitcoin and Blockchain related companies has declined to the lowest levels in years. Through the first half of 2016, only 72 deals were completed, the lowest number of deals in two consecutive quarters since the back half of 2013.
At the same time, the distributed computing network Ethereum, powered by the Ether cryptocurrency, has bootstrapped its way onto the scene, offering a more flexible, scalable platform and drawing back attention from the global tech community. Despite the recent decline in investments in the space, the industry still holds promise and it’s likely that activity will pick back up as new products and services are built on top of these platforms.
“There’s still plenty of excitement in the global tech community surrounding Blockchain technology and its potential to revolutionize the current financial ecosystem,” said PitchBook analyst Evan Morris. “And, while we’ve seen investor’s appetite for Bitcoin and Blockchain related companies decline as a result of perceived risk and slow adoption of the service, we anticipate interest to pick back up as the developers continues to work out any remaining kinks and find new use cases.”
Why does Blockchain technology matter?
Blockchain technology like Bitcoin and Ether allow transactions to be processed with little to no fees. Currently, a typical merchant pays roughly 3% processing fee depending on the retailer’s size and type of card. Either way the largest portion of the transaction fee goes towards bank interchange fees which goes entirely to the card issuer, something Blockchain aims to correct by offering lower fees, often times less than 1%.
The same low transaction costs allow for micropayments, very small payments made every time a user accesses an Internet page or service. This advancement could have a significant impact on media and digital music industries by creating the possibility of highly efficient and automated tip-jar services of all stripes.
The global remittance industry takes out $40 billion annually in fees globally, presenting another huge market ready to be disrupted by blockchain technology. Transaction fees on these types of transactions hover between 2-6% of the total depending on the volume of the corridor. Fees for bank wire transfers, however, can eat up 10-15% of the total. By using Bitcoin rails to bypass traditional plays like Western Union, individuals can theoretically send money more quickly at a lower cost.
Blockchain technology has the potential to reduce the time and money historically required for contract processing and enforcement. Tasks typically handled by back-office operations can now be automated through Blockchain. By eliminating the extensive clearing process needed to reconcile financial transactions, Blockchain would save the financial services industry, and its consumers, billions of dollars.
The future of Blockchain technology
Bitcoin set out to revolutionize the current payments system, however, it has become clear that the limited range of programmable functions make the network difficult to scale. In addition to that, the network was deliberately designed to be less vulnerable to attack, making it somewhat difficult to build apps on the network. Enter Ethereum, an open-ended distributed computing platform--pioneered by 22-year old Vitalik Buterin--on top of which developers can theoretically build any kind of software so long as the code provides enough Ether to pay the network to run the code. ConsenSys, Augur and Ether.camp are just a few examples of companies working on decentralized services and applications relating to Ethereum.
PitchBook expects multiple phases of massive future growth in Blockchain technology to come from innovation in applications built on top of the Bitcoin and Ethereum networks. In the present, startups like Coinbase, Blockstream, BitPay, BitPesa and BitMonet have already started to develop the necessary tools to make Blockchain technology more accessible. These products range from the actual processing services needed to use the currency, to platforms for content creators, to getting paid directly for their content in Bitcoin, to allowing micropayments.
Additional findings in this report include:
The inception of Blockchain and Bitcoin
A breakdown of how the technology works
Current applications and market development
An introduction to Ethereum
Risks to the marketplace
Deal flow & capital invested by year, quarter
Breakdown of investments into Bitcoin vs. Blockchain related companies
Active and new investor growth
Download the full report here.