The Bitcoin Startup Ecosystem in Bear Market, Regulatory Environment

Some of the more interesting discussions at this week’s Inside Bitcoins conference in New York City included panels on the Bitcoin startup ecosystem, the do’s and don’ts of Bitcoin investing, and institutional investing in Bitcoin.

Bitcoin Startup Ecosystem

The panelists discussed the prospects for starting up a company in the bitcoin ecosystem in the current environment of a relatively lower bitcoin prices and pending government regulations.

Brock Pierce, Founder and Managing Partner at Blockchain Capital pointed out that most of the startups that have been built over the last few years have been the infrastructure plays. Some of these companies will be the category winners in their space and, to start an exchange, payment service, or wallet now is risky. Pierce noted:

If you’re not live, you are going to find it challenging to raise capital.

Pierce sees great potential for Bitcoin technology in cross border payment services and in developing markets. Pierce is upbeat about investing in African Bitcoin startups. He commented:

The most advanced payment market in the world is Kenya. That is an area where there are interesting opportunities.

Pierce believes that Bitcoin is just the plumbing for the next wave of companies. He is positive about Blockchain 2.0 applications such as crowdfunding platforms, title records storage/auditing, and smart contracts. In terms of crowdfunding, he has been already been active and involved in investing in Koinify and Swarm. He is yet to come across a Blockchain application layer company that is attractive enough to invest in. Pierce told the panel and the audience:

I am waiting for someone to come and tell me they are more than a platform. I want a specific market and use case.

Justin Newton, CEO and Founder of the wallet simple naming startup Netki, noted that startups in the Blockchain 2.0 space are beginning to get beyond the theoretical use cases and building solutions.

By combining the best of both worlds, we are creating applications that were never going to happen.

Joey Krug, Leader Developer of Blockchain 2.0 prediction market startup Augur, added:

The hardest part for us has been building on foundation technologies…. Such as Ethereum and the Blockchaiin. We have finally confirmed yesterday that all our functions are working.

Houman B. Shadab, a Professor of Law at the New York Law School specializing in Bitcoin regulations, noted that the liquidity of bitcoin has been problem for comfort and adoption by the mainstream financial sector. He indicated that there are also pitfalls to pushing it as the better peer-to-peer payment system as it presents regulation issues.

However, Shadab noted that the JOBS Act of 2012 made it legal for startups in the cryptocurrency ecosystem to raise money online in crowdsales. Shadab noted:

The Jobs act of 2012 made it legal for these ventures to raise money online. The flood gates will even open more to retail investors.

Shadab indicated that there may be reluctance for venture capital firms and professional investors to invest in companies where there are thousands of retail investors but that the startups could to be structured for different classes of investors.

Pierce pointed out:

If you are trying to conduct a crowdsale, are you selling a security …what the SEC would consider a security? I think there is incredible demand for such projects. The idea that you will have ownership that you have in invested in will drive it forward. You pre-purchased access to services. [However] those lines now have to be clearly defined.

The other lawyer on the panel, Christopher Hopkins, a Partner at law firm Akerman LLP, thinks the move by businesses to blockchain-based applications like smart contracts will be slow but quite amusingly admitted that to get lawyers to do something else other than contracts this would be a good thing.

Krug of Augur plugged for Ethereum:

You will be able to use smart contracts to do anything. Where I see things… smart contracts on Ethereum communicating with each other.

Newton of Netki pointed to the massive potential of blockchain to be used as an alternate forum for Internet governance.

Vadim Telyatnikov, the CEO of AlphaPoint, was still positive about bitcoin infrastructure plays like exchanges:

We are definitely signing up more and more exchanges. Banking is one of the biggest issues our start-ups are facing.

One point often raised at this week’s Inside Bitcoins and other Bitcoin conferences is that more money was invested in the Bitcoin industry in 2014 than was invested in the Internet industry in 1995. However, a Pierce warned:

The world is very different than in 1995-1996. We have now AWS, open source. That capital that is being deployed like a seed takes time to become product and services. It is definitely more of a Bear market – this year – than back in the Bull of 2013.

That is why Pierce, other investors, and observers see great potential in developing markets. Adding to what he said about Kenya earlier in the panel discussion, Pierce said something striking about Africa:

Africa is the region that will most benefit from such technology. It is the spot for it. Africa could surpass American infrastructure today and have better services.