Some of the most high-profile and well-funded startups looking at bitcoin are now pivoting their businesses and distancing themselves from the digital currency, less than two years after the hype around bitcoin blew up.
Circle, BitPay, and Bitreserve — who between them have raised over $US130 million — have all shifted away from bitcoin in one way or another in recent months.
That’s after people failed to adopt it in the way entrepreneurs and venture capitalists had hoped.
Circle — which makes a mobile bitcoin wallet and is backed by Goldman Sachs — recently began accepting US dollars and when I met the founders in London recently they told me that bitcoin was just the first use-case of their technology.
The future, according to CEO Jeremy Allaire, lies in using the technology that underpins the technology, called the blockchain, to make sending any form of money as easy as sending an email. He didn’t want to talk about bitcoin.
Allaire says it’s always been Circle’s aim to go beyond bitcoin but that hasn’t always been obvious to outsiders.
Meanwhile Bitreserve, which began life as a bitcoin wallet and exchange, is even more explicit in its disowning of the digital currency. It recently re-branded and re-launched as Uphold, a more general online money service that, like Circle, is using blockchain technology to offer free currency transfers.
Uphold CEO Anthony Watson told me at the time of the relaunch: “When we say bit, we don’t mean bitcoin, we never did. We meant bit as is bits and bytes and reserve is obviously holding the value. But people are confused, they think we’re just a bitcoin company and it makes sense as our first use case was bitcoin.”
He added: “I don’t think bitcoin is going to be anywhere near as important as people say it is today. That’s a personal view. The blockchain is very transformative.”
Finally BitPay has also moved away from its original business model of providing software to let businesses accept bitcoin payments and, like the others, is falling back on the blockchain to try and find another way to make it work.
BitPay is building enterprise applications that use the blockchain, such as payroll software. The company recently laid off staff in a bid to “reduce costs” and “better align with the pace of growth” in the industry.
All three companies are struggling with the fact that bitcoin is not breaking into the mainstream in the way many had hoped. BitPay CEO Stephen Pair told me back in June: “We keep adding merchants — we’re up to over 60,000 now — but they’re selling to the same pool of Bitcoin early adopters.”
Despite recent spikes in price, using bitcoin to actually pay for things — and even just holding it as a speculative asset — remains a relatively niche activity.
‘You’re up against the adoption curve’
“You have to look at the broader picture: like with every new technology, whether it’s the advent of the internet or email, there’s an adoption curve,” Jan Hammer told me. Hammer is a venture capitalist at Index Ventures and an investor in BitPay.
He says: “I guess contrary to public expectation around bitcoin, and more broadly around the blockchain space, adoption has been slower [than expected].”
Hammer says BitPay is “not in difficulty” despite the layoffs and says the company has enough cash in the bank to survive for several years at least.
While consumers have failed to pile into bitcoin as companies and investors hoped, there has been an explosion of interest among banks and other financial institutions in blockchain technology.
A recent Economist cover story on blockchain technology declared: “Bitcoin itself may never be more than a curiosity. However blockchains have a host of other uses because they meet the need for a trustworthy record, something vital for transactions of every sort.”
The blockchain uses a network of computers to verify each transaction, removing the need for a “trusted middleman” like a bank or clearing house to sit in between transactions.
Instead, the blockchain uses the wisdom of the crowd to regulate the system. A certain percentage of users on the whole network have to sign off on any given transaction — which with the blockchain is actually cheaper, quicker, and easier than traditional transaction systems.
Hammer says: “That’s where it gets even more interesting. BitPay have created a set of products for payroll, settlement, intercompany transfer. BitPay is essentially not just a payment acceptance company — Stripe for bitcoin — it’s a broader open source software company for bitcoin applications.
“But, again, you’re up against the adoption curve. All of the large banks have various innovation units and are either making small investments or experiments. But, it takes time. And it takes capital. Really the situation BitPay is in is a market adoption situation, which is applicable to the whole sector. You’re waiting for a tipping point.”
‘It’s kind of like the tech equity bubble in the run up to 2001’
One of the few high-profile and well-funded bitcoin businesses that is still fully behind the cryptocurrency is Coinbase, the San Francisco-based bitcoin wallet and exchange business. The company is still committed to its original business model and seeing between 2,000 and 5,000 new account openings a day, according to co-founder Fred Ehrsam.
Ehrsam told me: “We’ve had crazy periods where that will be 7,000 to 10,000 accounts a day. In terms of baseline growth in normal times, that’s probably where it was at this time last year but it is growing. More people are dipping their toe in the water even if it’s just in a small way.”
Ehrsam says Coinbase now has around 2.8 million accounts. On Friday the company launched the first ever bitcoin debit card in the US to let people easily use the digital currency to pay for things.
He says: “If you look at the number of transactions on the bitcoin network a day, it’s an up and to the right graph where it’s roughly doubled in the last year. From that perspective bitcoin is doing pretty well, it’s quite healthy.”
But even he admits bitcoin needs to become more than just a way to pay online for it to really become a breakout success.
“At the end of the day, what’s going to make bitcoin successful is more people making more interesting things, just like the beginning of the internet,” he says.
“I actually think the most convincing graph in bitcoin is if you go to GitHub and look at the number of repositories that reference bitcoin. It’s a nice up and to the right graph.”
An example of an “interesting thing” Ehrsam hopes to see is a web browser linked to a bitcoin wallet. “Let’s say I go read Business Insider,” he says, “and I’ve chosen to surf the premium internet, so every time I hit one of you pages I pay half a cent but I don’t see any ads.”
Ehrsam puts at least part of the blame for company’s being forced to pivot on overzealous investors, who piled into bitcoin too soon.
He says: “If you invest in bitcoin thinking ‘oh my god bitcoin is happening in the next 2 years and we should hire up and staff up really quick for that’ you’re probably going to feel some pain. It’s more of a linear growth over the next 5 years.”
“If you look at investor interest in bitcoin, it’s probably about as crazy as the price is. When it’s hot it’s hot, when it’s not it’s not. It’s kind of like the tech equity bubble in the run up to 2001 — there’s so much potential there and that’s why investors get excited. But the highs can be really high and the lows can be really low.”
But he adds: “I don’t think just because a few companies haven’t worked well, people are abandoning bitcoin. In fact I think the aggregated trends point the other way.”