Bitcoin businesses and how to launch your own

Opportunities and business models in the Bitcoin ecosystem: from technology to real-world applications.

After more than fifteen years of network activity, the ecosystem developed around Bitcoin has become increasingly complex, creating various business models related to the functioning of this new monetary system. Just as the banking system, during its over 500 years of history, has employed ever-increasing percentages of the population, the Bitcoin industry will employ many people in the future and will create a varied supply chain to satisfy every kind of need connected to it.

One can imagine the Bitcoin protocol as the trunk of a tree, whose roots obtain nourishment from the earth, which represents the capital market as a whole. As the years pass, the trunk thickens, adding higher-level protocols, and generates branches. Each branch represents a sector (e.g., mining, exchange, etc.), continuously expanding to capture more and more light, which represents the retail market, and its growth brings benefit to the entire tree. Branches and leaves fall as they have completed their life cycle, have not proven strong enough to withstand a storm, or light has been stolen by new branches, continuing to enrich the soil.

The cycle of seasons also fits well in the metaphor. During the “Bitcoin Winter,” retail participants are not very active and the tree seems almost dead, but it is only preparing for the warm seasons. With the arrival of spring, the first signs of life begin to appear, laying the foundations for explosive summer growth (the “bull run”). Fallen fruits, leaves, and branches enrich the soil with nutrients and mark the arrival of autumn, during which enthusiasm subsides and work returns underground. Just replace nature’s annual cycle with the four-year cycle of halvings and everything fits!

Below are described the components of this complex ecosystem, albeit approximately, dividing them into two macro-categories: “DeepTech” and “Applications.” The first includes companies that directly develop the technology, operating at an extremely technical level; they are in turn subdivided between “Onchain,” that is, those who work on Layer 1, and “Offchain,” that is, those who work on higher layers. The second includes companies that offer products and services based on Bitcoin, subdivided between those who sell them to companies (“B2B”) and to individuals (“B2C”).

The most direct way to earn bitcoin is to mine, either on an industrial scale, giving life to a “Mining Farm,” or at a domestic level, through so-called “Home Mining.” The parameters that influence profit are the power of the machines, the efficiency of the infrastructure, and the cost of energy — finding low-cost energy, or even situations where it is wasted, is the sharpest strategy to have good margins. Beyond direct activity, it is possible to produce hardware and software that meet the needs of different types of miners. Finally, through the “pooling” of different miners, that is, the centralization of computing power in order to reduce income variance for individual actors, it is possible to obtain a commission on mined bitcoin.

The blockchain is saved in nodes and, although one can run a node on various types of more or less performing computers, it is possible to produce machines specialized for this function, as well as provide software to make their management more convenient. Despite criticism from purists, it is possible to use the blockchain for notarial purposes, with applications ranging from the creation of other digital assets to the certification of physical goods, particularly thanks to the combination with NFC technology.

There are particular types of onchain transactions that require the presence of a third party, which can request a commission for the service offered. To obtain more privacy there are mixers, systems that combine different transactions to reduce their traceability, which require the presence of a coordinator. Other third parties are oracles, which provide data external to the blockchain, and watchtowers, which ensure that certain conditions are met.

After years of continuous expansion, it can be stated that the Lightning Network represents the main financial infrastructure for transacting bitcoin quickly and economically, as well as the basis for further higher layers. Its operation is always based on nodes, far more complex than those used to custody the blockchain. Following an IaaS (Infrastructure-as-a-Service) model, it is possible to offer software designed to simplify their management, with different degrees of service outsourcing.

Lightning’s operation requires that each node have a certain amount of liquidity to make and receive transactions — providing it on demand allows requesting a commission. This need increases when the node takes part in the routing process, that is, when the money sent from A to B transits through some intermediate actors in the absence of a direct channel. Although minimal, routing commissions can begin to generate interesting profits if the service is performed on a large scale by specialized actors, who take the name of LSP (Lightning Service Provider).

Besides Lightning, there are other protocols designed to increase Bitcoin’s scalability: RGB, Ark, and Spark to name a few. Each differs in software architecture, but almost all require a service provider or specific nodes that offer the possibility of making these particular transactions in exchange for a commission. Moreover, thanks to their greater programmability, some of these protocols allow the creation of other types of assets, opening the doors to the digitization of RWA (Real World Asset) and to DeFi (Decentralized Finance) on Bitcoin.

In the future, we will see all typical banking and financial system services reported in Bitcoin, both by new actors and by traditional banks themselves. Accounting management will be performed through software to track movements and pay related taxes, sellable in SaaS (Software-as-a-Service) mode. Credit can be granted both by institutional actors and in a decentralized way, both denominated in fiat currency (using bitcoin as collateral) and in BTC. An increasingly common phenomenon is that of treasuries, which purchase bitcoin through the contraction of debt in fiat currency promising an extra return on capital.

Although this moves away from the original values, large companies or institutions, as well as smaller companies or individuals, can choose to renounce custody of their bitcoin to delegate it to specialized actors. This solution eliminates the responsibility of correct custody, but adds counterparty risk, compensated at most by insurance — two other forms of monetization.

There is software to obtain information regarding the state of the network and the movement of bitcoin between different addresses. Some can be used for free, at most with some limitations, others only through the purchase of the related license. Besides analytics, software to be sold to those who develop applications on Bitcoin is growing, in the increasingly growing B2D (Business-to-Developer) perspective.

One of the most historic businesses, as well as among the most profitable, is that of the exchange. It can be performed both by centralized actors, increasingly burdened by regulation, and in decentralized form, requiring a commission for each currency exchange. Besides through software, it is possible to make a currency exchange through physical ATMs, which however require higher commissions. Another way to convert bitcoin is through the purchase of prepaid cards; conversely, it is possible to purchase vouchers to obtain bitcoin — in both cases, the card issuer retains a percentage of the converted amount, dividing the profit with the reseller.

Equally historic are wallets, subdivided between software and hardware. The former, although there are several free and open-source ones (therefore self-hostable), can be released in the cloud and require a transaction fee, as well as a monthly subscription for additional features. The latter monetize on the sale of the physical device, very often also offering the included software.

Lightning’s minimal transaction costs make possible a wide range of business models based on the possibility of making microtransactions — pay-per-use of software services could soon supplant subscriptions in many areas. It is possible to offer payments in bitcoin within streaming services, video games, AI chatbots, or to add gamification dynamics, to create new services or improve the user experience of existing ones.

Bitcoin is a child of open source culture and, in this field more than elsewhere, it is important to avoid “reinventing the wheel”; on the contrary, one must try to “stand on the shoulders of giants.” This means studying the existing thoroughly and innovating it only by adding new components on top of what already exists. Inventing things from scratch is not to be totally excluded, but it is certainly riskier and more complex, as well as very often useless.

To launch a successful business in Bitcoin, it is fundamental to exploit the unique characteristics of this technology — rethinking products and services only by replacing their form of payment can be a way to make them more appealing in the eyes of bitcoiners, but it does not lead to the creation of an innovative business or a new market. At most, it is possible to integrate Bitcoin within an already existing application with a view to expanding its functionalities and increasing its benefits for the user.

Another element to keep well in mind is the reason why Bitcoin was born, that is, the creation of a monetary system that, thanks to the use of blockchain and proof-of-work, can function without the presence of a trusted central control. Therefore, offering solutions that resort again to trust toward entities managed by humans removes all the value of operating in this field.

When one has an idea or has already developed a first prototype, one must be careful about whom to ask for opinions — bitcoiners are always irrationally enthusiastic about new initiatives in the field, therefore very often the many positive feedbacks can prove to be without substance. All the more so in the case of products designed for general users, it is fundamental to validate the idea outside the Bitcoin niche, despite it being more difficult to explain the imagined solution.

A successful business model in Bitcoin should grow proportionally to the growth of the entire ecosystem and adapt to its seasonal nature, in line with the tree example. Metrics such as growth in volumes, adoption, hashrate, price, and number of transactions should imply long-term success. It does not matter if today the business generates little profit or is at a loss, many investors who embrace the vision of Bitcoin’s growth will be ready to bet on it anyway.

The successful Bitcoin business must know how to combine ideology, useful for creating company culture and defining vision, technical knowledge, necessary to understand which aspects of technology to exploit and how to build on top of it, and observation skills, important for identifying real shortcomings and problems worth working on.

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