Overall, 2014 could be characterized as a ‘Tale of Two Bitcoins’.
On the one hand, significant bitcoin venture investment continued and much progress was made in furthering adoption, particularly in bitcoin payment acceptance by big brand names such as Microsoft and Dell.
On the other hand, early on in 2014, the collapse of Mt Gox dealt a crippling blow to the extraordinary price momentum. Bitcoin’s price dropped 67% in 2014 from $951.39 to $309.87 and so far in 2015 it has plunged a further 18%.
Sustained downward price pressure will likely result in consolidation amongst exchanges and other players sensitive to the price of the cryptocurrency.
Trading and transaction volumes continue to increase
Total trading volume on exchanges increased by more than 50% in both BTC and USD terms. While Bitcoin may have been the worst performing currency in 2014, it also continues to be the most volatile currency, creating opportunities for speculators.
In the fourth quarter, monthly exchange volume surpassed the previous high in 2013, reaching a peak of around 17 million in November. Daily transactions also passed 100,000 for the first time in the fourth quarter. However, questions linger over how significant a milestone this is, given uncertainty over how many of these transactions are bona fide economic activities.
All-time bitcoin startup VC investment crosses $400 million
The fourth quarter saw a record-setting $130m of new venture capital invested in bitcoin startups – nearly double the $64m raised in third quarter.
To date, a total of $433m has now been invested in bitcoin startups since 2012, with 77% of that total ($335m) coming in 2014 alone.
The 2014 publicly disclosed VC investment in bitcoin startups also equals three times more than the total investment VCs made in bitcoin startups in 2013.
The number of countries that received VC investment grew from 8 to 18 in 2014, with half of the new countries receiving VC investment in 2014 located in Europe.
Total VC investment in 2014 well exceeded the $250m invested in first-sequence Internet startups in 1995. Looking ahead to 2015, 83% respondents of CoinDesk’s Bitcoin Thought Leader annual survey expect bitcoin VC investment in 2015 to surpass the level of investment made in 2014.
The informal Bitcoin Thought Leader survey was sent to a relatively small number of bitcoin community influentials. Respondees included Gil Luria, David Yermack, Izabella Kaminska, Jon Matonis, and others.
More commerce and consumer traction
In the fourth quarter, Microsoft became the largest retailer by far to begin accepting bitcoin for payment for Xbox games and mobile content.
CoinDesk is forecasting that the number of merchants accepting bitcoin will grow to over 140,000 at the end of 2015. However, the rate of growth in the number of bitcoin-accepting merchants slowed over the last quarter.
There were 1.4 million new bitcoin wallets created in Q4, representing 21% growth quarter-over-quarter. CoinDesk is forecasting 12 million total bitcoin wallets by the end of 2015.
In the fourth quarter, bitcoin network difficulty declined for first time in two years.
As CoinDesk previously outlined, a drop in difficulty was anticipated given bitcoin’s depressed prices. With rumours circulating around one previously announced M&A deal in the mining sector running into trouble, we expect a further shakeout among miners should prices remain low or decline further.
Security is the key concern in development. Companies across the ecosystem are collaborating on security to improve customers’ confidence. For example, more than 5% of bitcoins are now secured with multisig technology.
Regulation and the Big Picture
The fourth quarter saw some regulatory clarity, with welcomed revisions to the New York ‘BitLicense‘ and no new major regulatory setbacks for bitcoin.
The Bitcoin Thought Leaders survey revealed that international remittances are viewed as one of the most compelling Bitcoin use cases for 2015. When factoring in average remittance fees, the revised Bitcoin Market Potential Index reveals that Sub-Saharan Africa is a very fertile region for bitcoin adoption.
At the same time, Africa is the region where bitcoin has to date received the least regulatory attention. However, very few bitcoin startups are based in Africa or pursuing the use of bitcoin there.