wedbush bitcoin watch the innovation 2014.02.14

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Computer Services: Financial Technology

February 14, 2014

Gil Luria(213) [email protected]

Aaron Turner(213) [email protected]

Bitcoin: Watch the Innovation, Not the Price

The last few months have seen incredible growth in the bitcoin ecosystem, coupled with initial signs of Bitcoin pricestabilization, which we see as important milestones toward the widespread adoption and use of crypto currencytechnology.

Users continue to flock to Bitcoin, as evidenced by the number of wallets on Coinbase eclipsing 850K (page 9)(adding >200k users YTD) and Blockchain.info wallets nearing 1.2 million (page 10). Merchant adoption has also beenon the rise, with >25K locations as merchant acquirers such as BitPay have streamlined bitcoin acceptance.

More important, we see signs that entrepreneurs and developers are swarming to the bitcoin platform (page 2). Wesee this as the best indication of the potential for bitcoin as these developers are allocating their most valuable resource -development hours. We found nearly 3000 Github repositories, double from six months ago, which was double from theprevious six months. We believe nearly $86 million of venture funds have been invested in bitcoin companies, mostly over thelast 12 months, which does not include the >$200 million and counting we believe have been invested in mining equipment.

As a sign of price stabilization we would point out that Bitcoin has declined less than 15% in the face of its biggestand oldest exchange being crippled and other key exchanges coming under a broad denial of service attack. Wepostulate that even 6 months ago, the consequences to Bitcoin prices from these types of events would have been far moredire. We expect the start-up payment network to continue facing these challenges, but believe newer exchanges such asKraken and the ones we expect from Buttercoin will be better equipped to prevent assaults based on transaction malleability.This should, in turn, help reduce volatility further. Until then, merchant acquirers such as Bitpay, Coinbase, GoCoin andCircle will offer to shield merchants from current volatility.

We would also point out that Bitcoins volatility is not unusual compared to other high-growth equities (such as FB,TSLA, TWTR; page 12).

We believe Bitcoin has made strides toward mainstream institutionalization as large retailers and content creatorshave begun incorporating Bitcoin into their acceptance options.We believe these early use cases will lead to other largemerchants getting comfortable accepting bitcoin.

o OSTK was the first large online retailer to accept Bitcoin on January 9 (on an accelerated timeline - originallyschedule for 2H14) and Tiger Direct also recently started accepting Bitcoin. Extrapolating from OSTKs initialsuccess, we estimate Bitcoin transactions may add as much as 0.5-1% to growth and 1-2% to GAAP net income. Assuch, OSTK may be the first publically traded shares to see an impact from the success of bitcoin (more publiccompanies impacted in our previous note Digitizing Trust, dated January 2).

o ZNGA has also announced Bitcoins acceptance, which may create the opportunity for a micro paymentimplementation for in-game payments. The Chicago Sun Times has also implemented Bitcoin micro payments as away for users to pay per article on its website rather than rely on a subscription service. Bitcoin micro payments are oneof the early benefits we discussed in our first Bitcoin note Intrinsic Value, dated December 1.

We see another avenue for decentralized innovation in the numerous crypto currencies that have been created in thewake of Bitcoins rise in popularity. Some utilize variations on hashing algorithms and proof of work to generate loweroperating costs than Bitcoin (e.g. Litecoin $500 million market cap, Peercoin $100 million market cap) and some have morewhimsical ends (e.g. Dogecoin $50 million cap, RonPaulCoin $150k cap; keep in mind Snapchat looked whimsical all the wayto a $3 billion valuation). Other coins and ventures (e.g. Mastercoin, Ethereum) aim at leveraging the bitcoin infrastructure forambitious attempts to facilitate more advanced applications, including the transfer of a broad set of assets. Another varietal isRipple ($2 billion market cap) from Ripple Labs, which we see as an attempt to provide some of the benefits of cryptocurrency to mainstream financial institutions. However, at this point in time, it appears that the Bitcoin may have enough of ahead start to remain the most important and prevalent crypto currency.


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Computer Services: Financial Technology| 2

WEDBUSH Accepts Bitcoin

We see Bitcoin and its associated technologies as a promising new area and Wedbush intends to become increasingly involved in. As

part of that effort we will be accepting Bitcoin on a limited basis for previously published reports on the topic of crypto currency at

www.wedbush.com/bitcoin.
http://www.wedbush.com/bitcoinhttp://www.wedbush.com/bitcoinhttp://www.wedbush.com/bitcoin


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Additional Analysis

Github, an online community for developers seeking open-source code, has seen an explosion of bitcoin-related code over the past

year, which we see as an indication of developers gravitating toward bitcoin. This new focus for developers has also led to increased

attention and funding from venture capital investors in bitcoin-related startups. We expect continued dedication to bitcoin ecosystemdevelopment to contribute to the next leg of Bitcoin growth.

Figure 1: Github Number of Created Repositories

Source: Bitcoin Pulse, Wedbush Securities, Inc.

Figure 2: Bitcoin Venture Funds Raised

Source: Venture Scanner, Wedbush Securities, Inc.


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In the pages that follow we have included a number of figures that we believe illustrate the growth and current state of the bitcoin

ecosystem from an adoption, support, and regulatory perspective.

Figure 3: Bitcoin Market Capitalization

Source: Blockchain.info, Wedbush Securities, Inc.

Figure 4: Estimated USD Transaction Volume



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Figure 5: Country-specific Response to Bitcoin

Source: BitLegal, Wedbush Securities, Inc.


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Figure 6: Miner Economics

Source: The Genesis Block, Wedbush Securities, Inc.

Figure 7: Miners Revenue



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Figure 8: Hash Rate


Figure 9: Average Transaction Confirmation Time



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Figure 10: Blockchain Size


Figure 11: Number of Downloads of Bitcoin Client



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Figure 12: Number of Active Bitcoin Nodes


Figure 13: Coinbase Number of Wallets



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Figure 14: Blockchain.info Wallet Number of Users


Figure 15: Blockchain.info Wallet Number of Transactions per Day



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Figure 16: Crypto Currency Market Cap

Source: coinmarketcap.com, Wedbush Securities, Inc.


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Figure 17: Tesla Motors Price Chart

Source: Company data, Wedbush Securities, Inc.

.

Figure 18: Bitcoin Price Chart


Figure 19: Pharmacyclics Price Chart


Figure 20: Twitter Price Chart


Figure 21: Facebook Price Chart



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COMPANY TICKER RATING PRICE PRICE TARGET

Facebook FB OUTPERFORM $67.66 $80.00

Tesla Motors TSLA OUTPERFORM $199.63 $205.00

Twitter TWTR NEUTRAL $56.47 $58.00Zynga ZNGA OUTPERFORM $4.76 $6.00

Public companies mentioned in this report (closing prices on 2/14/14)

Analyst CertificationI, Gil Luria, Aaron Turner, certify that the views expressed in this report accurately reflect my personal opinion and that I have not and will not,directly or indirectly, receive compensation or other payments in connection with my specific recommendations or views contained in this report

Disclosure information regarding historical ratings and price targets is available at http://www.wedbush.com/ResearchDisclosure/DisclosureQ413.pdf

Investment Rating System:Outperform: Expect the total return of the stock to outperform relative to the median total return of the analysts (or the analysts team) coverageuniverse over the next 6-12 months.Neutral: Expect the total return of the stock to perform in-line with the median total return of the analysts (or the analysts team) coverageuniverse over the next 6-12 months.Underperform: Expect the total return of the stock to underperform relative to the median total return of the analysts (or the analysts team)coverage universe over the next 6-12 months.

The Investment Ratings are based on the expected performance of a stock (based on anticipated total return to price target) relative to theother stocks in the analysts coverage universe (or the analysts team coverage).*

Rating Distribution(as of December 31, 2013)

Investment Banking Relationships(as of December 31, 2013)

Outperform:54%Neutral: 43%Underperform: 3%

Outperform:18%Neutral: 2%Underperform: 0%

The Distribution of Ratings is required by FINRA rules; however, WS stock ratings of Outperform, Neutral, and Underperform most closelyconform to Buy, Hold, and Sell, respectively. Please note, however, the definitions are not the same as WS stock ratings are on a relativebasis.

The analysts responsible for preparing research reports do not receive compensation based on specific investment banking activity. The

analysts receive compensation that is based upon various factors including WS total revenues, a portion of which are generated by WSinvestment banking activities.

Wedbush Equity Research Disclosures as of February 14, 2014

Company Disclosure

Facebook 1Tesla Motors 1Twitter 1Zynga 1

Research Disclosure Legend1. WS makes a market in the securities of the subject company.2. WS managed a public offering of securities within the last 12 months.3. WS co-managed a public offering of securities within the last 12 months.

4. WS has received compensation for investment banking services within the last 12 months.5. WS provided investment banking services within the last 12 months.6. WS is acting as financial advisor.7. WS expects to receive compensation for investment banking services within the next 3 months.8. WS provided non-investment banking securities-related services within the past 12 months.9. WS has received compensation for products and services other than investment banking services within the past 12 months.10. The research analyst, a member of the research analysts household, any associate of the research analyst, or any individual

directly involved in the preparation of this report has a long position in the common stocks.11. WS or one of its affiliates beneficially own 1% or more of the common equity securities.12. The analyst maintains Contingent Value Rights that enables him/her to receive payments of cash upon the companys meeting

certain clinical and regulatory milestones.
http://www.wedbush.com/ResearchDisclosure/DisclosureQ413.pdfhttp://www.wedbush.com/ResearchDisclosure/DisclosureQ413.pdfhttp://www.wedbush.com/ResearchDisclosure/DisclosureQ413.pdf


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Price ChartsWedbush disclosure price charts are updated within the first fifteen days of each new calendar quarter per FINRA regulations. Price charts forcompanies initiated upon in the current quarter, and rating and target price changes occurring in the current quarter, will not be displayed untilthe following quarter. Additional information on recommended securities is available on request.


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* WS changed its rating system from (Strong Buy/Buy/Hold/Sell) to (Outperform/ Neutral/Underperform) on July 14, 2009.Please access the attached hyperlink for WS Coverage Universe: http://www.wedbush.com/services/cmg/equities-division/research/equity

researchApplicable disclosure information isalso available upon request by contacting Ellen Kang in the Research Department at (213) 688-4529, by email to [email protected],or the Business Conduct Department at (213) 688-8090. You may also submit a written requesto the following: Business Conduct Department, 1000 Wilshire Blvd., Los Angeles, CA 90017.

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herein mentioned securities may be sold to or bought from customers on a principal basis by this firm. Additional information with respect to theinformation contained herein may be obtained upon request.
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wedbush bitcoin watch the innovation 2014.02.14

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