DEALSTREETASIA: For all of its challenges, there are compelling reasons to evaluate Bitcoin, a relatively new FinTech innovation. In fact, it holds tremendous promise and opportunities for investors and entrepreneurs interested in exploring the space.
Bitcoin (BTC) is a decentralised cryptocurrency and digital commodity money, operating on a bi-directional flow where its traded for various fiat currencies like the Singapore Dollar (SGD), Japanese Yen, Euro or US Dollars (USD). It’s also a peer-to-peer (P2P) system secured via cryptography that was introduced as an open source project by a developer or team of developers going by the pseudonym of Satoshi Nakamoto.
Functioning on the blockchain — a public ledger of transactions – it confirms transactions throughout the network. BTC nodes use the blockchain to distinguish legitimate transactions from attempts to re-spend coins spent elsewhere, whether by a network fault or fraud. The distributed ledger and trustless security of the blockchain is what grants BTC its usability, with its use as a currency being a single use case.
While most established financial institutions (i.e. banks) prefer to disassociate themselves to Bitcoin, they are integral to the blockchain’s functionality, given that BTC mining is the foundation of the BTC network. Miners are rewarded for their mining in bitcoins as an incentive to contribute time and computing power to maintain the blockchain.
So what are the investment opportunities that the Bitcoin industry presents? Moreover, where will these opportunities manifest themselves? Bitcoin has the advantage of connecting people directly into the digital economy and leveraging on Internet infrastructure, compared to conventional banking methods. Will it see traction in developed economies or emerging markets?
BTC presents significant opportunities for investment, with the BTC ecosystem maturing through a stage where it has suffering significant markets shocks, a bubble, extensive negative publicity, misinformation and myths. Technically, the blockchain that underlies BTC is already validated.
Industry leaders and thought influencers have come out in support of it, citing capabilities such as intelligent contracts and distributed autonomous corporations (DACs), in addition to its use as a currency.
Reid Hoffman, the co-founder of LinkedIn, an early investor in Facebook and currently working with Greylock Partners, commented in a CNBC interview summarised by Coindesk that “I think it’s an incredible system that’s created a ledger that is across – a distributed ledger across the whole world for it can be money but it can also be other things. You can have bitcoin stand for something that isn’t just a bitcoin. […] It could mean your car. So then your car could be accounted for on a general ledger that is then – you know, can let you do electronic contracts. you could put liens against it, moving it all into the electronic age.”
In addition to this, investment capital flowing into the Bitcoin and cryptocurrency space in the US market reached US$400 million in aggregate funding by Q4 2014, according to New York-based CB Insights. Despite heavy volatility, investors maintained capital injections into emerging digital currency companies, ranging from bitcoin wallets to data providers to blockchain APIs.
Some notable deals in the space including Blockstream which raised $21M from investors including Reid Hoffman, Khosla Ventures and Real Ventures. Coinbase raised a $25 million Series B round from Andreessen Horowitz, Union Square Ventures and Ribbit Capital while Bitpay raised a $30 million Series A round from Index Ventures, AME Cloud Ventures, Felicis Ventures and Founders Fund.
“Remittances and wallets with brokerage services are currently the lowest hanging fruit establishing the infrastructure in the reign and worldwide. Blockchain 2.0 apps are getting a lot of attention as well but investors should be realistic in their target applications and feasibility of many projects.”
The most promising markets for BTC lie in the Asia-Pacific (APAC) and Africa. This is due to the large volume of emerging markets in the region, significant numbers of unbanked consumers and the growing Internet and smartphone penetration that the region enjoys. These markets are also enjoying significant velocity in the growth of their banked population and their middle class.
The fact that financial infrastructure is growing also presents a market where entrenched interests (i.e. multi-national banks) do not wield as much influence over the financial infrastructure, though that influence is still significant. This allows for greater freedom to navigate the market, especially in terms of regulations.
Aside from being emerging markets with unbanked populations, many APAC nations like Indonesia, India, Bangladesh and the Philippines also have significant diasporas and emigrant communities based around the world, who often remit money back to their home nations.
However, mainstream banks like Credit Suisse and the Bank of England are slowly warming up to the prospects presented by this new market. They’re exploring the possibilities of integrating Bitcoin or Bitcoin-like capabilities into current financial infrastructure. The use of Bitcoin brings significant benefits, with the risks mitigated by year-on-year (YOY) growth of the ecosystem. It’s even emerged as a store of value alongside gold.
Two cities that have emerged in the Asia-Pacific as Bitcoin hubs are Hong Kong and Singapore. Given their status as financial hubs. ItBit, a Singapore-based Bitcoin exchange, recently shared a comparison of the two written by Antony Lewis, their director of business development.
Lewis concluded that “Hong Kong and Singapore share many similarities. Both have bitcoin-friendly governments that have welcomed digital currency companies and helped drive innovation across the space. However, though both Singapore and Hong Kong regulators have a reputation for being world-leading, they seem to be in a holding pattern when it comes to creating a regulatory framework for cryptocurrency companies.”
While the Bitcoin space is certainly one in a state of flux, seeking to find its place as a consumer-facing or back-end application, there’s almost certainly a tremendous amount of opportunity to be found in this emerging FinTech ecosystem.