A cumulative $1.4 billion of institutional funding has gone into bitcoin- and blockchain-related startups across 549 deals since 2013, according to PitchBook’s bitcoin/blockchain analyst report. Below we map out some of the most exciting verticals and companies that investors are betting on to radically change the way payments, financial infrastructure and value transfer work.


Top bitcoin/blockchain investors and startups


How Bitcoin Works
In 2009, “Satoshi Nakamoto” pseudonymously released the paper “Bitcoin: A Peer-to-Peer Electronic Cash System.” Satoshi envisioned bitcoin as a distributed digital payment system that bypasses the status quo centralized financial intermediaries. The protocol incentivizes a peer-to-peer network to validate transactions and ownership on a shared public ledger known as the blockchain.
The legitimacy of each bitcoin is backed by a record of all previous transactions on the network. The owner transfers bitcoin by providing their address, the address of the sender, a private key or password to verify rightful ownership, and the hash of the previous block to serve as a timestamp in the list of all transactions. New transactions are broadcast to all nodes. Each node (miner) collects new transactions into a block, currently averaging around 1,500 transactions per block every 10 minutes. Nodes (miners) accept the block only if all transactions are valid and not already spent. They express acceptance of the block by using its hash as an input when working on creating the next block. To be confirmed, transactions are stored in the “mempool” of nodes that receive them, which has a capacity of around 50,000 pending transactions.
The cryptographic hash function is central to understanding what makes bitcoin tick. The hash function represents the process by which miners verify transactions and mine blocks. Functionally, the hash is a mathematical algorithm that converts data of any length (in this case a list of transactions) to a string (of characters) of a fixed length. Most importantly, the function works in such a way that the output will always be the same for a given input, but the input can only be calculated through trial and error.
Example of a hash:
Take the square root of 5. The result will be 2.2360679774997896964091736687313. Take the third through seventh digits after the decimal. The output will be 60679.
This is basically a very simple (and weak) hash function. For any given prime number (in this case it has to be prime), one can create an otherwise unrelated five-digit output.

Bitcoin incentivizes individual “miners” to lend their computing power to the network. Computing power is the primary resource required to run a transaction network, and the bitcoin protocol allows miners to monetize their processing power. Senders of bitcoin typically attach between five and 20 basis points (.05-.2%) to a transaction to incentivize miners (nodes) to put it on the next block. The other incentive comes from the process to verify each new block, which releases new bitcoin.
The above process is called a “proof of work.” The inputs for the hash that miners need to guess include the sender’s private key, the transaction details, the last transaction from the blockchain and a nonce (random guess value). The random guess value aims to find an output value with the longest string of zeros at the beginning, making the process more akin to rolling a die than actual problem solving. The longer the string of zeros, the more computing power is required to mine. As a result, the longest chain is always considered the correct one, and nodes (miners) will always work on extending it. Over time, the length of the string of zeros at the beginning grows, exponentially increasing the difficulty of the problem to account for an increase in computing power.

Originally, bitcoin miners (nodes) were mostly hobbyists using spare computing resources to contribute to an emerging technology. Over time, miners discovered that the nature of calculations for the hash function made bespoke hardware, or application-specific integrated circuit chips (ASICs), far superior to general-purpose PCs or server farms. Canaan Creative, perhaps the first mass producer of bitcoin mining ASICs, accounted for by far the largest single investment in the space when it was acquired by Shandong Luyitong Intelligent Electric (SHE: 300423) for CNY3.1 billion ($470 million) in June.

The total bitcoin (BTC) money supply will gradually reach a maximum. Every time a block is mined, the first node to calculate the hash is rewarded with 12.5 bitcoins. This reward is halved every four years, most recently in July from 25 BTC, and the reward will halve again around July 2020. There are currently almost 16 million extant bitcoins, just over three-fourths of the maximum of 21 million BTC to be in circulation around the year 2140. The 21 million maximum is ultimately an arbitrary number that is a function of the halving schedule. As the maximum is approached and the block reward decreases, miners will need to be compensated with transaction fees rather than mining proceeds.

For more data and in-depth analysis on the emerging blockchain ecosystem, download the PitchBook Fintech Analyst Report: Bitcoin & Blockchain.

Article by Evan B. Morris, George Gaprindashvili – PitchBook