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Wedbush Bitcoin Watch the Innovation 2014.02.14

Wedbush Bitcoin Watch the Innovation 2014.02.14

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Published by Ars Technica
Wedbush Bitcoin Watch the Innovation 2014.02.14
Wedbush Bitcoin Watch the Innovation 2014.02.14

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Published by: Ars Technica on Mar 12, 2014
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03/14/2014

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Equity Research
LOS
 
ANGELES
 
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SAN
 
FRANCISCO
 
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NEW
 
YORK 
 
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BOSTON
 
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SEATTLE
 
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MINNEAPOLIS
 
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MILWAUKEE
Wedbush Securities does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Please see page 13 of this report for analyst certification and important disclosure information
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   C  o  m  u   t  e  r   S  e  r  v   i  c  e  s  :   F   i  n  a  n  c   i  a   l   T  e  c   h  n  o   l  o
 
Computer Services: Financial Technology
 
February 14, 2014
Gil Luria
(213) 688-4501 gil.luria@wedbush.com
Aaron Turner
(213) 688-4429 aaron.turner@wedbush.com
Bitcoin: Watch the Innovation, Not the Price
 
The last few months have seen incredible growth in the bitcoin ecosystem, coupled with initial signs of Bitcoin price stabilization, which we see as important milestones toward the widespread adoption and use of crypto currency technology.
 
Users continue to flock to Bitcoin, as evidenced by the number of wallets on Coinbase eclipsing 850K (page 9) (adding >200k users YTD) and Blockchain.info wallets nearing 1.2 million (page 10).
 Merchant adoption has also been on the rise, with >25K locations as merchant acquirers such as BitPay have streamlined bitcoin acceptance.
 
More important, we see signs that entrepreneurs and developers are swarming to the bitcoin platform (page 2).
 We see this as the best indication of the potential for bitcoin as these developers are allocating their most valuable resource - development hours. We found nearly 3000 Github repositories, double from six months ago, which was double from the previous six months. We believe nearly $86 million of venture funds have been invested in bitcoin companies, mostly over the last 12 months, which does not include the >$200 million and counting we believe have been invested in mining equipment.
 
As a sign of price stabilization we would point out that Bitcoin has declined less than 15% in the face of its biggest and oldest exchange being crippled and other key exchanges coming under a broad denial of service attack.
 We postulate that even 6 months ago, the consequences to Bitcoin prices from these types of events would have been far more dire. We expect the start-up payment network to continue facing these challenges, but believe newer exchanges such as Kraken and the ones we expect from Buttercoin will be better equipped to prevent assaults based on transaction malleability. This should, in turn, help reduce volatility further. Until then, merchant acquirers such as Bitpay, Coinbase, GoCoin and Circle will offer to shield merchants from current volatility.
 
We would also point out that Bitcoin’s volatility is not unusual compared to other high-growth equities (such as FB, TSLA, TWTR; page 12).
 
We believe Bitcoin has made strides toward mainstream institutionalization as large retailers and content creators have begun incorporating Bitcoin into their acceptance options.
 We believe these early use cases will lead to other large merchants getting comfortable accepting bitcoin.
o
 
OSTK was the first large online retailer to accept Bitcoin on January 9 (on an accelerated timeline - originally schedule for 2H14) and Tiger Direct also recently started accepting Bitcoin.
 Extrapolating from OSTK’s initial success, we estimate Bitcoin transactions may add as much as 0.5-1% to growth and 1-2% to GAAP net income. As such, OSTK may be the first publically traded shares to see an impact from the success of bitcoin (more public companies impacted in our previous note “Digitizing Trust,” dated January 2).
o
 
ZNGA has also announced Bitcoin’s acceptance, which may create the opportunity for a micro payment implementation for in-game payments.
 The Chicago Sun Times has also implemented Bitcoin micro payments as a way for users to pay per article on its website rather than rely on a subscription service. Bitcoin micro payments are one of the early benefits we discussed in our first Bitcoin note “Intrinsic Value,” dated December 1.
 
We see another avenue for decentralized innovation in the numerous crypto currencies that have been created in the wake of Bitcoin’s rise in popularity.
 Some utilize variations on hashing algorithms and proof of work to generate lower operating costs than Bitcoin (e.g. Litecoin $500 million market cap, Peercoin $100 million market cap) and some have more whimsical ends (e.g. Dogecoin $50 million cap, RonPaulCoin $150k cap; keep in mind Snapchat looked whimsical all the way to a $3 billion valuation). Other coins and ventures (e.g. Mastercoin, Ethereum) aim at leveraging the bitcoin infrastructure for ambitious attempts to facilitate more advanced applications, including the transfer of a broad set of assets. Another varietal is Ripple ($2 billion market cap) from Ripple Labs, which we see as an attempt to provide some of the benefits of crypto currency to mainstream financial institutions. However, at this point in time, it appears that the Bitcoin may have enough of a head start to remain the most important and prevalent crypto currency.
 
 
Computer Services: Financial Technology
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WEDBUSH Accepts Bitcoin
We see Bitcoin and its associated technologies as a promising new area and Wedbush intends to become increasingly involved in. As part of that effort we will be accepting Bitcoin on a limited basis for previously published reports on the topic of crypto currency at www.wedbush.com/bitcoin. 
 
 
Computer Services: Financial Technology
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 Additional Analysis
Github, an online community for developers seeking open-source code, has seen an explosion of bitcoin-related code over the past year, which we see as an indication of developers gravitating toward bitcoin. This new focus for developers has also led to increased attention and funding from venture capital investors in bitcoin-related startups. We expect continued dedication to bitcoin ecosystem development to contribute to the next leg of Bitcoin growth.
Figure 1: Github Number of Created Repositories
Source: Bitcoin Pulse, Wedbush Securities, Inc.
Figure 2: Bitcoin Venture Funds Raised
Source: Venture Scanner, Wedbush Securities, Inc.

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