Retail investors not big money may fuel the next Bitcoin rise – Here’s why:

[The following Article is by Renegade Investor Chief Editor – Edward Blake]

There is always a lot of discussion and speculation in various Bitcoin forums trying to figure out when big institutional money such as hedge funds and major private equity groups are going to start moving into the Bitcoin space.

The reasons for this are obvious. These funds command trillions in wealth worldwide and even speculative positions from these players could have a major effect on the price and market cap of bitcoin.

However, it could be retail investors and smaller investment groups that fuel the next price rise ahead of major institutional money. This article will take a look at why the market may not be ready yet for big institutional towards the end, but first let’s look at why retail investors may be set to enter the market.

Retail Investors:

Having worked at a major UK brokerage in 2013 as an investment consultant, I spent every day consulting with retail investors which provided me with a great insight into their investing behaviour.

From my experience here are some of the reasons I believe they may soon look to invest in the Bitcoin market.

Brokerages offer a huge amount of Funds and Multi Manager Funds (funds that invest in other funds) they are an extremely popular investment vehicle for retail investors. The reason they are so popular is because many retail investors are very passive by nature, this is partly contributed to by the fact that many have full time jobs and in many cases they don’t have the time or interest to carry out in-depth research on many individual investments. It provides them with exposure to multiple types of investments, through one low maintenance security that is professionally managed for a small premium.

During the last bull run in Bitcoin during Q4 2013, there were no secondary market Bitcoin funds for retail investors, but this looks set to change towards Q3 and Q4 of 2014.

CEO Barry Silbert of SecondMarket Holdings, Inc, the company that set up the Bitcoin Investment Trust (BIT), have indicated that they are looking to expand the scope of their operations to make funds available for retail investors hopefully by Q4 this year.

In addition to this the Winklevoss twins are also well into the process of getting approval for their ‘Winklevoss Bitcoin Trust’ an exchange traded fund (ETF) which looks like it will list on the NASDAQ. Whilst it’s difficult to estimate when the regulatory process will be completed for the ETF, many commentators believe it could be finalised by Q4 2014 if not by early 2015.

The creation of these funds may help usher in a new wave of retail investment and the successful completion of the funds may be a catalyst for the creation of more Bitcoin secondary market funds in the future.

Confirmation of a trend:

The fact is the majority of retail investors always wait for the confirmation of a trend before investing, as retail investors by their nature are more risk averse less and less likely to be part of the ‘smart money’ that invests early in high risk investments.

Whilst Bitcoin is without a doubt still a high risk speculative investment, it has now been around for 5 ½ years and the Bitcoin economy continues to mature every day. With another potential move back above $1000 as many analysts are predicting in 2014, this may give the confidence that retail investors need to enter the market.

There are only so many times you can declare an asset is dead, after a price correction, before seeing it go to new highs to provide retail investors with the confidence they need to enter the market.

High Bitcoin price:

Whilst I have heard arguments from some early bitcoin investors that a higher bitcoin price may deter retail investors as the thought of spending 4 figures on a single bitcoin may not seem attractive. There are many reasons why this may not be the case.

One reason as we discussed earlier is to do with the secondary market funds. For example whilst a $1000 bitcoin price seems expensive for a single bitcoin, investing $2000 in a ETF and receiving 100 shares may sound more attractive than buying 2 single bitcoins.

Along the same lines, the proposal of changing the pricing of bitcoin to ‘Millibits’ (mBTC), may have the same psychological affect. For example buying 1,500 mBTC for $1500 may sound more appealing to a retail investor than purchasing 1.5 BTC.

Main Stream Media coverage:

During the late 2013 run up in the bitcoin price, there is one correlation I really noticed whilst working as an Investment Consultant that led me to believe that retail investors are much more reliant upon mainstream media (MSM) for their investment decisions.  

It was not until the price started to reach $1000 dollars that we started to get multiple enquires of  how and if  clients were able to invest in Bitcoin whilst working at the brokerage.

This coincided with growing coverage in the MSM from sites such as CNBC , Bloomberg and Reuters as the price reached this distinct milestone.

The charts below show the google trend searches for ‘Bitcoin’ V the Bitcoin price as it neared and surpassed $1000.

Google trend search V bitcoin price 1000

It could be argued that a move back into the $1000 will likely ignite the MSM coverage again and increase interest from retail investors. Coupled with the fact that many retail investors will be more aware of Bitcoin from the previous spike and may soon have investment vehicles thy can then use to invest. This may lead to an influx of retail capital into the Bitcoin space.

Slowing global equity markets:

2014 has currently seen a significant slowdown in equity market returns globally, compared to recent years. It is these equities that currently make up a large percentage of many investment Funds and Multi Manager funds offered by major brokerages.

Whilst it is extremely difficult to gauge the future direction of the markets, due to massive market distortions from the likes of the Federal reserve through QE and their Permanent Open Market Operations (POMO). The decline in macroeconomic data and the appearance of tapering of these tools has currently led to weaker equity markets in 2014.

If this trend continues and ROI continues to lag for equities, we may see much more interest from retail invest towards Bitcoin. The reason for this is that during my time working as an Investment Consultant I noticed that  retail investors in many cases use 4 main metrics when looking for an investment fund.

  • Past price
  • Current Price
  • Historical Yield (Past performance of the security)
  • Distribution yield (Total interest likely to be paid to you, by the fund divided by the fund’s value)

If these metrics start to decline for equity heavy weighted funds and the Bitcoin market continues its growth trend. We could potentially see a lot of money move out of these funds into Bitcoin specific funds (and or) other funds start to weight their portfolios to include Bitcoin funds (dependant on fund remit & regulation).

Conclusion:

Whilst there are many potential variables to all the points above, there are a lot of reasons why retail investment may soon come into the Bitcoin space and help fuel the next possible upside move in Bitcoin.

A move back above $1000 and new secondary market funds would definitely be a great catalyst to start the process and this could lead to a much higher bitcoin price and market capitalisation.

The reason this is important is because this is of the main pre-requisites and incentives big institutional money like hedge funds and major private equity groups need to get involved in the market.

Reggie Middleton of ‘Boom Bust Blog’ recently highlighted this in one of his tweets:

In addition to this, without liquidity it is extremely difficult for big players to move in and out of the market without dramatically affecting the buy and sell price. Executing a bid or ask price in the tens of millions on any of the current main exchanges, would take out a huge amount of bids and asks in the order book. This would lead to a much higher buy price or much lower sell price when trying to execute a trade.

However, improved liquidity coupled with improved infrastructure, and derivative products for hedging could see the big institutional money start to invest in bitcoin and that could potentially take us closer to the much anticipated S-Curve adoption in the future.

Disclaimer

I do not have any affiliations with the funds/products mentioned in this article. This article should not be viewed as an endorsement of the funds/products discussed. Please carry out your own extensive research before considering investing in any funds/products mentioned in this article.

How Merchants can reap the benefits of Bitcoin adoption

[The following article is by Renegade Investor Chief Editor – Edward Blake]

Regardless of a merchants underlying ideological stance towards Bitcoin, there are many reasons why acceptance of Bitcoin through merchant processors such as ‘Bitpay’ and ‘Coinbase’, can provide both value for the merchant and increase the value of the underlying Bitcoin network as a whole in a relatively low risk way.

The basic understanding of ‘value’ is the regard that something is held to deserve; the importance, worth, or usefulness of something.

Simply by accepting Bitcoin as a method of payment, merchants are recognising the ‘value’ that Bitcoin can provide in many ways:

Benefits for merchants:

1) It opens up businesses to a wider market audience and pool of capital. The bitcoin market cap has seen highs of $14 billion and is projected by many analysts to be many multiples of this in the future. On top of this the user base for Bitcoin looks to be growing at an ever increasing rate.

2) It lowers their transaction costs for purchases with Bitcoin by 50%-66% based on a <= 1% transaction fee (volume dependant) compared to in the region of 2%-3% charged by debit card and Credit card companies.

3) Time is money – It saves merchants time on the processing of transactions. Please see my article Bitcon V UK Retail Banking for an example of how much time Bitcoin transactions can save.

4) Being at the forefront of Bitcoin adoption, merchants have opportunities for free advertising and media coverage not only in the mainstream media, but also in the alternate media and on social media platforms.

5) Merchants that adopt bitcoin for payments are seen as pioneering, trendy and in touch with the digital age, to a growing technologically orientated populace.

6) Many merchants have benefited from the support and passion of the Bitcoin community, that have been very supportive of companies that accept bitcoin. A good example of this is Overstock.com where Patrick Byrne CEO recently reported $1.6 million in bitcoin sales and states that bitcoin purchases are growing by 25% a month.

How does Bitcoin and the Bitcoin network benefit from merchant adoption:

1) It adds to the services and products that can be purchased using Bitcoin, thus increasing the ‘utility’ of the currency which is a major attribute that provides Bitcoin with value.

2) In the case of EuroPac Precious metals, Bitcoin gains from the perception of having a highly respected investor and public figure accepting payments in bitcoin. This increases its validity in the eyes of sceptics and people less informed on Bitcoin as a whole.

3) With every merchant acceptance of Bitcoin, it makes it more desirable purchase the currency because of increased utility and boosts the network effect that increases the chances of Bitcoin reaching large adoption.

4) The ‘Amount of transactions’ on the Bitcoin network is an important metric in analysing the health of the Bitcoin economy and one of the indicators used for potential investment. Increased merchant adoption will likely have the same effect on the amount of transactions.

5) Companies that accept bitcoin payments have the potential to create margin compression for other companies in the same industry, as reduced transaction fees enable savings to be passed onto consumers. This creates an incentive for all other companies in the same sector to adopt Bitcoin to stay competitive. This has the potential to create a snowball effect of facilitating Bitcoin payments within many industries.

Conclusion:

The important thing to look at here for all merchants and investors looking to adopt or invest in Bitcoin, is the underlying symbiotic relationship where both the merchants and the value of the Bitcoin network benefit from the adoption of Bitcoin by merchants.

One of the biggest criticisms I hear at the moment is the fact that merchants are not really supporting Bitcoin, or do not see the value of Bitcoin if they immediately convert back into fiat currency. But as we have seen above, there are a lot more factors to consider than just the currency conversion.

For me the conversion back into Fiat currency when adopting Bitcoin represents ‘Phase 1’ of merchant acceptance and companies like ‘BitPay’ and ‘Coinbase’ provide a good way to hedge against current price volatility that is undoubtedly present in the market and will be for the foreseeable future.

As Bitcoin matures leading to a possible increase in market cap and reduced volatility, this could potentially lead to ‘Phase 2’ where merchants begin to reduce the percentage of Bitcoin they convert back into fiat currency.  

We have already began to see this at Overstock.com as CEO Patrick Byrne recently stated, they are now holding onto 10% of all Bitcoin transactions in Bitcoin.

‘Phase 2’ also has the possibility to alleviate the potential  impact of another talked about problem, that converting Bitcoin transactions straight to fiat currency puts sell side pressure on the exchanges.

If you like Bitcoin or not, every merchant can find value by accepting bitcoin and by looking at the points above, everyone in the Bitcoin space can potentially benefit from increased merchant adoption. There is also a good case to be made that those merchants that do act early will potentially see the biggest amount of benefits and gains by accepting Bitcoin at this relatively early stage.

For further information and an in-depth look on the topic of Bitcoin and value, I highly recommend this excellent article by Javier Marti, Bitcoin expert, digital trend analyst and CEO of Bitcoin global Investments. ‘Do Bitcoins hold intrinsic value, or are they overvalued’

Disclaimer

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Bitcoin V UK Retail Banking – David and Goliath

[The following article is by Renegade Investor Chief Editor – Edward Blake]

For centuries banks have provided a medium for the facilitation of financial transactions domestically and internationally. During this time they have provided a necessary service that has helped facilitate the growth of domestic and global commerce.

However in the last century especially, it could be argued that the financial services sector has become growingly complacent with archaic infrastructure, considerable fees and a severe deterioration in integrity and trust.

The lack of serious competition may have fostered this complacency, however, this all changed with the creation of Bitcoin in 2009. There is no doubt that globally banks are very worried about the competition that Bitcoin offers and for good reason. Bitcoin has the potential to massively disrupt their privileged position as financial/transaction intermediaries that net them billions in commissions and fees every year.

However, if bitcoin is to grow into a mass adopted currency, it needs to provide retail users with utility and benefits that go above and beyond the current banking system that currently handles the vast majority of transactions.

With a recent study showing that UK consumers are still very sceptical about Bitcoin, now may be a good time to look at this in more detail.

This article aims to take a closer look at how Bitcoin compares in cost, speed and availability against other transaction methods used in retail banking in the UK. But before we look at the intricacies, there are two major benefits that Bitcoin can potentially offers over the current banking system, that I think need special attention:

Reduced Counterparty risk:

It is no secret that due to fractional reserve banking (FRB), banks have rehypothecated thier tier 1 capital multiple times in the UK, much of which has made its way into risk assets.  This brings into question if banks actually have the collateral available to back all the bank deposits currently sitting on their balance sheets. In the event of one or more major sovereign defaults and the likely ensuing contagion, it is not difficult to envisage a scenario where the mark to market losses on these risk assets would render one if not more of these institutions insolvent.

In an event like this, bitcoin potentially offers a safe haven (similar to physical precious metals) of having an investment without any counterparty risk to the highly leveraged current financial system. Whilst counterparty risk can come from holding bitcoins in third party companies such as exchanges like Mt.Gox. This risk can be mitigated with various hot and cold storage techniques that can greatly reduce or almost eliminate this risk altogether.

Protection from devaluation of fiat currency:

Around the world, the continuing and accelerating debasement of fiat currencies through FRB and Quantitative Easing (monetisation of sovereign bonds) has accelerated, especially since the financial crisis of 2008 and the bank bailouts that ensued. In the UK currently £375 billion has been pumped into the monetary system by the BOE and the real world effects of this can be seen with asset price inflation creating price rises in fuel, energy, utilities, travel, tuition, house price and rents. The result of this, simply by holding your money in GBP, people’s purchasing power continues to decrease as low interest rates cannot offset losses from a higher rate of inflation.

On the other hand, as a currency, bitcoin has a set limit of 21 million units. Whilst bitcoin remains inflationary as bitcoins are rewarded through the mining process, the inflation rate is very slow and as a result, devalued fiat currencies continue to fall in value against bitcoin. One of the major advantages of this is that bitcoin holders possibly have the opportunity to protect their purchasing power from more aggressive devaluation.

Having looked at two of the major benefits that Bitcoin could provide going forward, let’s take a closer look at this comparison.

The following information takes a look at how Bitcoin compares against a standard infrastructure and fee structure of a large UK retail bank account. It will look at the most widely used transactional methods used BACS, BACS faster payments, CHAPS and SWIFT, in terms of cost, speed, availability and limitations for Domestic and international payments. A list of all financial institutions that use these methods can be viewed here.

The information collected is publicly available information from one major high street bank in the UK. Whilst other banks may differ slightly in there fees structure this information should provide a fairly reliable benchmark across the main players in the industry.

Before we review this information, it is worth taking into account that the Bitcoin protocol and bitcoin market factors are changing all the time, so the scope of this information is to give a realistic snap shot in time of what the Bitcoin can potentially offer. Depending on adoption and growth of the bitcoin network these factors are likely to change going forward.

Domestic transactions:

Domestic payment UK retail banks and Bitcoin

(Click for larger image)

At the moment, it is possible to make fee free domestic transactions in the UK through BACS and BACS faster payments with a retail bank deposit account up to the value of around £25,000. A full break down of faster payment limits can be viewed here.

For clients sending money between the institutions where faster payments are available, this service actually provides a fairly good cost effective way of sending money domestically in the UK.

It is worth noting that Bitcoin transactions can be made without a fee, but the fastest transaction confirmation time of 10 minutes cannot be guaranteed. More detailed information on Bitcoin transaction fees can be found here.

Whilst this undercuts the current recommended miner fee of around 0.01 mBTC to help ensure a 10 min transaction using Bitcoin. It could be argued that it is the speed and availability that will make Bitcoin a viable competitor for smaller domestic payments. Further adoption of bitcoin and increased transaction volume could potentially reduce this fee in the future, which would help make micro and small transactions more cost effective in a domestic scenario.

One area where Bitcoin clearly offers an advantage is with large, time sensitive transactions that make up the bulk of CHAPS payments in the UK. Bitcoin can clearly undercut the speed, availability and average £30 fee charge for this service which is used mainly for payments that are normally above the BACS and BACS faster payment limitations.

Making International Transactions:

Internatonal transactions uk retail banks - Bitcoin

(Click for larger image)

As the Bitcoin protocol and bitcoin currency can be used globally, the advantages of sending international payments are a lot more clear when compared to the most commonly used method of SWIFT, currently used by the banking system. The process of sending money internationally is the same process as sending domestically when using bitcoin in terms of cost, speed and availability. SWIFT on the other hand, as you can see from above, has a lot more disadvantage’s against Bitcoin in terms of:

  • Cost (especially for smaller transactions),
  • Availability (limited to working days),
  • Transaction limits (£75,000 online)
  • Speed perhaps most importantly the time for the transaction to clear. At best transactions clear in 2-4 days, but depending on the geographical region of the receiving financial intermediary this can sometimes be as much as 12 days.

In addition to this, a widely discussed major benefit of Bitcoin is that it provides a low entry transactional network that opens up commerce for billions of people who are currently unbanked around the world, for reasons that range from geopolitical, to the lack of banking infrastructure in there geographical region. With bitcoin something as simple as a cell phone can be used to transfer bitcoins internationally.

Receiving an International transaction:

Receiving international payments

(Click for larger image) 

Another cost that can be mitigated by Bitcoin altogether is when receiving international payments. Whilst the percentage cost is fairly low for large transactions. When receiving international payments through a retail bank account in the UK, it is the more common smaller payments that incur a noteworthy transaction fee on a cost % basis.

Other bank fees that could be avoided through the use of Bitcoin:

Other fees avoided uk retail banking

 

Time is Money:

Having looked at the difference in transaction speeds across Bitcoin, BACS, BACS – FP, and CHAPS, we can now look at the total time that could potentially be saved per annum, using Bitcoin, based on the amount of transactions for each method and the generally accepted transaction times.

Whilst there are many variables, including transactions that clear before the limits shown below for BACS,BACS FP and CHAPS, as well as Bitcoin transaction confirmations that exceed the 10min 1st confirmation time. The following information I believe shows the potential for time saving when using Bitcoin versus the current banking methods.

The total amount of transactions shown below is taken from the ‘Annual Summary of payment clearing statistics 2013: Inter-bank and Inter-branch Clearings’ available from the UK payments council.

Tranascation times savings bitcoin

(Click for larger image)

Drawing a comparison in overall time saved when using Bitcoin over the current methods of banking transactions, we can see that the potential time saving when using Bitcoin is huge. It’s easy to conceive just how much time could potentially be saved in the UK alone with the reduced time in waiting for transactions to clear and how this can accelerate the speed in which domestic and global commerce can take place.

Whilst the Bitcoin protocol is currently capped at 7 transactions per second with artificial limits to prevent major growth of the Blockchain, before the network is ready for it. These limits can be removed and the amount of transactions that the network can handle is scalable by many multiples, especially with growing computer power which will help facilitate this.  If the network continues to increase in size and speed, the potential for being able to facilitate the amount of transactions shown above is not inconceivable.

Conclusion:

Whilst the UK banking industry still plays a dominating role in facilitating domestic and international transactions in the UK and in some instance, provide a good medium for very low cost transactions. The risks associated with using the banking system in the UK are growing by the day.

Coupled with long transaction times and in some case partial availability, Bitcoin looks set to provide much needed competition in the UK retail banking industry, especially with its low cost for domestic and international payments, fast transaction times and 24/7 availability. In addition, the prospective growing need to hold assets that can be used to hedge against counterparty risk and debasement of fiat currency, could see its adoption grow.

Whilst it is unlikely to replace the banking system in the near term. On a longer time scale, with further development of key services needed for wide adoption. The scalability of the Protocol and network provide a realistic proposition of Bitcoin having a much larger market share of this industry.

Because of this, it is likely we will see a determined effort from these banking institutions and other powerful payment providers to try and slow down and limit the impact of Bitcoin through lobbying, regulation and patent trolling.

After the recent Chinese crackdown in particular on Bitcoin exchanges in China, I discussed this fact with Javier Marti, Bitcoin expert, digital trend analyst and CEO of Bitcoin Global Investments.

During the conversation he stated;

“One of the most important things to look at right now, is who has the most influence over the law makers and what will be the outcome?” 

“The difference may be a future in which Bitcoin comes to mass adoption in the medium term, or one where the process is greatly slowed”.

Whilst Javier remains optimistic about the potential of Bitcoin going forward. This is something that has to be taken into consideration.

Whether you agree with political donations or not, perhaps one of the silver linings for Bitcoin in relation to this, is the recent news that US Politicians can now accept bitcoin donations up to the value of $100, which could lead to similar legislation in other jurisdictions.

The future remains to be seen, but Bitcoin has the potential being one of the greatest examples of lean engineering the financial services industry has ever seen, and the fact that Bitcoin is being backed by a tireless community network of developers, entrepreneurs, investors, business minds, journalists and enthusiasts, may help it face up to these head winds.

In addition, with the possibility of extreme tail risk in the banking industry, it is possible the adoption of Bitcoin in the future may go from being a ‘want’ to a ‘need’.

Disclaimer

 

 

 

Russia & Bitcoin – Growing proof that Bitcoin is bigger than any one country

As I previously stated in my article ‘China V Bitcoin prices – Why investors should look at the bigger picture’:

“For people currently invested or looking to invest in bitcoin, it is important to remember that Bitcoin is a lot bigger than any one country, even if that country is one of the biggest players on the world stage.”

“It is also worth remembering that bitcoin is a global currency. As such, the opportunity for regulatory arbitrage ensures that there will always likely be a state that recognises the value of Bitcoin and are open and willing to cooperate with Bitcoin entrepreneurs, exchanges and start-ups to help build a robust Bitcoin economy”

“It is these states that will likely force the hand of the more reluctant states in the long term, as they enjoy the competitive advantage that comes from a growing Bitcoin economy that benefits from the use of an efficient, low cost, frictionless transaction network”

We began to see proof of this today when Bank of Russia deputy chairman Georgy Luntovsky indicated a loosening in the central banks stance on Bitcoin and Cryptocurrencies:

“At this stage we need to watch how the situation develops with these kinds of currencies. These instruments should not be rejected,”

Andrey Ostroukh from the WSJ reports:

“Russian authorities have softened their tone on Bitcoin; the central bank now says it won’t hamper the usage of the virtual currency whereas previously it had vowed to crack down on the electronic payment instrument.
The Bank of Russia is now accumulating information about so-called crypto-currencies and is not blocking Bitcoin, the central bank’s first deputy chairman Georgy Luntovsky said Wednesday”

While is waits to be seen if Russian authorities follow through fully on the back of this rhetoric, what is perhaps of significant value here is the speed in which the stance has changed from the beginning of the year.

This may have been contributed to by the rapid speed of developments in the Bitcoin space, especially in regards to its growing legitimacy. We have recently seen the first large and mid-cap companies begin to adopt Bitcoin as a payment method ( DISH, Expedia, Newegg) and many other large cap companies have stated there interest.

In addition to this, recent US sanctions against Russia as well as perceived overreach by a prominent US bank could have possibly been taken as another warning that Russia may need a more diverse set of tools to facilitate international trade in the future.  This will only be compounded as the existing global financial system becomes more unstable and trust between major powers (especially the US) continues to deteriorate.

It will be interesting to see in the near future if this reversal in rhetoric from a superpower like Russia, creates further announcements from governments that have so far been more hardline inclined towards Bitcoin and Cryptocurrencies as a whole.

Disclaimer

Visualising the path of Bitcoin adoption – Past, Present & Future

One of the most remarkable points taken from the most recent Bristol (UK) Bitcoin meetup was an excellent diagram/concept (which I will share with you shortly) from Javier Marti, CEO of Bitcoin Global Investments who hosts and sponsors the meetup.

The diagram itself provides an interesting overview& timeline charting Bitcoin adoption from its conception back in 2009, to present day, as well as a potential scenario for future adoption.

Most importantly it puts focus on the ‘requirements’ needed to facilitate Bitcoin adoption, with user groups that have yet to participate or invest in Bitcoin.

 In addition, it is particularly useful as an insight into the technology investment cycle, such as the process of technology adoption and various investment stages that drives this growth.

I have added observations on investment risk at each stage of adoption, annotations on key events and contributed partly to the requirements which I believe each user group will need at each stage.

Visualising Bitcoin Adoption:

Bitcoin adoption Chart(Click for larger Image)

Geeks, Nerds, Techies, Smart money:

As with all new technology, due to its complexity, it is always the most technologically literate and those that have the most interest in new technology that become the initial adopters.

Bitcoin is no exception and we can see from the diagram that so called ‘geeks’, ‘nerds’ and cryptographers followed by I.T professionals ‘techies’ were the first to work on, develop and invest their time and resources into Bitcoin. These are the first user groups to understand Bitcoin’s huge potential, along with smart money and investors of a libertarian/anarchic capitalist persuasion. These investors see Bitcoin as a currency that directly fits in with the libertarian ideology and a move towards the Austrian economic frame work for how markets should operate.

Investment risk: Extreme/Very high

  • Experimental protocol,
  • No social proof of acceptance,
  • High opportunity costs,
  • Greater threat of 51% attack,
  • Potential threat from government agencies in early stages, Very high volatility.

Venture Capital (VC’s), Bitcoin Businesses/services

The previous user groups drive adoption and market value to a point where (VC) looking towards Silicon Valley in particular for investment opportunity start to take note.

The VC tipping point came in early 2013 when the Bitcoin market spiked to $260 aided by the Cyprus bank bail-ins.

(Figure 1) taken from the ‘CoinDesk’ State of Bitcoin Q2 2014’ report, (1), shows  that from this time period in 2013, VC capital increased 1200% YOY and the number of VC-backed startups increased 700%.

VC investment - visualising the path of bitcoin adoption

Following the influx of VC capital is the creation of Bitcoin Businesses and services that provide platforms that make it easy for early adopter investment and for merchant adoption to take place.

 Investment Risk: Very highHigh

  • Young protocol and growing need to keep up with scalability,
  • Increased risk from legacy financial system lobbyists and government regulations due to increased profile,
  • speed of innovation,
  • Competition from alternate protocols/coins.
  • Potential for revenue streams and cash flow to partly offsets risk.

Merchant Adoption

All the prior stages of adoption has led to and facilitated a massive increase in merchant adoption. This has been especially rapid due to companies like Bitpay and Coinbase that can mitigate the volatility risk of accepting bitcoin by converting transactions back to fiat currency almost instantaneously.

(Figure 2) also taken from the ‘CoinDesk State of Bitcoin Q2 2014’ report, (1) highlights this rapid expansion.

Merchant adoption - Visualising the adoption of Bitcoin

It was estimated in market commentary that at the beginning of 2013 there were only 1000 companies accepted bitcoin payments and this grew to an estimated 10,000 towards the end of 2013. Already by Q2 2014, we have seen this number balloon to around 63,000 and the number is now estimated to already be around 80,000+ as we near the end of Q3. In addition to this the acceptance by large Merchants such as Dell, Overstock, DISH, Expedia and the recent announcement of ebay subsidiary Braintree and Paypal will be providing their clients with a way to integrate Bitcoin merchant processing has the potential to bring in other major retailers into the Bitcoin economy.

Investment Risk: Low*

  • Instant conversion back into fiat can mitigate high risks of holding Bitcoin.
  • Easy to integrate relatively small opportunity costs.

The ease and rapid growth of adoption by merchants it could be argued, is arguably one of the main contributors that has led to the continued downward pressure on the market price in 2014 due to increased sell side pressure on the exchanges as merchants convert their bitcoin transactions back to fiat currency.

This raises the question, when will the next wave of user adoption occur to offset the current sell side pressure?

And what are the requirements needed in order to bring in the new user groups to facilitate this?

Users/Retail Investor adoption:

It must be noted here that all potential future Bitcoin adoption patterns are speculative due to the large amount of potential ‘Wild Card’ scenarios listed in the chart that could have a significant positive or negative affect on the market price.

Bearing this in mind, let’s take a look at some of the requirements we can expect will be needed to bring in adoption from general users and retail investors:

Requirement 1: Need for Bitcoin

It could be argued that the vast majority of the general public simply doesn’t see the need for Bitcoin at the present time. One of my previous articles Bitcoin V UK Retail Banking- David and Goliath’ highlight’s that despite the many advantages of Bitcoin (well known by the Bitcoin community as a whole), the current retail banking system still provides a low cost transactional network that meets the day to day requirements of most of the general public, especially with regards to domestic payments.

Add to this a profound level of cognitive dissonance & lack of understanding to the extreme level of fraud and risk in the legacy financial system and you have a largely disengaged public; a public that are dangerously unconcerned about investment or future wealth preservation.

However, there are 3 major uses of Bitcoin we have identified that we believe will fuel the need from this user group in the future. They are the following:

  • Inflation hedge against the debasement of fiat currency.
  • A way of mitigating counterparty risk to the extreme leverage and risk in the current banking and financial system.
  • ZIRP/NIRP (zero or negative interest rate policy).

All three reasons stated above are becoming more and more prevalent.

The Cyprus Bail-ins in 2013 was a prime example of counterparty risk and a major contributor to the April 2013 Bitcoin price surge. In addition we are seeing the continuation of long term ZIRP; and now NIRP is looking to become a growing trend (2). This means not only will depositors fail to get any meaningful interest on savings and deposits to offset inflationary pressures of fiat currency. But they may soon find themselves being charged simply for depositing in the first place. This makes holding any form of fiat currency increasingly undesirable in the long run and may help spur people into alternate holdings of inflationary hedge assets and alternate currencies.

Requirement 2: Trust

Another need that Javier Marti identified as a prerequisite for adoption from this user group is trust.

Key areas of trust that are required:

  • Trust that Bitcoin as a currency has longevity.
  • Trust in the infrastructure/core protocol.
  • Trust in the security of key services built around the core network (e.g wallets and exchanges)
  • Trust that potential government legislation will not have a terminal detrimental impact upon the practicality of Bitcoin as an investment/currency.

Despite a series of events in 2014 that damaged the trust requirement of Bitcoin to this user group, the most prolific of which being the loss of Bitcoin from ‘Mt.Gox’;  the notorious crack down on financial services in China and their restrictions on Bitcoin involvement; and the recent ‘BitLicense’ proposals from the NYDFS.

There are many reasons to be optimistic that the ‘trust’ requirement will continue to grow.

Firstly, the Bitcoin protocol is now approaching the 6 year mark and whilst still young, every day increases the perception that Bitcoin has a solid framework to become a competing transactional network. Coupled with the fact that large household names such as Dell, Paypal, Expedia, Overstock and DISH are also adopting the technology, gives much needed credence that Bitcoin will have longevity.

Secondly the bankruptcy of Mt.Gox has led to an increased implementation of auditing for the exchange services, pushed by user demand for proof of holdings.

Thirdly, whilst some jurisdictions have been draconian with their approach to Bitcoin regulation, there are 200 competing sovereign states and the UK in particular, has currently had a hands off approach to Bitcoin regulation; and is taking real interest in its innovative potential.

Another key factor that must be taken into account when looking at trust as a requirement for Bitcoin adoption, is the loss of trust in the current financial system and with the governments that regulate these institutions.

 In the last 6 years since the financial crisis, we have seen little meaningful reform in terms of regulation, deleveraging or accountability for the 2008 crash. As a result it’s been well documented that trust in the banking system has hit all-time lows; barely a day goes by without new reports of fraud and manipulation.

As a result of this and the negative impacts of monetary policy on the economy to compensate for the extreme leverage;  governments are increasingly desperate to raise tax revenues to fulfil interest payments occurred through the monetised debt from these policies.

In essence you now have a general public waking up and finding themselves stuck between a predatory Banking system and desperate governments.

This is an observation that Javier Marti highlighted in a recent conversation, he stated:

“ You have banks on one side, governments on the other, and the common citizen in the middle. This will create pressure that will make more and more people escape into Bitcoin”

A recent article by Siri Srinivas from the Guardian ‘Americans Chased by IRS give up citizenship after being forced out of banks accounts’ (3); highlights some of the consequences the pressures that both of these entities can have on American citizens in particular.

The article focuses on the Foreign Accounts Taxation Compliance Act (FATCA) and how its pushing foreign banks to reduce cooperation and services with American Expat’s; acts that could lead to loss of trust in the banking system and increased adoption of Bitcoin as a viable alternative.

Siri Srinivas writes:

“Steep penalties add muscle to the law. If a foreign bank – not just in Canada, but anywhere – fails to report even a single US citizen as a customer to the IRS, the US Treasury department would withhold 30% of the banks’ US income as penalty.”

“Scared of running afoul of US banking laws, foreign banks are taking extreme steps to limit US citizens to a narrow range of services. The result for expats has been a chaotic brew of closed bank accounts, mysterious excuses and a scramble to find local banks that would allow them to park their money.

 Increasing amount of these actions, could lead to a pivotal point where the trust in Bitcoin begins to exceed the current trust in the toxic relationship between big finance & government .

Trust - Bitcoin V Gov Banks

 

Requirement 3: Opportunity\ Ability to invest

Another key requirement that Javier, notes for this user group, is the prerequisite of having the ability and opportunity to invest in Bitcoin.

It is very easy for established, long term or early investors to take for granted the skills and knowledge needed to understand, facilitate and safely secure bitcoin holdings.

Without outsourcing these services and paying a premium, it requires a certain level of technical aptitude that most members of this user group do not have.

In order for this to change, retail investors and general users need highly refined user interfaces and applications that greatly reduce technical barriers for adoption.

There are two significant areas in particular that are looking to address this requirement:

  • Institutional/Retail Investment funds
  • Bridge services (Circle, Wallet providers, Merchant processors)

The first, (which I annotated on the chart) and could be of great significance are retail investment funds.

Bitcoin investment funds such as OEIC’s and ETF’s will provide an easy way for retail investors to gain exposure to Bitcoin in a way that’s familiar to them and generally has more liquidity than bitcoin holdings stored in hot or cold wallets. These funds can provide an investment vehicle that removes all technical knowledge required to store the bitcoins; which partly offsets the negatives of centralised risk and service premiums.

Secondly, the increase in professional bridge services such as ‘Circle’ that provide general users with a way to exchange, transact, store and Bitcoins through one simplified user interface (UI); have the potential to drive adoption from this group. Whilst the centralisation of these services comes with a risk, it has the potential to provide a stepping stone for general users, before the same level of services can be provide in a decentralised manner.

Requirement 4: Utility

 The condemnation of Bitcoin as a viable currency is evident almost daily through the Main Stream Media (MSM).The main reasons stated, are always associated with market volatility and Utility.

What the MSM often fail to recognise, is that the utility of Bitcoin will centre round its use as an investment asset, long before it widely used as a currency.

The primary reasons for this? As a way to hedge fiat currency debasement and counterparty risk in the legacy financial system.

As the network affect from this adoption takes hold, we will potentially see an ‘S-Curve’ pattern in Bitcoin utility; as adoption from both users, merchants and services expand. Increased utility and network size draw in more and more users in behavioural patterns that are seen from adoption in social media giants, like Facebook and twitter.

Institutional Investors, Private Equity, Hedge Funds :

Whilst 2014 was touted as the year of Wall Street participation in Bitcoin, as we enter Q4, this has not come to pass.

One of the main reasons for this is that Wall Street is interested in trading, not investment. They do not care about investing in evolutionary technology and the benefits it can bring; especially when the technology is detrimental to their own margins and their far reaching control over the financial system.

This point was highlighted in an interesting article by Jack C. Liu ‘Why Wall Street has yet to enter Bitcoin’ (5);

Jack C. Liu writes:

 “The motto for Wall Street has always been to find an edge – an arbitrage model, a high frequency algo, a long/short pair trade, credit vs. equity, offsetting risk to retail investors, fundamental analysis, event-driven plays etc – and then to lever up and trade on that edge. Rinse and repeat”.

In order to maximise the profits from the processes listed above they ultimately desire complete control over the markets in which they operate; another reason that might help explain why Bitcoin adoption by this group has yet to be realised.

However, this is not to say that they will not participate without control in the future. Something that myself and Javier have discussed and will feature in a future article.

Conclusion:

 Whilst the price of Bitcoin remains supressed due to the weakness in chart technicals, market tone, asset allocation and sell side pressure from merchant adoption. It is important to focus on the growing strength in the fundamentals that have driven Bitcoin to date. It is these fundamentals that will likely address the requirements needed to bring in mass adoption and trust from user groups currently outside of the Bitcoin economy.

The diagram itself also puts Bitcoins first mover advantage into perspective. Whilst many (especially in in the MSM) are now claiming Bitcoin was a trial crypto currency or the ‘Napster’ if you like; and only its underlying technology has value. It will be a big task for another Coin/protocol to compete and capture the same human and monetary investment that has moved the Bitcoin economy to this stage.

Whilst there are many wild card scenarios that could cause extreme positive or negative shifts in the pattern and or speed of adoption, than those listed shown in the diagram.

It is important to remember that the main fundamental behind Bitcoin, as an alternative to the controlled Banking and Government issued fiat, has never been more important.

End notes:

1) http://www.slideshare.net/CoinDesk/state-of-bitcoin-q2-report

2)  http://www.zerohedge.com/news/2014-09-15/bank-america-has-message-its-european- depositors-we-may-charge-you

3) http://www.theguardian.com/money/2014/sep/24/americans-chased-by-irs-give-up-citizenship-after-being-forced-out-of-bank-accounts?CMP=fb_gu

4) http://renegadeinvestor.co.uk/retail-investors-not-big-money-may-fuel-the-next-bitcoin-rise-heres-why/

(5) http://jackcliu.com/post/97546140332/why-wall-street-has-yet-to-enter-bitcoin

Disclaimer

Why an IBM/Central Bank Blockchain system wont stop the surge in Bitcoin adoption

[The following article is by Renegade Investor Chief Editor – Edward Blake]

Ever since Bitcoins dramatic conception and explosion in popularity following the 2008 financial crisis; it would be a safe bet to assume that financial incumbents worldwide have had all there top think tanks planning on how they can marginalise, undermine, circumnavigate and prevent one of the biggest black swans in global finance for centuries from coming to fruition.

Bitcoin having previously been ignored & laughed at looks to be reassuringly into the ‘fight you’ stage, as an anonymous source allegedly linked to IBM has revealed this week:

Reuters Reports:

 “The company has been in informal discussions about a blockchain-tied cash system with a number of central banks, including the U.S. Federal Reserve, the source said. If central banks approve the concept, IBM will build the secure and scalable infrastructure for the project”

“Unlike bitcoin, where the network is decentralized and there is no overseer, the proposed digital currency system would be controlled by central banks, the source said”

Whilst we don’t yet know the full details or validity of these statements; if they are true, a system of this nature (whilst potentially offering some advantages for traditional currencies) goes completely against the fundamental ideology of the Bitcoin protocol as an open source, decentralised, trust free network.

In my opinion, it would not be unfair to interpret this as an attempt by central banks to bootleg the underlying technology of Bitcoin, whilst trying to remain completely in control of the global financial system and monetary policy; which has caused unprecedented mal investment bubbles in recent times.

Whilst on the surface this is likely to be perceived as increased competition for Bitcoin ( and rightly so). There are a lot of reasons why a system of this nature may not be able to stop the surge in Bitcoin adoption. Here’s why:

1) Trust – Any closed proprietary system removes one of the cornerstone attributes of the open source Bitcoin network & currency, which is the universal trust of the network. The fact that Bitcoin is not controlled by any sovereign state or banking entities is one if not ‘its’ killer attribute that provides the network with tremendous potential value and utility.

2) Surveillance/politicised system – Point 1 is exacerbated by the loss of confidence in the US and the US tech industry since the Snowden NSA revelations and the use of back door surveillance in US technology. In addition, nations outside the US are not going to jump at using a new SWIFT’esq system at a time when they are becoming increasingly aware of SWIFT’s ability to be used as a political tool/leverage with regards to geopolitical events such as international sanctions. A  great example of this is China’s recent completion of a SWIFT alternative.

3) Innovation – Open source networks such as Bitcoin and the internet create a free market environment that encourages large scale innovation by removing prerequisites for participation in the development of services and Businesses that sit on the network. The result of this is large scale & rapid innovation. A closed proprietary walled garden system such as the one rumoured by IBM could potentially lack the ability to compete with the rapid innovative progression of the Bitcoin economy and infrastructure.

4) Confidence – in Central banking and governments worldwide is on the verge of being decimated. Years of promises that QE would benefit the wider real economy are failing, with evidence of massively deteriorating global macro-economic data in 2015, led by the United States.

During the next recession ( which looks to be imminent) there will be no easy policy tools left for the central banks, such as lowering interest rates & there are only so many times you can announce another QE program before losing all credibility. The lessons learned from this monetary experiment could be so egregious and detrimental that people worldwide will be massively sceptical of any monetary system tied to these central institutions in the future.

5) Currency wars – We are currently experiencing an era of large scale & accelerating currency wars worldwide. The race for all fiat indebted currencies to devalue their currencies to relieve debt burden’s and support their global exports has already led to over 20 instances of monetary easing by central banks in 2015 alone.

This trend looks set to continue, as the amount of debt needed to produce additional amounts of GDP growth has led to extreme volatility and risk in Forex markets. In 2015 this has rattled institutional investors and led to billion dollar losses for funds worldwide. In a period of financial turmoil and unpredictable events, investors and individuals will move to currencies without counterparty risk such as bitcoin and precious metals

6) Currency Attributes – Whilst the details are not 100% clear yet on the system reportedly being created by IBM. If the idea of the system is to represent traditional fiat currencies in a tokenised format with an underlying blockchain infrastructure; what will be the attributes of the currencies that operate on this network? Blockchain protocols at their core are monetary systems with unique characteristics that define the desirability of the currency on that specific network/system. Bitcoin is highly desirable because of its finite supply (inflation hedge) low counterparty risk, and open source protocol that provides a level playing field on a global scale.

If the traditional government currencies that are to operate on the new IBM system still have the attributes of current fiat currencies such as: infinite supply (through fractional reserve & QE policies). Are still unpredictable and manipulable due to policy oversight by a few individuals and are on a  trust based closed proprietary system. Then what IBM system will achieve will only be a fraction of what Bitcoin can offer and currently provides. Due to the nature of good money driving out bad, you would still expect in this scenario for capital flows away from this system and into bitcoin.

7) Time – Bitcoin has already been around for over 6 years and in technology terms that means its potentially nearing the tipping point of ‘S-curve’ adoption. The point where adoption becomes an exponential curve. This happens on average approximately 4-7 years after the technology is created.

S-Curve adoption

(click to see larger image)

The longer it takes for IBM’s system to come to fruition, the more chance Bitcoin will have already ready reached its critical tipping point for mass adoption.

8) Revolution – With the relentless militarisation of police forces, the use of armed forces domestically and increasing amounts of legislation to clamp down on protesters and belligerents. Protesting what could be argued the most unbalanced and unfair global monetary system in history, is becoming physically dangerous. It is here where Bitcoin could become the digital revolution, a way to peacefully push back, by deleveraging the out of control current financial system, without having to take volleys of rubber bullets and lung fulls of tear gas, if not worse.

As people awaken to the realities of the current monetary system, the anger phase of this awakening is more likely to push people to alternative currencies outside of the current system and away from those controlled by central financial institutions.

 Conclusion:

Since the first day I invested in Bitcoin there has always been two main fundamental reasons that have driven me to Bitcoin as a currency and store of value.

The 1st is debasement of traditional fiat currencies and 2nd to eliminate counterparty risk to the financial assets that I hold.

If the IBM/central bank blockchain system comes to fruition in the way described by the IBM source, it is difficult so see how this system would compete with these two main fundamental reasons for investing in and holding Bitcoin.

Along with all the other reasons above, there is a lot of hope that Bitcoin will continue to lead the way against competition; to a fairer global financial system in the future.

Disclaimer

Bitcoin 2.0 – ‘Blockchain’ platform to replace incumbent financial services providers

[The following article is by Renegade Investor Chief Editor – Edward Blake]

It has recently been reported that major UK brokerage Hargreaves Lansdown currently managing around £40 billion in client assets has launched a price war in the brokerage industry, signalling possible future savings for retail investors in particular.

It could be suggested that such a move may be premeditated to offset any negative PR in response to the upcoming Retail Distribution Review (RDR) in April headed up by the FCA. One of the reviews aim’s is to bring greater transparency to the brokerage industry’s widely used pricing model where trail commission is extensively used between fund manager and Brokerage as compensation for facilitating and promoting investments, in particular for popular Open & Close ended funds.

Whether or not the use of trail commission model is actually a negative for retail investors is debateable, however, whilst regulators and brokerages tinker around with pricing models, potentially a much greater problem for the brokerage industry and financial service industry is currently looming on the horizon. It’s a threat from the world of Bitcoin and crypto currencies and it could truly lead to increased competition and much lower prices for investors in the financial markets.

‘Bitcoin 2.0’ has recently been coined to describe the growing trend of alternate uses for the Bitcoin network protocol. The Bitcoin ‘Blockchain’ (the decentralised public accounting ledger) is essentially a massive distributed asset registration system and this technology may soon be competing with the current function of (CSD’s) central security depositories and international central security depositories (ICSD’s).

These systems currently facilitate the electronic settlement of securities all over the world and include banks and brokerages that act as centralised registrars for assets within these systems; where things such as the trade, currency for the trade, registration of asset ownership and tax payments are settled between registrars for a wide range of securities.

But just as Bitcoin has ushered in a new era of decentralised global digital currencies that facilitate frictionless, low cost, efficient transfer of value outside of the control of governments and financial institutions, there are ongoing projects under way to do the same thing with other financial assets.

Two prime examples of these are ‘Mastercoin’ and ‘Coloredcoins’ which are basically additional protocols that sit on top of the main Bitcoin network and provide additional functionality to the underlying network. The main purpose is to take small fractions of the Bitcoin currency to create tokens that can then be assigned different values and functions. These in turn can then be traded between individuals and companies. This could potentially lead to the total digitalisation and decentralisation of many services currently provided by financial institutions including:

  • Issuance and secondary market trading of Stock, ETF’s, VCT’s, Investment trusts, OEIC’s and CEIC’s, Corporate and sovereign bond.
  • Trading of Commodities
  • CFD, spread betting, derivative market (financial contract management)
  • Property and contract rights ownership

In any situation where proof of ownership needs to be registered or facilitated, these systems have the potential to remove the middleman and would therefore at the least provide increased competition and at the most threaten the very existence of brokerages and financial institutions that provide these services as a large part of their business model.

The benefits of this cannot be understated:

At the moment there are multiple CSD’s and ICSD’s that investment funds and companies have to be registered with on individual basis to make their financial product eligible for purchase and trading in that jurisdiction or region. With the decentralised method shown above the medium of trading and purchase will simply be through the internet. This has the potential to be one of the greatest examples of lean engineering ever witnessed.

For entities such as Investment funds or companies issuing stock or financial products, they instantly have access to a much larger global market, reduced administration costs and the removal of costs associated with the third party financial institution and it would also have the potential to decrease the time it takes to roll out financial products. All of this could potentially lead to reduced management fees and or lower spreads which again is another benefit to potential investors.

Other advantages to the investor is being able to be in essence, their own brokerage, which means they will not be paying the considerable fees that facilitate the overheads of the brokerage or financial institution. These include, buy & sell trading fees, exit fees, transfer fees, account closing fees, annual management charges for specific accounts. This frees up more capital that can be invested to further support growth and innovation. In addition the investor could easily have access to a much larger pool of investment markets and financial products that are often restricted through certain brokerages and financial institutions.

One other area that could be significantly improved is the integrity of the markets. It is no secret that since 2008 especially there have been multiple instances and revelations of market manipulation by the big banks in particular, including Libor manipulation that affected hundreds of trillions of dollars in assets benchmarked to this rate. Bitcoin 2.0 can provide triple entry accounting, completely eliminating the possibility of manipulation and alleged naked short selling that has been so prevalent in recent times.

There are significant challenges to overcome before such a system is fully developed and easily accessible for main stream use, one of which (besides technological development) is the navigation of the international regulatory landscape. However, it will hopefully bring much needed competition to a financial services sector that has become growingly complacent with archaic infrastructure, considerable fees and a severe deterioration in integrity.

We have already seen positive signs of remittance service providers dropping prices for sending money abroad, which could be attributed to the rapid growth of Bitcoin. Could Bitcoin 2.0 about to have the same impact upon other financial services in the near future?

Disclaimer

PROSPER IN THE NEW FINANCIAL PARADIGM