6 More Don’ts for Bitcoin Startups

Cointelegraph once again reached out to a handful of crypto entrepreneurs regarding their experiences of starting a business in the cryptocurrency industry.

In a follow-up to our previous article on “5 Don’ts for Bitcoin Startups,” here are the next six caveats that will help startups get off the ground in this volatile landscape. 

1. Don’t Ignore Demand 

The most fundamental thing to consider when starting a business is to know whether your product or service is actually needed or whether it will be in demand sometime in the near future. This includes analyzing the market, knowing your target audience, and assessing risk.

“Generally, many projects begin development without performing proper research into existing solutions and work done in the academy before delving into developing something that will never work,” explained Synereo CEO Dor Konforty to Cointelegraph.

The sentiment was echoed by BTC.sx CEO Joe Lee, who added:

“The long-term goal of anyone setting up a startup in this space should be to operate a stable service that is able to serve a growing demand.”

“If over time the demand for your service drops, your long-term business model may not be sustainable,” he continued. “One thing this economy needs is stability of the services offered to end users. Focus on this, and the whole ecosystem will thank you.”

A perfect example is the 2013 bitcoin price bubble, when many companies in the space rapidly expanded, hired new employees and got ready to “land on the moon.” But after the bubble popped in the wake of the Mt. Gox collapse, the price went on a steady decline and many companies were forced to downsize, including industry giants, such as BitPay, the Bitcoin Foundation and many mining companies. 

2. Don’t Ignore Regulations

Despite your personal views on state-imposed regulations, shunning compliance will ultimately not only hurt your company, but also your customers.

“When it is your own personal self as a sole proprietor, you certainly can make such decisions as disregarding regulations,” explains Ribbit.me CEO, Gregory Simon. “But, when running a business where others are investing in that business, you have a fiduciary duty to protect their investment and to put those investors’ best interests first. That includes diligently following all relevant regulations.”

Simon stresses:

“Disregarding regulations is playing with fire at best, an illegal break of fiduciary duty at worst. 

Moreover, becoming an “officially regulated” business in the crypto space will not only get your name in the papers, but it will also instill greater confidence from investors and potential clients.

“KYC seems the only way to go for future development and acceptance among the wider public,” adds the CEO of Danish-based exchange CCEDK, Ronny Boesing. “So while a country like Denmark does not require KYC as such, we are still including this as part of our compliance, simply to be ready for the future demand worldwide.”

3. Don’t Do Token Crowdsales (Unless You Actually Use Tokens)

Crowdsales have become “a very innovative way” for startups to raise funds, according to BnkToTheFuture.com CEO, Simon Dixon. However, there are some potential pitfalls here as well, particularly involving compliance and being perceived as a “pump and dump” scam. Dixon explained to Cointelegraph: 

“Investors should beware, though, that the price of a token in a crowdsale is plucked out of thin air, and once the token floats on a market, it is very common for it to pump and dump until it reaches a fair value, often below the crowdsale price.” 

Thus, while guaranteeing your investors US$20 per token, for example, might certainly get you some attention, market realities often differ from expectations, so prepare to face the consequences when your promise doesn’t live up to the hype. 

“I think token sales are only relevant if the token has a clear use in the system you're trying to build,” adds Dor Konforty. “Most crowdsales to date relied on tokens that had zero innate value, including the original Mastercoin one.”

But perhaps the most important factor to consider when hosting a Crowdsale is to clearly understand and let the customers know what you are selling. Startups and investors “need to be very careful,” warns Dixon. Selling equity instead of a product might put you at odds with the law, as the nature of the sale changes. Dixon explains:

“If the business is using a crowdsale as an alternative to selling equity to investors, then this is a regulated activity that requires [the business] to comply with international securities law.”

On the other hand, if the Crowdsale is selling a token that acts as the product, as opposed to equity, “then it can be very useful for raising funds in bitcoin and launching a new token,” he concludes.

4. Don’t Become Too Centralized

Banks and other centrally controlled entities are certainly right to fear Bitcoin and, specifically, decentralization. The word has become the rallying cry among crypto-anarchist circles, as well as the ultimate goal of startups that wish to appeal to this emerging segment of security-oriented and tech-savvy users.

While complete decentralization is still rather difficult to achieve, decentralizing some of your company’s functions is a good first step towards increasing the security and flexibility of your product or service.

"Decentralization is a buzzword that often gets thrown around,” explains Bitnation CEO Susanne Tarkowski Tempelhof. “Hence people tend to forget its original purpose. Decentralization does one specific thing; it creates resilience through not having a 'central head' to cut off.” She stresses: 

“Beyond decentralizing the technology, it's also key to decentralize management, financial distribution, communications, etc. It's a long and difficult process, but it's necessary for long-term survival.”

“At Bitnation we estimate that it will take us about five years to reach full decentralization in every aspect of the organization," Tempelhof concluded.

Simply put, if something goes wrong, decentralized storage of you customers’ private keys (funds), for example, will make a hacker’s life much more difficult, by eliminating the single target where all of the money is kept.

“By centralizing operations, you are creating key dependencies which increase what the finance industry calls ‘counterparty risk,’” adds Joe Lee. “While it is still very difficult to decentralize your entire operations and business risks, you can still take proactive measures in developing a successful business where you are a dependency.”

5. Don’t Underestimate Hackers

Late last year, an anonymous white hat (meaning well-intentioned) hacker uncovered a security problem and stole 250 BTC from vulnerable addresses from online wallet provider Blockchain.info. The story had a happy ending, however, as the hacker returned the coins and everyone learned a valuable lesson: complacency and good security don’t mix. 

“Obviously it's very important to take into consideration the fact that you're controlling steal-able money online,” explains Bitrefill CEO Sergej Kotliar. “Almost all exchanges thus far have been hacked in some way, and wallet security is still a difficult issue.” He suggests:

“Hiring white hats is one strategy; another is limiting one's exposure in case things should go bad; for example, never holding bitcoins online.” 

Therefore, it’s always better to sleep safe by testing your security under real-world conditions. Keeping your enemies closer by hiring white hat hackers is one of the best ways to ensure greater security. “White hats are an important part of insuring ongoing development, as a counter move to the constant desire from hackers to show what they are not supposed to be doing,” adds Ronny Boesing. 

6. Don’t Bet It All on Bitcoin 

We often hear the phrase: “Bitcoin might fail, but the technology is here to stay.” Indeed, while Bitcoin has experienced unprecedented success by being first on the scene, other alternative cryptocurrencies could be only a hardfork away from taking the top spot.

Founder of Toast, Aaron Siwoku, warns:

“Don't build a business model based on your opinion that bitcoin will become the world’s new currency of choice.”

“Do build a business model on the opinion that the blockchain will be a new paradigm in the distributed connectivity of financial services and their associated liquidity liability,” he adds.

Despite its immense potential, Bitcoin might not be the panacea to all of our financial problems. Thus, betting all your chips on Bitcoin could become a grave mistake down the road when Ripple, Bitshares, “Dollarcoin,” etc., emerge as the new fan favorite, as bitcoin is unable to overcome its scaling issues, for example, and fizzles out.  

Another thing to consider is the specific market niches that can be wrested from bitcoin by other alternative currencies with specific use-cases, such as increased anonymity, or a coin designed for a specific industry. This will become increasingly important in the future, as the millennial generation continues to transform traditional banking, and cryptocurrency gains legitimacy.

“Just as in any other industry, different consumers have different needs,” explains Gregory Simon. “I expect [Bitcoin] will always be around to meet a specific market need, but not the entire market’s needs. [Bitcoin] won’t fail. On the contrary, it will continue to grow, but it will likely become a smaller and smaller share of the more rapidly growing distributed ledger industry.”

He concludes:

“As an entrepreneur, be cognizant of the entire of the distributed ledger industry and the potential opportunities that may exist there for your business beyond Bitcoin.”