Understanding the Bitcoin Ecosystem: A Market Taxonomy

Bitcoin futures are officially trading in the biggest derivatives exchange in the world. Yesterday, future contracts made its debut on the Chicago Mercantile Exchange(CME) pushing the cash value of Bitcoin above $18,500. The CME joins the smaller Cboe as the two derivatives exchanges offering Bitcoin future contracts adding an important component to the Bitcoin ecosystem. That ecosystem has evolved in just a few years from a handful of miners to a very complex and complete market with a large variety of areas that can influence the price of Bitcoin.

The size and complexity of the Bitcoin ecosystem has created a series of new channels that are relevant to the price of Bitcoin. While most people reduce the Bitcoin market to miners, exchanges and, just now, future contracts, the fact of the matter is that there are over ten segments of the market that have become highly influential in the price and direction of Bitcoin. In that context, I’ve put together a taxonomy that includes some of the biggest categories you should be aware of when evaluating the Bitcoin ecosystem. Here are my favorites:

1 — Exchanges: Bitcoin exchanges play a centre role in the market allowing people to buy and trade Bitcoin for fiat currencies or other crypto-assets. CoinBase or BitStamp are examples of popular crypto currency exchanges.

2 — Miners: Bitcoin Miners are a key component of the ecosystem as they use high computer power to create new Bitcoins. Companies such as AntPool or Bixin are important members of this group.

3 — Crypto VCs: A recent category in the Bitcoin world, Crypto VCs are venture capital funds that are actively and exclusively investing in Bitcoin and blockchain companies. Polychain Capital and MetaStable are two notorious examples of Crypto VCs.

4 — Crypto Quant Funds: Some of the best quant funds in the market have been devoting their analytical resources to the trade of crypto currencies. Chicago-based DRW is the most representative examples of this category.

5 — Traditional VCs: Venture capital funds have also become very relevant in the Bitcoin ecosystem by investing in companies that are actively using or relying on the digital currency. Union Square Ventures and Andreessen Horowitz are two of the most active VC funds in the Bitcoin ecosystem.

6 — Hedge Funds: Wall Street’s traditional investors have been raising funds for investment vehicles entirely dedicated to digital currencies and Bitcoin. Miller Value Partners and Galaxy Partners are some of the best known examples in this category.

7 — Passive Investment Vehicles: There is a group of companies that have been working on passive investment vehicles such as Bitcoin ETFs or similar products.VanEck and Grayscale are taking the lead in this area.

8 — Securities: There are some security products related to Bitcoin that are an interesting investment channel. The Bitcoin Investment Trust(GBTC) is the best known example in this category.

9 — Regulators: The regulatory arms of markets such as the US Securities and Exchange Commission(SEC) are likely to play a more active and influential role on the price of Bitcoin.

10 — Futures: Futures are becoming more and more relevant in the Bitcoin ecosystem. CME, Cboe and, very soon, Nasdaq are the pioneers in this category.

CEO of IntoTheBlock, Chief Scientist at Invector Labs, I write The Sequence Newsletter, Guest lecturer at Columbia University, Angel Investor, Author, Speaker.

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