Bitcoin Start-ups that have failed before even starting: what mistakes do they make?

Bitcoin has provided an exciting platform for entrepreneurs as the cryptocurrency market has become more established and mature over the last couple of years. Financial technology is a sector which continues to provide strong potential for innovation, leading to a number of startup operations around the world, all attempting to sell their vision for global finance using the power of Bitcoin.

Due to a number of factors, including the unfamiliarity with many of the complex technologies required for such innovation, companies have run into issues before even getting off the ground. The potentially lucrative rewards that come with a successful Bitcoin enterprise can, at times, cloud the judgement of even the most experienced entrepreneurs, who may be tempted to rush into a sector which is essentially unknown. The volatile nature of the Bitcoin market coupled with a number of operational factors, like the lack of established best practice security procedures, have led to the collapse of many start-ups which appeared to offer exciting business models.

Arguably, the biggest difficulty that such start-ups run into relates to the nature of their funding. Buttercoin, a Bitcoin trading platform which had high-profile backing from the likes of Google Ventures, Y Combinator and Rothenberg Ventures, closed its doors in April this year, despite gaining market traction. Funding from such high-profile entities forced too much structure into the company’s operations and didn’t afford the founders the flexibility to operate in an unpredictable market. Large-scale VC funding can cause issues, particularly if achieved too early in the start-up life cycle. Investors can be less forgiving and unlikely to offer extra funds if the company doesn’t get things right straight away. Alternative funding models such as seed and angel funds can be more tolerant; this can be especially useful in Bitcoin operations due to the unpredictable nature of the cryptocurrency market.

The Bitcoin sector is still new territory for business; Bitcoin has had to gradually evolve from being a new technology, loved and led by enthusiasts to being a successful, global payment network which operates professionally and responsibly. This has led to a number of concerning incidents, particularly in the early Bitcoin market infrastructure, where users are uncertain whether a company was victim of theft, or was actually responsible. Early online wallet service MyBitcoin collapsed after nearly 79,000BTC were lost, but a scam by the site’s operators is yet to be conclusively ruled out. Bitcoinica lost almost 59,000BTC in two hacks, and other Bitcoin operations have had similar difficulties with hacks and theft. The need for sophisticated security practices in the Bitcoin sector cannot be understated: companies must also look to understand the process of managing Bitcoin funds, as a great many bitcoins have been lost forever due to errors in backing up wallets and similar mismanagement.

Despite concerns, the potential for lucrative rewards means that Bitcoin will continue to provide an enticing opportunity for both investors and entrepreneurs. The maturing cryptocurrency industry has begun to establish best practice security procedures, which can help to protect businesses if adhered to correctly. It will be exciting to watch developments over the next year or so, with the introduction of all-encompassing Bitcoin platforms, which integrate wallet and exchange services more directly with the fiat money we use daily. There are new business models and exciting start-ups emerging all the time, and Bitcoin continues to be an exciting sector to be involved with!

Author: George Basiladze

George is a finance guy with an in-depth knowledge of financial systems. Together with Dmitry they designed the concept of Cryptopay in May 2013 and started developing the system.

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