Cointelegraph has put together a research report on Bitcoin’s journey through 2014. This year has seen many unprecedented events in cryptocurrency, and we’d like to highlight the main ones for readers.

The report contains infographics, summary text and exclusive commentary from our resident expert, Tone Vays.

The report will be published in three sections, with the first available below relating to Price and Commercial activity in Bitcoin this year.

Cointelegraph Bitcoin Review October 2014

Bitcoin’s story over the past two years (January 2013 – October 2014) has seen its entire ecosystem transformed into a major global phenomenon.  Major growth is everywhere, with both years yielding data in a different league to the previous annual period.

2014 has shown particularly sharp growth in VC investment and commerce, while growth in technical circles has been less pronounced. The statistics below intend to give a broad overview of activity from across all areas of Bitcoin, so that this remarkable phase in its history is easy to track and understand.

The statistics have been gathered with the assistance of a wide range of sources, ensuring accuracy is optimal.

There are 7 main sections, which are as follows:

  1. Price
  2. Commercial activity
  3. VC investment
  4. Regulatory environment
  5. Media presence
  6. Technological climate
  7. Conclusion

Certain aspects of each section overlap into others, thus data from one section can be pertinent to further understand those present in another.

Each section consists of core research data, interspersed with commentary from a range of cryptocurrency experts from all areas of the industry. At the end of each section, our resident analyst Tone Vays provides more in-depth explanations of the findings themselves.

1. Price

1.1 Market cap

Bitcoin’s market cap over 2014 has seen significant decline overall. This was achieved broadly steadily over two downward runs, separated by a level period and a moderate uptick (see fig. 1.11).

Similarly, BTC price has experienced a downward trend through 2014. It should be born in mind, however, that the highs achieved in November 2013 came off the back of an uptick of even larger proportions. By comparison, the price of 1 BTC on November 1, 2012 was US$10.54.

This section contains a selection of opinions from a wide range of cryptocurrency experts from throughout the community, each of whom has contributed to the question of why such a price history has occurred, and to what extent it is significant for Bitcoin.

(fig. 1.11: BTC price history, 27 December 2013 – 27 October 2014)

In relation to its poll position in the list of cryptocurrencies, Bitcoin’s market cap on 1 January 2014 was 15.68 times larger than its nearest competitor (Litecoin). On 21 October 2014, its market cap was 34.4 times larger than its nearest competitor (Ripple).

Bitcoin’s total market cap share in relation to all cryptocurrencies measured by Coinmarketcap.com has also increased, now standing at over 90%.

Bitcoin’s market cap share remains at average levels following a turbulent period mid-2014, as the number of altcoins and their volatility increase.

(fig. 1.12: BTC Market capitalization share)

CT: Bitcoin’s market cap share has been increasing this year and now stands at over 90%. What does this tell us about Bitcoin’s future usage compared with its leading competitors such as Litecoin and Ripple?

“As the Bitcoin price fluctuates during the course of the year so does the relative share of his market cap. The movements are mostly caused by speculation and do not tell us anything about Bitcoin's future. The only thing we know for sure is that all cryptocurrencies have a high correlation. Over the long run a market share of over 90% seems fair to me because Bitcoin profits of tremendous network effects. All competitors implemented so far only slight improvements over Satoshi's groundbreaking protocol and you need a lot more to convince people to change a working system.”

– Stanislav Wolf, Vice President of Product Development, Yacuna AG

“The current trends seem to indicate the continued dominance of Bitcoin. As the Bitcoin client can always be upgraded with whatever features are created on an altcoin, so the monetary value of altcoins is questionable. However they serve as an important playground for new technological innovation, which is harder to implement in Bitcoin.”

– Ron Gross, Executive Director of the Mastercoin Foundation; Founder and board member of the Israeli Bitcoin Association.

“I do not think that the share of market capitalization says anything about Bitcoin's future usage. I think it's important to look at a variety of other factors, and there will of course be factors that we may not be able to predict. This is specially the case for Ripple, which is a very different system than Bitcoin.”

– Stephen DeMeulenaere, Co-founder, Coin Academy

1.2 Volatility with events

Following the price action associated with the Mt. Gox events in late 2013, Bitcoin’s price has continued to show direct correlation to specific events in the market. The severity of volatility, both as a result of events and overall, has broadly decreased in comparison to 2013 (see graph 1.21).

CT: What can be inferred from the decline in Bitcoin price and market cap in the course of 2014? There are two downward trends, separated by a level period and slight uptick.

“I infer that the hype from 2013 has generally passed, and while all of us who are really involved remain deeply dedicated to the success of Bitcoin, it's also time for us to achieve mass adoption and develop new apps that meet the needs of the general public.”

    – Stephen DeMeulenaere, Co-founder, Coin Academy

“I probably wouldn't call it a "market cap" […] and in my view, an analysis of the self-reported bitcoin price is difficult because of the lack of transparency in the underlying trusted third parties.  Perhaps something like a Consolidated Audit Trail or "proof of non-collusion" will become the norm as the industry professionalizes but until then this space will likely be vulnerable to a bevy of manipulations which may be causing these types of trends […]

Furthermore, because Bitcoin's supply is based on a fixed, limited issuance the only way to reflect changes in demand is through its price.  Thus, the fluctuations this past year are based on a myriad of factors some of which are difficult to measure like perceived regulatory/solvency risk and future law enforcement activity.  And because it is still very illiquid, sudden shocks are absorbed / reflected through volatility.”

    – Tim Swanson, Melotic  

(fig.1.21: Timeline of BTC price with major events marked, November 2013 – October 2014)

CT: How would you view BTC price’s reaction to various events post-Mt. Gox in terms of its long-term stabilization? Is BTC becoming broadly more resilient or are the events of this year not a thorough enough test to prove this?

“It’s still difficult to assess where BTC long-term stabilization point will be. But it’s interesting to note that the last drop saw a strong resistance around the US$300-350 range. […]

Daily trading volumes have reached over 700K BTC in some days over this period, a level of trading not seen since February. When we take a look at a 30-day average, we can infer that volumes have been consistently high lately –over 300K BTC of daily volume. I believe a hard floor has been reached at the US$ 300 level. Liquidity has certainly increased, though China is now responsible for over 70% of the bitcoin market.

There are still uncertainties around bitcoin, especially regulatory, but I think the market is evolving and maturing as it should. There are more exchanges and options for derivatives and futures trading with bitcoin, what will definitely contribute to reduced price volatility.”

    – Fernando Ulrich, author, ‘Bitcoin: Money in the Digital Age’

CT: How do you think the issue of rumored events, eg. China rumored to be mulling restrictions etc., will affect BTC price going forward? Do you think increased use will provide the resilience necessary to avoid volatility?

Yes, I certainly do agree that increased use will provide the necessary resilience to reduce volatility. Hopefully rumors such as these will be released slowly to allow the market time to adjust.


    – Stephen DeMeulenaere, Co-founder, Coin Academy

1.3 Expected trends vs. unexpected trends

The above changes in the price of Bitcoin contain varying degrees of predictability. Some may argue that certain events had an overbearing effect on price, while other significant events did not have the impact which was expected.

Separate from this issue however are explanations regarding the general price trends over the course of 2014, specifically the trends mentioned in section 1.1 of this piece. Hotly debated in particular is the subject of merchant acceptance causing a decline, rather than a rise, in the Bitcoin price.

(fig. 1.31: Cumulative merchant acceptance vs. BTC price, 7 August 2014 – 22 October 2014)

CT: What is your opinion on the theory that merchant acceptance is in fact having a negative impact on BTC price? If this is true, how do you think this phenomenon will play out in future?

“This is an interesting question and I thought about it quite a bit. I think in the short-term merchant adoption will keep the BTC price under pressure because people spend their Bitcoins and merchants usually exchange them into fiat currency right away. However, in the long-term user adoption will increase and reach the masses and outweigh the early adopters who bought Bitcoins to speculate on the price.  

“At that point, there will be a constant cycle of people buying Bitcoin, using Bitcoin, merchants exchanging them, and so forth. I don’t know what this will do to the BTC price but I think and hope that the price will stabilize at that point, which will be important for sustainable mass adoption.”

    – Manuel Heilmann, CEO and Co-founder, Coinzone

“I think that there is some merit to that theory.  The merchants create selling pressure, by cashing out immediately everyday. This pressure is not being offset by buying pressure in the market.  I think in the long term merchants will find ways to hold and use bitcoin, by paying suppliers, employees and purchasing advertisement.”

– Lamar Wilson, CEO Love Will LLC; Creator of Pheeva! Wallet

“I can't see how the growth of Merchant adoption can be having a negative impact on the price of Bitcoin. As more and more merchants get on board and consumers realize the superior payment system Bitcoin is, I believe there will be more demand for Bitcoin. Considering the declining supply model, the price should increase, not decline.”

– Anthony Di Iorio, Founder of Decentral; Co-founder of the Ethereum Project and KryptoKit; Executive Director and board member of the Bitcoin Alliance of Canada

“The theory is just that, a theory and as long as we don't have real data about the behavior between merchant vs price we have to guess. [B]ut data is coming on a daily basis and it's just a matter of time to be able to conclude if the price has been influence by the merchants or not.”

– Fred Mazo, Co-founder of Mundobitcoin; advisor at Cryptor Trust; blogger and Bitcoin technical analyst at elBitcoin

“I do not dispute the argument, because merchant adoption does in fact introduce selling pressure. I argue, however, that current volumes from payment processors are not relevant enough to influence the market.”

    – Fernando Ulrich, author, ‘Bitcoin: Money in the Digital Age’

Cointelegraph’s Tone Vays : Analysis

Litecoin and Ripple should not be viewed the same way, as one is a direct competitor to Bitcoin while the other is meant to be complimentary. More importantly, technologies like Ripple and others like Bitshares or Next which have been pre-mined should be placed in a completely separate category.

Having said that, in an environment where trading and speculation is dominating price moves, the fact is that as the cumulative Market Cap of Blockchain Technologies goes down, the majority of the people will tend to hold the one that has the highest level of confidence.

The reverse will also be true once the price of Bitcoin reverses: people will have more confidence in all Blockchain Technologies and will be speculating in the altcoin space for a much bigger reward in the future. This is no different than the Small Cap Stocks leading the way in a bullish phase of a stock rally vs. the Blue Chips.

Bitcoin saw amazing growth in 2013 as it picked up a large new wave of passionate users, even as most were made fun of with statements like “so what are you going to do with them?” In 2014 this has changed in the fact that there are now plenty of places to spend your bitcoins but the user base does not seem to be growing as rapidly.

This is of course also understandable because using Bitcoin requires a learning curve and at the moment there is not much wrong with the current fiat system and the average person has no issues using it. This is one of the reasons we have been on a 10 month downtrend so right on cue we start to see articles blaming large-scale manipulation.

It’s always interesting to see that when something is goings down, it’s always manipulation, but when it unrealistically goes up it’s perfect and never gets high enough. Yet in the current Stock Market, which is once again at new all-time highs, there is talk of manipulation, and if you think about it, the common element is that the average person does not benefit, so it must be manipulation.

These grand notions are pretty ridiculous. Yes, there are always some big players with the ability to move the price, but it’s always in the direction of the general long-term trend. When Bitcoin prices were going up, Mt. Gox bots pushed it higher, and now that the general trend is down, big players can nudge it lower. When the trend eventually reverses, there will be nothing they can do to keep the price down.

So what will change the trend? The answer is Global Capital Flow. When the world is ready for Bitcoin and average people start to believe it is the better system, things will change. The fall of Mt. Gox is one of the best things to happen in this ecosystem. It showed the world what should happen with ‘too-big-to-fail’ institutions, they should just be allowed to fail so that more efficient competitors would rise to the top.

It is definitely wise to say that you need data in order to prove the theory of merchant adoption having a negative effect, but this idea does seem to have a lot of merit. At the present time only those with bitcoins are benefiting from merchant adoption and since the majority are converting straight to fiat, those people are definitely not the ones buying them back. Unless we see more articles and stories about companies attempting to pay salaries and suppliers in bitcoins, this pressure on prices will most likely continue. It is just as difficult today to convince a friend or a neighbor to convert some savings to bitcoins. (Perhaps even harder now during this price-declining environment.)

CT: Do you think significant events this year had a proportionate effect on BTC price? Is Bitcoin volatility still difficult to predict in this regard?

“I think there are multiple reasons for the decline but one event to be highlighted is the IPO of Alibaba. You can see that there was an overproportional effect on the BTC price when Alibaba went public. It is fair to assume that Chinese Bitcoin owners shifted some of their savings and tried to buy Alibaba shares.”

– Manuel Heilmann, CEO and Co-founder, Coinzone

2. Commercial activity

2.1 Major merchant adoption data 2013 and 2014

There are now 75,000 Bitcoin-accepting merchants worldwide using Coinbase or Bitpay as processors, a 19% increase in Q3 2014 alone. Of these, approx. 35,000 use Coinbase and 40,000 Bitpay.

This figure is predicted to be as high as 90,000 by the end of Q4 2014.

        (fig. 2.11: Forecast for number of merchants accepting Bitcoin)
        (NB. R2 = A value between 0 and 1 which expresses how well the data fit the trend. The higher the value, the better the fit.)

As can been seen from figure 1.31, Bitcoin merchant adoption in 2014 has been occurring at a broadly steady pace. The names involved however have become considerably more high profile.

(fig. 2.12: Timeline of major merchant/ other significant entity adoption, 2013 – 2014)

2.2 Brick-and-mortar outlets

The number of individual brick-and-mortar merchants accepting Bitcoin payments has increased steadily over this period (see figure 1.31) but now stands at 5672 worldwide as of 22 October 2014, according to Coinmap.com.

Of those merchants, the overwhelming majority are from within the food and beverage industry.

(fig. 2.21: Sectors of Bitcoin-accepting businesses 2014)

2.3 Consumer apparatus

2014 has seen a rapid increase in consumer activity, specifically entry into the Bitcoin ecosystem via means such as wallets.

See page 14 for details of growth in central aspects of the Bitcoin consumer ecosystem (fig. 2.31).

(fig 2.31: Growth in number of Blockchain.info wallets, number of unique BTC addresses and transaction quantity)

Trading volume has increased in line with the above trend across exchanges.

(fig. 2.32: Cumulative trading volume in BTC, October 2013 – August 2014)

The total number of wallets in existence is expected to grow to over 8 million by the end of Q4 2014.

(fig. 2.33: Predicted wallet penetration through December 2014)
(NB. R2 = A value between 0 and 1 which expresses how well the data fit the trend. The higher the value, the better the fit.)

CT: To what extent is it important for the average consumer to be aware of price trends in terms of using Bitcoin as a day-to-day payment method? Is education in the respect necessary for any Bitcoin user?

“I think it's good for any active bitcoin user to be aware of price trends, and I will bet the vast majority of them are. It's important for people to understand the need to buy bitcoin regularly over time, and not stick with one particular price point.

“Do not overestimate the price predictions of those who argue that the price of bitcoin will go to x number of thousands of US dollars. The price is what it is now, what it was a month ago, and what it will be in a month. If you are only buying a little at a time, and spending a little, then the price differences are negligible.

If you are buying more, or a lot more, then there are tools or simple ways to keep track of purchase price points to know whether or not you should spend now or wait for an increase.”

– Stephen DeMeulenaere, Co-founder, Coin Academy

“People need to be aware of volatility when thinking of Bitcoin as an investment. Until goods are denominated in Bitcoin, most consumers will likely only use Bitcoin for relatively small parts of their purchases. Therefore, I do not believe volatility is a big concern to average the current Bitcoin consumer. However, in order to reach mass adoption, we will need to enable people to use Bitcoin without the volatility. Startups like Circle and others are working on this very problem.”

– Ron Gross, Executive Director of the Mastercoin Foundation; Founder and board member of the Israeli Bitcoin Association.

2.4 ATM propagation 2013 and 2014

ATM operations have increased rapidly during 2014. At the end of 2013, only 4 machines were operational internationally. As of 18 October 2014, 276 machines are now operational, according to CoinATMRadar.com.

(fig. 2.41: Growth in ATM installations 2014)

It is interesting to note that ATM propagation does not strictly correlate with regulatory environment in the country of operation.

(fig. 2.42: Bitcoin ATM installations worldwide, 31 October 2014)

ATM installations are, as expected clustered around major financial hubs in North America, Europe and East Asia.

(fig. 2.43: Top Bitcoin ATM countries vs. legislative status, October 2014)

For more information on international regulation, see 4.1.

CT: What do you think are the main challenges facing the Bitcoin ATM industry at present? Given the growth to 276 currently operating, is usage more or less than what was expected?

“The biggest challenge to the Bitcoin ATM industry may very well be access to reasonable and reliable Bitcoin ATMs.  There have been many horror stories about delays and non-working ATMs.   A very close second is the challenge of regulation.  In many jurisdictions, it just isn't clear if the ATMs are legal, or if they will be determined to be illegal in the future.  I do believe over time the hardware issues will improve, and the regulations will be sorted out as well.”

– Paul Snow, Co-founder, Texas Bitcoin Association and the Texas Bitcoin Conference; contributor, Colored Coins and Ethereum

“Companies run by people who have little to no experience in the ATM industry, more specifically in the area of logistics. Logistical issues and proper customer support by BTM providers has been a major source of frustration for end-users. While this has been improving as of late, the incumbents who burnt customers early-on continue to be problematic. I would also say that the 275 currently operating is perhaps a result of the drop in Bitcoin price, thus spending power for BTM investors and operators. The fears and uncertainties as they relate to KYC (Know Your Customer) regulations from FinCEN and FinTRAC are also likely determining factors for what I consider to be slow-growth in this particular sector.”

    – Nathan Wosnack, Founder and COO, uBITquity

“I think the main challenge faced by Bitcoin ATM industry is the absence of ATM machines in high traffic areas, I mean if you put an ATM machine in an Airport or train station then you will have much higher footfall and higher revenue than putting it in some corner shops. The problem on ATM machines is the cost of bitcoins is normally much higher than exchanges. However, we in CoinOutlet, have solved both the problems by making a special Deal with Locant Services which gives and exclusive rights to 100,000 high traffic locations in US and we are doing backend arbitrage to maintain lower prices of Bitcoin on our ATMs. I think usage of these machines is going to rise exponentially as people will build businesses around these machines.”

– Abhimanyu Dayal, CEO, CoinOutlet

Cointelegraph’s Tone Vays: Analysis

In order to fully understand the effects of merchant adoption, we need to see details of how much of the Bitcoin sales are being immediately converted into local currency and how much is retained in bitcoins. Acceptance of bitcoins is of course a good thing for any corporation and is a step in the right direction, but because Bitcoin is not a company and does not have a CEO or a sales team, the community badly needs more people explaining to senior management of all these companies why they should be proactive in creating Bitcoin velocity globally.

It makes perfect sense for brick-and-mortars with the thinnest margins to adopt bitcoins as a payment method first as credit card fees can eat away at profits. For a small restaurant when people decide to split a US$30 billion across 3 credit cards it can significantly eat away at the profits. Restaurants are also the most common merchants serving the same loyal customers, and since the majority of businesses were most likely introduced to Bitcoin by a customer, it is highly likely that this is what started the initial trend which of course will eventually even out. The one type of business that is surprisingly slow to adapt to Bitcoin, at least in the US, are gas stations. It’s already clear as to their views on credit cards as they charge premiums when customers use them.

There have been plenty of events this year though none as significant as those of 2013. The news of Merchant adoption is no longer considered groundbreaking especially after PayPal made their intentions clear and caused a speculative pop of over US$50 in one day.

The big news this year has been regulatory and is the big wild card, which makes it really hard to assess. Bitcoin’s rise to stardom was the fact that it was unregulated and allowed unlimited innovation in just a few years, but now a vast number are claiming that it needs regulation to take it to the next level. History will be the judge and in the case of Bitcoin, the price is the barometer of its success, which has clearly been going all year.

Will regulation bring out the financial players with money that are waiting for legitimacy? We will soon find out. Bitcoin 2.0 has been the other hot topic this year; some will claim that many of the crowd sales have been the cause of the price drops as the developers are cashing out in order to continue the project and pay themselves for the hard work already put in. It looks like the SEC is starting to get curious.

The charts in section 2.3 above show linear trends in both merchant adoption and new wallets, but there is more to the numbers than what meets the eye. For starters, the trend in merchant adoption is going to be interesting to assess in cases like Uber or AirBnB. Is that considered as one merchant or is each car or apartment being counted? It most likely depends on whether the operator is taking the Bitcoin for themselves or is it being immediately liquidated by the parent company.

What about the wallets? With the latest regulatory news, veteran Bitcoin users are starting use more wallets and addresses in an attempt to maintain some privacy and new wallets are coming out that will create a new address with each transaction.

In order to achieve another massive price appreciation like in 2013 the user base would need to experience a spurt of exponential user growth, which can be caused by a significant external event (like the need for everyone in a region to use Twitter during the Arab spring) or an eventual realization by the masses that this new technology is beneficial to their everyday life (like the exponential growth in people joining MySpace back in 2003, most also learning how to make basic changes to HTML code in order to customize their pages).

As for ATMs, when there is a demand, an entrepreneur will find a way to generate supply, so it should be no surprise that the ATM industry is occasionally having issues, but it’s better than waiting for banking to start a new trend. However the biggest issue with ATMs is of course regulation, which has now taken companies to unreasonable extremes to identify people just to convert US$20 worth of bitcoins. The ability of any tech-savvy individual with less than US$1,000 in parts to be able to build a Bitcoin ATM (without all the KYC gadgets of course) is a perfect example of how 30-year-old ATM regulation needs to change.

Sources: CoinMarketCap, Coinpulse, CoinATMRadar, Blockchain.info, Bitcoinwisdom, CoinDesk, Coinmap, Bitcoinstats, Bitcoincharts, Bitcoinwatch, Stackexchange, OKCoin, Bitcointalk, Reddit, Cointelegraph. All pages accessed 21 October 2014 – 27 October 2014.

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