The bitcoin sector made progress in 2018 that set a foundation for future growth. Venture capital entering the space increased meaningfully, with publicly announced investments totaling $1.9 billion, a 76% increase from the $0.8 billion of investments announced in 2017. Bitcoin network usage showed strength despite a year-to-date bear market, with value sent over the blockchain reaching a cumulative total of $7.4 trillion and staying buoyant above $200 billion per month.
The title of "leading exchange" changed hands multiple times this year. Japan-based Quoine and UK-based Bitstamp became the largest regulated spot bitcoin exchanges after receiving licensing by financial regulators in Japan and the US, respectively. This was supported by globalization, successful marketing strategies, and the availability of margin trading – although such systems are limited in scalability relative to traditional capital markets. However, market volumes grew most meaningfully in derivatives, bringing Seychelles-based bitcoin futures exchange BitMEX to daily average trading volumes of over $1 billion.
The total spot exchange traded volume for the BTCUSD pair across all major exchanges is $1.7 trillion year to date. This represents a 96% increase when compared to the $0.87 trillion in spot exchange trading volume that occurred in 2017. The average daily volume on Quoine and Bitstamp currently ranges from $20 million to $200 million per day on each. The majority of bitcoin trading actually takes place outside of exchanges, with an estimated 60%-70% of bitcoin trading volume being executed OTC.
The bitcoin industry made progress in developing on- and off-ramp points to the bitcoin network, particularly in the ETP and bitcoin ATMs segments. Swedish firm Coinshares received SEC approval to list its bitcoin ETN product in the US, providing first-time competition to Grayscale Investment’s GBTC private fund as an institution-friendly bitcoin investment vehicle. Bitcoin ATMs aim to provide a retail brokerage for buying and selling bitcoin focused on the underbanked, in addition to payment services that compete with Western Union, MoneyGram, and others. More than 40% of bitcoin ATMs currently in operation today were installed in 2018, with the current global count sitting around 3,700 machines. We expect there to be more than 10,000 machines in operation globally by the end of 2020. All of these market participants are generally considered sell side.
Progress made in regulatory guidance has brought substantial clarity to those involved in bitcoin. On the US federal level, SEC clarified that BTC is not a security and its initial launch is not considered a securities offering. States also began to communicate money transmission or banking licensing requirements, or lack thereof, for bitcoin exchange operators and custody services providers. The proposed New York bitcoin-specific regulatory framework, known as the ‘BitLicense,’ grew its list of regulated entities as more market participants entered the lucrative Wall Street market. Japanese financial authorities conducted extensive reviews of and implemented additional requirements on domestic exchanges, which are all currently regulated under the FSA’s virtual currency licensing framework.
There have been numerous improvements in bitcoin wallet technology, which enhances the companies and consumers’ ability to interact with the bitcoin network. Technology upgrade segwit was adopted early in the year, which enables layer 2 transaction solutions such as lightning network to be implemented, which increases scalability of bitcoin to millions of transactions per second and brings additional functionality such as smart contracts in a secure manner.
While still primarily made up of retail traders, bitcoin companies, and algorithmic traders, multiple large hedge funds and small banks have recently begun participating in the bitcoin market.