Familiar Price Gains, Updated Infrastructure: A Look at the Bitcoin Economy (Part 2)

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As initially discussed in Part 1 of this series, bitcoin’s exchange rate has garnered significant attention for its recent climb, but far less visible is the dramatic growth in the infrastructure underlying bitcoin economy itself. In continuing with the theme of Part 1, this report will look at the economic evolution behind bitcoin’s growth since the last time exchange rates climbed this dramatically.

Adoption

map

coinmap.org tracks physical locations that accept bitcoin

In the beginning of this year, the notion of a business accepting payments in bitcoin – particularly at a physical store – was relatively unheard of. When bar/nightclub EVR (co-owned by Charlie Shrem of BitInstant) in New York began accepting bitcoin in April it made national headlines as a unique phenomenon. Since then, thousands of  internet and brick-and-mortar merchants have adopted the cheaper, faster payment technology. Coinmap.org and usebitcoins.info tracks physical locations that accept bitcoin payment, with the total figure approaching 1,000 listed merchant locations.

Even if the store itself isn’t set up to take bitcoin, a number of services have enabled people to spend the digital currency at tens of thousands of locations. Delivery food coordination sites like Foodler.com have added bitcoin as a payment option since April, opening tens of thousands of restaurants to accepting bitcoin as well. In May, gift card vendors like Gyft began offering services that allow users to buy gift cards with bitcoin, which can then be spent at hundreds of top retail brands. As discussed in Part 1 of this series, those figures are translating into significant volume growth for bitcoin payment processing companies. On top of increasing mainstream use, court documents related to the closure of online drug bazaar Silk Road showed just how little of the bitcoin economy was attributable to the online narcotics trade – a concept broadly connected with bitcoin in media until recently.

Somewhat less tangible is the general societal interest in digital currencies. While the bitcoin community is increasingly filled with anecdotes about family and colleagues inquiring or adopting bitcoin, measuring sentiment can be difficult. In May, we looked at global meetup participation and by revisiting that measurement we can see that interest in such groups has increased roughly 300% since then.

meetups

Figures based on the largest meetup group in each city

foundation

The community’s organization has increased dramatically as well. This is exemplified in the growth of the Bitcoin Foundation, a trade group created to promote and protect bitcoin. With all members required to pay dues, we can see yet another measure of the dramatic increase in bitcoin interest.

As of November 2012, shortly after being founded, the Bitcoin Foundation had garnered 200 individual members and 5 corporate members. One year later, those figures have grown to 862 and 47, respectively, indicating not only personal interest, but also a quickly-growing entrepreneurial environment.

Transaction Growth

Given the dramatic increase in uses for bitcoin and associated volume through payment processors, it shouldn’t be surprising to hear that the number of daily bitcoin transactions has grown dramatically as well. What may surprise people is the degree to which it has increased.

In fact, the number of daily bitcoin transactions (excluding the top 100 most popular addresses like those of SatoshiDICE which tend to skew results) is on an exponential trajectory. At an average of approximately 55,000 per day, that figure is roughly double the rate in April and five times the rate at the beginning of the year. While much of this is surely due to exchange accounts being funded and withdrawn for speculative purposes, the quantitative data above indicates a significant portion is likely also due to bitcoin’s increasing use as a transactional currency.

Network Strength

hash rate Underlying bitcoin’s security are bitcoin miners – the currency’s transaction auditors. Adding computational power to the network makes the currency more secure from attacks by a malicious party and that computational power has grown 80x since April, nearly 200x since the beginning of the year. Ultimately that translates into a significantly greater cost of creating a fraudulent transaction.

Behind that growth is the advancement of customized processors specifically made for bitcoin mining. Not only has custom hardware been introduced, but it’s sophistication is quickly approaching that of the world’s leading consumer technology. In April, 110nm chips were at the leading edge of bitcoin mining. Now, with nearly a dozen consumer companies and multiple private mining companies, 28nm chips are being deployed in locations around the world, delivering increased power/efficiency and exponentially strengthening the bitcoin network.

Ease of Use and Security

Access

Often cited as the greatest barrier to mainstream adoption, bitcoin’s difficulty for non-tech savvy users has historically limited the number of participants in the bitcoin economy. Over last few months, significant advancements have been made in that realm by entrepreneurs building interface layers on top of the bitcoin protocol.

wallets

Coinbase, a provider of consumer wallets and merchant processing, had just over 100,000 customer accounts in May – a figure that has since tripled to 377,000. The company’s popularity and associated growth are generally attributed to its feature of enabling customers to link a bank account and buy/sell bitcoin directly from Coinbase, as well as a friendly interface and well-credentialed operational team.

In April, the primary way to obtain bitcoin was to send money to an exchange and to trade in the open market. The process required multiple transfer parties to get government fiat to an exchange, as well as a verification queue at Mt. Gox nearly 30,000 people long. Since then, bitcoin ATMs have begun to pop up, offering bitcoin access in a matter of seconds.

Institutional and high net worth investors now also have the option to invest in SecondMarket’s Bitcoin Investment Trust, an investment vehicle which offers financial exposure without requiring investors to manage the technical custodianship of their bitcoin. Since launching in late September, the fund has garnered $15M of investments, with returns since the fund’s inception recently climbing to over 200%.

Security

Bitcoin has seen a number of important advancements in technical security, yet dubious or irresponsible parties have continue to drive the loss or theft of thousands of bitcoin. Open-source wallet software Armory raised $600K to offer industry-leading security and Trezor, the first mass-produced hardware wallet, is expected to begin delivery in January.

One of the largest risks in the bitcoin economy remains around counterparty exposure. As has been the case for years, irresponsible or irreverent actors continue to illustrate the benefits of self-storage. In the last few weeks alone, hosted wallet service Inputs.io lost 4,100 BTC due to a security breach and a small Chinese exchange known as GBL absconded with millions of dollars worth of customer deposits.

Understanding what lies beneath the continued advancement of bitcoin is generally more than will make it into brief television segments or quips from mainstream pundits. Yet, when considered holistically, the bitcoin economy has grown tremendously since the last time this much attention was given to digital currencies and still has quite a way to go.

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