A pre-post-mortem on BitPay

Yesterday at the MoneyConf in Belfast, BitPay’s CEO Stephen Pair announced that they were pivoting away from payments and towards technological infrastructure for banks and enterprises.

This is an interesting announcement in that a year ago, almost to the day, I published an article, A Marginal Economy versus a Growth Economy, that mentioned how on-chain transaction volume was not following the growth in merchant adoption.  That it was relatively flat.  Reddit and parts of the Bitcoin community derided that analysis yet the data was correct.

In fact, on-chain data later showed that BitPay volume plateaued throughout last year, see The flow of funds on the Bitcoin network in 2015 and A gift card economy: breaking down BitPay’s numbers.

What kind of tech does BitPay currently offer the marketplace?

  • ChainDB, introduced in March, though it seems a bit late to the party already started by ErisDB (and from Ripple’s NuDB).
  • Copay is in a packed group of multisig offerings including GreenAddress, BitGo and CryptoCorp.
  • Insight was their first API / blockchain explorer but everything has moved over to Bitcore.
  • Bitcore competes with BlockCypher, Chain, Coinkite, Gem.co, Block.io and others.
  • (Their API also has some kind of payment channel which could compete with the Lightning Network)
  • Foxtrot seems to also compete with IPFS (and perhaps to some degree Filecoin and DNSChain from okTurtles).

Social media has recently been filled with other hype and rumors but no other big product lines have been announced (yet).

There are a couple open questions.  How will they scale and monetize to a new customer base after such a large pivot in an increasingly competitive fintech market?

For instance, they built their company around consumer payments, but they have let about 20 people go over since the Bitbowl, including the Bitbowl team in large part because consumers as an aggregate did not spend bitcoins (their developer evangelist just left recently too).

For example, in his interview with Business Insider, Pair stated that:

We keep adding merchants – we’re up to over 60,000 now — but they’re selling to the same pool of Bitcoin early adopters. At Bitpay we’ve never thought there’d be this overnight adoption where you get people using it this year or even next year. It’s going to take some time. In the industry there’s a realisation that yes it’s an incredible technology but it’s going to take a while for it to mature.

Again, based on demographic research from CoinDesk and others the typical “owner” of a bitcoin is a North American male in their early 30s that is not living hand-to-mouth.1 They likely have a low-time preference and long-term time horizon and thus are unlikely to spend bitcoins because they view it as an investment, not virtual cash.2  Another data point: in moving to Switzerland, Wences Casares noted that 96% of the customer deposits on Xapo do not move, that they are stagnant.

But Xapo is primarily storage right?  Why would customers frequently move their deposits in and out of bunkers?

transactions coinbase

Source: Coinbase

Above is the off-chain transaction chart over the past year at Coinbase.  Up until recently it has been relatively flat with around 3,500 – 4,000 transactions per day.  In October 2014, Brian Armstrong and Fred Ehrsam, co-founders of Coinbase, did a reddit AMA.  At the 31:56 minute mark (video), Fred discussed merchant flows:

One other thing I’ve had some people ask me IRL and I’ve seen on reddit occasionally too, is this concept of more merchants coming on board in bitcoin and that causing selling pressure, or the price to go down. [Coinbase is] one of the largest merchant processors, I really don’t think that is true.  Well one, the volumes that merchants are processing aren’t negligible but they’re not super high especially when compared to people who are kind of buying and selling bitcoin.  Like the trend is going in the right direction there but in absolute terms that’s still true.  So I think that is largely a myth.

Echoing Pair’s view, in a March 2015 interview with CoinDesk, Steve Beauregard, CEO of GoCoin, a payment processor stated:

“I believe merchants have been widely disappointed by the number of transactions they see in bitcoin,” Beauregard said.  He went on to state that “consumer adoption is the problem”, speaking out against the ‘if you build it they will come’ mentality of the bitcoin ecosystem in past years.

Thus it is unsurprising that a company, BitPay, that in public previously stated it would generate revenue via transaction and SaaS fees, was unable to in a market filled with stagnant coins.  Behind the scenes, as described later below, they were telling people (and investors) that they hoped to generate money via the market appreciation of bitcoins themselves.

Is it the only explanation?

Last month Moe Levin, former Director of European Business Development at BitPay, was interviewed by deBitcoin, below is one detailed exchange starting at 1:57m:

Q: There was a lot of stories in the press about BitPay laying off people, can you comment on that?

A: Yea, what happened was we had a high burn rate and the company necessarily needed to scale back a little bit on how many people we hired, how many people we had on board, how much we sponsored things.  I mean things were getting a little bit out of hand with sponsorships, football games and expansion — more care needed to be put on how and where we spent the money.

Q: Can you elaborate on the burn rate?  Tim Swanson wrote a piece on BitPay in April, published this piece about the economy, the BitPay economy. Posted this piece on the burn rate and actual figures, have you read that piece?  Can you comment on that?

A: Yes, it is especially hard for a company to build traction when they start off.  Any start up is difficult to build traction.  It’s doubly hard, the hardness is amplified when a company enters a market with competitors that have near unlimited resources because the other companies can either blow you out of the water or have better marketing strategies or they can do a ton of different things to make your startup more irrelevant.  Standard in any company but it is doubly difficult when you enter a market like that.  In the payments industry, forget about Bitcoin for a second, in the payments industry and the mobile commerce, ecommerce, company-to-company payments industry there are massive players with investments and venture backed companies in the billions.

Competing at that stage is tricky and it necessarily requires a burn rate that is much higher than the average startup because of how you need to compete in this space.  What is also important is that the regulation costs a lot of money for the startups in the Bitcoin economy.  It’s the perfect storm of how a startup will be hit with a ton of expenses early on and that can hurt the growth of a company.  Even though a lot of the money that went into it was growth capital it takes a while to get the balance right between spending and growing.

I do think this explains some of the pivot but not all of it.

According to AngelList, at the time of this writing there are 1,870 payments startups.  Some of these, as Levin stated, are well-funded.

While it likely will not win any friends on Reddit, I think BitPay’s effort to succeed in consumer payments was likely hindered due to the first factor, the fixed inelastic money supply.

As Robert Sams noted in May 2014:

There is a different reason for why we maybe should be concerned about the appreciation of the exchange rate because whenever you have an economy where the expected return on the medium of exchange is greater than the expected return of the underlying economy you get this scenario, kind of like what you have in Bitcoin.  Where there is underinvestment in the actual trade in goods and services.

For example, I don’t know exactly how much of bitcoin is being held as “savings” in cold storage wallets but the number is probably around $5 billion or more, many multiples greater than the amount of venture capital investment that has gone into the Bitcoin space.  Wouldn’t it be a lot better if we had an economy, where instead of people hoarding the bitcoin, were buying bitshares and bitbonds.  The savings were actually in investments that went into the economy to fund startups, to pay programmers, to build really cool stuff, instead of just sitting on coin.

I think one of the reasons why that organic endogenous growth and investment in the community isn’t there is because of this deflationary nature of bitcoin.  And instead what we get is our investment coming from the traditional analogue economy, of venture capitalists.  It’s like an economy where the investment is coming from some external country where Silicon Valley becomes like the Bitcoin equivalent of People’s Bank of China.  And I would much prefer to see more organic investment within the cryptocurrency space.  And I think the deflationary nature of bitcoin does discourage that.

Based on talks with several other companies in the same space, it is probably not the last announcement of a pivot out of consumer payments.

A next step

So hire experts in financial services right?  It might not be so easy.

Why not?

How will all the bitcoins sitting on BitPay’s books impact their ability to pivot?

The video above is a clip from an two week old interview with Jason Dreyzehner a UI/UX engineer at BitPay.

After watching that, is BitPay: 1) a payment processor 2) exchange 3) forex trading house 4) asset manager 5) all of the above?3

It sounded like they were all of the above.  But perhaps they will just raise another round (downround?), hope for the best and ignore these sunk costs.4

What about banks then?

This quote Pair provided Business Insider is probably not fully accurate:

Banks are desperate to figure out how to apply this technology to mainstream currencies and the likes of Citi, UBS and Santander are all looking at blockchain technology.

I’m not sure what banks Pair has been talking to but from my conversations they are not primarily looking at how to “apply this technology” for currencies.  Though perhaps my sample size is too small.

Rather, in my experience, financial institutions are looking at how to use some kind of distributed ledger to achieve a number of goals, namely in reducing cost centers and complexities within the back office and this is (so far) largely unrelated to currencies.

The entrepreneurs view

For perspective I reached out to Alex Waters, CEO of Coin.co, a NYC-based cryptocurrency payment processor.  According to him:

In light of recent regulations, and their impact – I see several bitcoin companies pivoting. Payment processing was already a tight margin business when it wasn’t considered an MSB. Now with the regulatory costs involved, it would be a challenging line of business for any startup.

ChainDB and Copay are outstanding, and Bitpay’s open source culture makes them a desirable place to work. The regulatory environment may be a blessing in disguise as it can free some companies from investor and branding pressure. Freeing them to pursue new models.

In addition, when asked how BitPay can pivot into the finance and enterprise sector with a team built around consumer payments, Waters noted that:

I think that’s really challenging. Not only is it a different development skillset to do SaaS, but the existing team may not want to work on that model.

For additional perspective I reached out to Steve Beauregard, CEO of GoCoin.  In his view:

I’ve been publicly speaking out for the last year about merchant adoption sharply our pacing consumer adoption.  Whereas BitPay is shifting their focus to helping banks settle transactions more quickly, GoCoin has decided to address the problem head-on. Clearly merchants see the value proposition, so the thesis behind our merger with Ziftr is to combine our technologies to provide consumers incentives in the ways they currently expect them.  The new merged GoCoin / Ziftr will provide merchants with a digital coupon platform where they can give coins to consumers as incentive to make product purchases.  Our wallet will be a hybrid in that it will store tokenized credit cards similar to ApplePay, yet also enable payments with multiple cryptocurrencies including Bitcoin, Litecoin, Dogecoin, tether and zifterCOIN.

While I agree the consumer adoption is not happening at the pace any of the early pioneers believed it would, but we are taking the dog to the fight so to speak to provide the tools to merchants to change the behavior to the safest, lowest cost payment alternative.

In addition I reached out to Nikos Benititis, CEO of CoinSimple, an Austin-based payment processor.  In his view:

Tim, your thoughts on the cost of regulation and market size already provide a reasonable framework for explaining the recent developments. What I would like to contribute to those is the issue with the “bifurcation” of the bitcoin startup scene.

The first batch of bitcoin startups, which includes BitPay, is quite different from the second batch. In the first batch, you had entrepreneurs who got support from bitcoin early adopters to launch businesses that helped the ecosystem. In the second batch, you have serial entrepreneurs, running companies like Xapo, Circle and 21e6, who got millions from Silicon Valley VCs. Startups from the first batch have to make tough choices, given that interest in bitcoin (see price) is not what it used to be, and that they have to get “traditional” funding to survive. If they get such funding, like BitPay did, they may have active investors questioning the direction of the company, looking at the market size etc. In other words, the price of bitcoin and the lack of crowdfunding does not allow startups from the first batch, to continue working on “ideological” agendas, like bitcoin merchant and user adoption. Startups of the first batch can continue working on what they started on only if the bitcoin price rebounds, or if large bitcoin holders support them. BitPay had to pivot in order to create a sustainable business because it could not afford to do otherwise.

CoinSimple, that provides a Blockchain.info-style merchant processing, because it never touches customer or merchant funds (unlike Coinbase, or BitPay), continues to try to contribute to wider Bitcoin merchant adoption. With a product that works, and we minimum overhead, we can afford to grow organically and contribute to the growth of the ecosystem.

Whatever the reasons for pivoting were, this is a very fluid market place as companies are still looking to find product-market fits.  The next post will look at what Noah Smith and JP Koning have been writing on as it relates to a medium-of-exchange.

Update: according to a new tweet from Stephen Pair: “@BitPay has not pivoted, never even considered it…every line of code we write is about extending our lead in payment processing”

[Acknowledgements: special thanks to Fabio Federici and Pete Rizzo for their feedback.]

End notes:

  1. See New CoinDesk Report Reveals Who Really Uses Bitcoin as well as the the leaked Coinbase pitch deck (pdf).  Regarding “owning” a bitcoin see Bitcoin Ownership and its Impact on Fungibility from CoinDesk []
  2. If they believe the future utility (value) of a bitcoin is greater than the value they would receive by using it today, it is rational to hold.  For more specifics see Chapter 12 in The Anatomy []
  3. Based on reliable contacts at large exchanges,  BitPay does in fact sell directly to other exchanges. []
  4. Future researchers may also be interested in valuations.  A number of VC-funded Bitcoin companies raised on strong user growth totals in the consumer market so in absence of this, it is unclear how BitPay would show a similar “rocketship: growth in enterprise.  How did and how will VCs judge a company that basically sells them on massive user growth that then almost completely evaporates? []
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4 thoughts on “A pre-post-mortem on BitPay

  1. “a North American male in their early 30s”

    “their”? If ever there were a time to use the correct word, “his”, it would be here.

  2. You’ve missed SO MANY more of BitPay’s products!

    1) BitPay Payment Protocol!

    2) BitAuth: Decentralized Authentication

    3) BitPay Checkout: Mobile POS

    4) BitPay Client Billing: 1099 Contractor hotness

    5) BitPay Best Bid Rate: Yes! Great exchange rate service.

    BitPay is huge. Lots of awesome tech that you missed bro.

  3. Pingback: BitPay Shifts Focus from Payments and Merchants to Large Banks | cryptoFellows bitcoin news radar

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