10 years later — The bitcoin virus is here to stay
Bitcoin boomed during the pandemic — up close to 80 percent since the lockdown in March — and just might end up as good as gold.
Pitching bitcoin
Despite being a fully-committed blockchain revolutionary for more than a few years now, if you had asked me just six months ago if you should buy bitcoin, my answer would have been ‘I don’t know.’ Maybe the pandemic loosened one of my bolts, but my gut-opinion on bitcoin has changed, and today I am going to tell you why.
First, a qualifier. Way back in 1999, Roger McNamee, a billionaire tech investor, psychedelic rock star, and author of the book, Zucked — Waking Up to the Facebook Catastrophe, gave my brother Michael and me some straightforward yet sage advice. We were just embarking on our mission to write our book, The Internet Bubble. We wanted to check in with Silicon Valley’s top tech company picker before we announced to the world that the Internet stock house of cards was about to collapse.
Roger was all good with our primary thesis and forecast but cautioned us to stick to our strengths of looking at the big picture trends and don’t pose as Wall Street analysts. In the end, we took Roger’s advice and just used a single P/E-based algorithm developed by Bill Gurley, who was then a top technology analyst — and, of course, blossomed into the Larry Bird of risk investing and earned a starting 5 spot on the team of the greatest VCs of all-time. In the end, after interviewing over 50 tech industry insiders and applying Gurley’s brilliant math to the stock price of the 217 public Internet stocks listed in the back of our book, the result was an international bestseller published just six months before the beginning of the crash.
Since the McNamme approach worked then, we shall apply it again now. So rather than produce a dense, faux bitcoin analyst report, I offer instead a not particularly logical nor integrated series of snippets that have been collected since the breakout of the virus from China. It is the sum of these snippets and the momentum they represent that has led me to believe that the bitcoin Genie ain’t going back in her bottle.
Bitcoin as safe-haven
Bitcoin may have dropped out of the headlines due to the CCP flu (a.k.a. COVID-19), but the cryptocurrency industry is very much alive and kicking. Bitcoin is up close to 80 percent since March 16, when the US first began widespread school closures and stay-at-home orders. During the same period, the Dow Jones is up 22 percent, and the S&P 500 is up 24 percent. Year-to-date, bitcoin is up a staggering 34 percent compared with a -3 percent decline for the S&P.
Other cryptocurrencies have also followed suit, with Ethereum(ether), Ripple (XRP), and Bitcoin Cash, all experiencing considerable gains since the start of the outbreak. ‘Prices jumped to near three-month highs following turbulence on traditional stock markets, reinforcing cryptocurrency’s growing position as a possible safe-haven investment,’ said Simon Peters, an analyst at the online trading platform Toro.
On June 23, 2020, the entire crypto-economy of over 5,000 cryptocurrencies was worth $255 billion. BTC was trading for $9,100 and averaging close to $5 billion in 24-hour global trades.
Since the start of 2020, altcoins began to outperform bitcoin. (Altcoins are represented in the chart below by an index of 20 mid-cap cryptocurrencies chosen by Pantera Capital). Pantera’s 24-year-old Co-Chief Investment Officer and Augur founder, Joey Krug, expects this altcoin trend to continue. ‘In 2021 — as the bull market matures — we expect alts to gain a significantly larger market share relative to bitcoin,’ says Joey. The chart below shows the same altcoin index’s performance during the 2017 bull market.
In a new report from Morgan Stanley’s Head of US Equity Strategy Michael Wilson, the analyst told investors that the stock market shows similarities with the 2009 recovery that led to the longest bull run in history. ‘Given bitcoin’s recent correlation with the stock market, this could also result in an extended bull market for the first-ever cryptocurrency,’ the report says.
The more recent surge can’t be attributed to the third bitcoin halving on May 11th, as some analysts have speculated. The price was already on a ride before halving — up 80 percent between March 16th and May 11th and up another 14 percent since the halving.
Bitcoin halving: After 210,000 Bitcoin blocks are mined (about every four years), the reward given to bitcoin miners for processing transactions is cut in half. This cuts in half the rate at which new bitcoin is released into circulation. This is Bitcoin’s way of using a synthetic form of inflation that halves every four years until all 21 million bitcoin are released and are in circulation.
Bitcoin enthusiasts see this upwardly mobile price action as proof that bitcoin has arrived as a store of value and a hedge against uncertainty. In just a four-month period, the world has been broadsided by a foreign virus with no vaccine, an economy that was put on hold, and, in America, looting and rioting in almost every big city. This perfect storm of chaos rattled investors like no other combination of events in history, and we witnessed both the most dramatic stock price plummet and ascent in history. Safe havens have long played a key role as an instrument whose value increases during market uncertainty, and bitcoin performed well in the face of its first major economic downturn. There now appears to be a growing belief amongst sophisticated investors that bitcoin is akin to digital gold.
The liquidity tsunami
As inflationary monetary economics and liquidity traps with zero percent interest rates or even negative interest rates, some investors believe this trend will only drive up the bitcoin price.
In the recent Pantera Blockchain Letter, founder Dan Morehead observes: ‘The repeated, and literally unlimited, use of fiscal and monetary expansion will dramatically push up the quantity of fiat money required to buy non-quantitatively-feasible things — like bitcoin and other cryptocurrencies. As more and more stimulus packages come, crypto prices will likely rise — a lot,’ says Moorehead.
Wall Street and bitcoin
After shunning bitcoin in a 2014 report, Goldman Sachs became so pumped-up on the bitcoin opportunity in the heat of the crypto bull market in October of 2017, the New York-based investment bank considered launching a bitcoin and cryptocurrency trading desk. This event was viewed as a potential major move by Wall Street toward the new digital asset class. That sentiment was short-lived, however. After the collapse of the crypto market in 2018, Goldman released another report entitled ‘(Un)Steady As She Goes’ which famously stated, ‘We expect further declines in the future (of digital assets) given our view that these cryptocurrencies do not fulfill any of the three traditional roles of a currency.’
Fast forward to May 2020, and Goldman is back on the negative track again with another report on bitcoin and cryptocurrencies with the same headline as 2014: Cryptocurrencies, including bitcoin, are not an asset class. Ironically, a sizable chunk of Goldman’s new slide deck on the ‘impact of the coronavirus outbreak on inflation, gold, and bitcoin’ focuses on bitcoin and other virtual currencies, leaving one to wonder if they might be feeling a little defensive.
Goldman warns its investors that in addition to not meeting sovereign currency criteria, cryptocurrencies do not generate cash flow like bonds, appreciate through economic growth such as public equities, nor do they show evidence of hedging against inflation.
‘We believe that a security whose appreciation is primarily dependent on whether someone else is willing to pay a higher price for it is not a suitable investment for our clients. We also believe that while hedge funds may find trading cryptocurrencies appealing because of their high volatility, that allure does not constitute a viable investment rationale.’ the report concluded.
Meantime, across town at 270 Park Avenue, JP Morgan CEO Jamie Dimon, the banker once tagged as bitcoin’s ‘biggest enemy,’ has had a change of heart. Dimon earned his bitcoin battle scares by famously stating in November 2015 (when bitcoin was trading at $400/BTC) that bitcoin was basically for corrupt money launderers and drug dealers. (As it turned out, Dimon was half-right, as discussed below). Again, in September 2017, Dimon called Bitcoin ‘a a fraud’ right before its historical peak. ‘It’s worse than tulip bulbs. It won’t end well. Someone is going to get killed,’ said the banker at the time.
Spinning to the present, in the JPMorgan blockchain industry report dated February 21, 2020, they concluded that bitcoin is looking ‘mostly positive’ and cryptocurrencies more broadly have ‘longevity as an asset class.’ The report states that ‘though the [bitcoin] bubble collapsed as dramatically as it inflated, bitcoin has rarely traded below the production cost.’ It also notes that ‘the crypto market continues to mature, and cryptocurrency trading participation by institutional investors is now significant.’
In May 2020, the largest US bank by assets notably added its first crypto exchange customers — Coinbase and their rival bitcoin and crypto exchange Gemini — and JPMorgan is already processing their transactions.
That being said, JPMorgan still has many of Goldman’s reservations, namely that bitcoin continues to exhibit extreme volatility relative to fiat currencies. ‘While prices have corrected much of the gap versus intrinsic value, (crypto coins) have yet to demonstrate their value for portfolio diversification,’ the bankers say.
In January 2019, the $49 billion-assets strong Signature Bank became the first US bank to launch a blockchain-based proprietary payments platform via partnering with trueDigital Holdings, a fintech-focused on blockchain-based infrastructure, exchange, and settlement technology. The ‘Signet’ platform was approved by the New York State Department of Financial Services, making Signature Bank the first bank to receive regulatory permission to use blockchain in this capacity.
Signet allows Signature Bank’s commercial clients to make real-time payments in US dollars to other Signature commercial clients at no cost, eliminating the need for a third party to facilitate the payment. Signet also allows commercial clients to make payments in US dollars 24/7, which compares favorably to traditional corporate payments using the SWIFT interbank platform or the Automated Clearing House (ACH) network, which can take as long as three days and are generally not available on weekends. The bank’s crypto bet appears to be paying off as it facilitates a steady new stream of low-cost deposits as customers sign up for the service.
It is important (and gleeful for many) to point out the elephant in the room when talking about commercial banks and crypto. Simply put, if the blockchain revolution plays out as it looks like, most banks will be, at a minimum, hugely diminished and, more likely by my estimation, completely f*cked. Banks make money by collecting free deposits they can bundle and invest or loan out and charging middleman service fees. In the crypto paradigm, people will store their own tokenized money and investments in a crypto wallet that only they can control and will transact peer-to-peer, free of institutions and the fees they come with.
On a personal note, despite the fact I was in on the founding of Silicon Valley Bank in my early twenties as employee number 7, I find watching the impending creative destruction of the global banking system as a beautiful thing. Below we outline even more reasons why this dream is coming true and good for the average global citizen.
Institutional investor support
According to a comprehensive report released by Fidelity Investment on June 9, 2020, there has been a significant increase in institutional investment for Bitcoin and Ethereum across Europe and the United States. Out of the approximately 800 European and American institutional investors surveyed, one-third (36 percent) of respondents hold bitcoin, other digital assets, and/or derivative products tied to cryptocurrencies. Almost 80 percent of investors find ‘something appealing’ about the asset class. Six out of ten investors believe digital assets have a place in their investment portfolio.
Fidelity Digital Assets President, Tom Jessop, claimed that Europe's heightened interest was partly due to negative interest rates in several nations. ‘Bitcoin may look more attractive because there are other assets that aren’t paying returns.’ says Jessop.
Famous hedge fund investor Mike Novogratz of New York-based Galaxy Digital Holdings recently announced that Galaxy is partnering with Intercontinental Exchange’s Bakkt unit to offer a ‘white-glove’ service for large asset managers looking to buy and store Bitcoin. ‘We are targeting multi-billion-dollar asset managers from traditional finance with this new service,’ says Tim Plakas, the head of sales at Galaxy’s OTC desk and digital trading.
Galaxy‘s over-the-counter trading desk helps funds make large trades and handled more than $1 billion in trading volume in Q1 2020. Bakkt’s custody business safeguards cryptocurrency for more than seventy institutional clients. Bakkt also runs a derivatives exchange. The announcement comes amid a rush of companies adding crypto-brokerage services — including BitGo and Genesis — who now offer a safe and regulated way for institutional clients to wade into the crypto market.
New York-based, Grayscale (a subsidiary Digital Currency Group) claims to be ‘the world’s largest digital currency asset manager.’ It sponsors nine investment products, including the Bitcoin Investment Trust (ticker: GBTC) and the Digital Large Cap Fund. As of Q4 2019, Grayscale had a total of $2 billion in assets under management across all vehicles, with quarter-over-quarter investment inflows of ~$225 million. Premium paid-for shares of its Bitcoin Trust (GBTC) reached 40 percent in February 2020. New capital investment and rising share premiums are both signs of healthy investor demand for crypto.
Hedge fund manager Paul Tudor Jones recently added fuel to the fire when he revealed that he held between 1 and 2 percent of his assets in bitcoin because it reminded him of gold in the 1970s. ‘Demand on the CME Group’s derivatives exchange has been surging,’ Jones said.
Chamath Palihapitiya, the billionaire CEO of Social Capital and chairman of Virgin Galactic, told CNBC in May: ‘When you see sophisticated market participants like Paul Tudor Jones — who haven’t necessarily been crypto-enthusiast — all of a sudden start buying bitcoin as a hedge in this massive deflationary spiral, you start thinking that it just might be a way to protect yourself in downturns. There may come a moment where you’re going to wish that you had just bought the 1 percent and just kept it.’
A May 2020 PwC survey showed that most crypto hedge funds trade bitcoin (97 percent), followed by Ethereum (67 percent), XRP (38 percent), Litecoin (38 percent), Bitcoin Cash (31 percent), and EOS (25 percent). Almost half of all funds in the survey (49 percent) reported that at least half of their daily cryptocurrency trading volume in BTC, while only 5 percent of funds are pure Bitcoin funds and trade only BTC.
Will 2020 be the ‘Year of Crypto Derivatives?’
The 2019 crypto derivatives market saw a host of positive developments across the board as several trading avenues opened worldwide. Retail brokerage giants like BitMEX and OKEx commanded much of the trading volume throughout the year. However, the latter part of 2019 saw the emergence of new cryptocurrency derivatives exchanges looking to gain a market share.
In its 2019 crypto derivatives trading report, TokenInsight revealed a massive increase in the global virtual currency derivatives trading market due to these developments. Some important takeaways from the report include:
- Total crypto derivatives trading on exchanges topped $3 trillion in 2019, with an average daily trading volume of about $8.5 billion.
- The market also rose from 10 percent of the spot trading market volume to one-fifth (20 percent).
- Three major exchanges — BitMEX, OKEx, and Huobi DM, cornered most of the crypto derivatives trading activity, accounting for over 85 percent of the total market trading volume.
The report forecasts the crypto derivatives market in 2020 will maintain similar growth trends experienced in Q3 2019. Trading volume for cryptocurrency derivatives in the second half of 2019 almost doubled the figures recorded for the first half of the year. TokenInsight predicts that the crypto derivatives market will outstrip the spot trading scene by as much as 100 percent. With the influx of more virtual currency derivatives instruments, some commentators are already tipping 2020 to be the year when the crypto derivatives scene takes center stage.
The crypto brokerage game
Coinbase recently jumped into the brokerage game for advanced traders, hedge funds, and family offices by acquiring Peter Thiel-backed startup Tagomi Systems in May 2020. Founded in 2017, Tagomi is pitched as an institutional investor platform for active traders to trade across multiple markets and exchanges as a tactic to secure the best prices. Customers include Paradigm, Pantera, Bitwise, Multicoin, Electric Capital, Founders Found, Galaxy Digital, Morgan Creek Capital Management, and Parafi Capital.
Tagomi raised $28 million in venture capital funding. Along with Peter Thiel, investors included 9Yards Capital, CoVenture, Multcoin Capital, Dragonfly Capital Partners, Paradigm, Pantera Capital, La Famiglia, and Fabric Ventures. .Coinbase acquisitions include blockchain tracking startup Neutrino in February 2019 and Keystone Capital, Venovate Marketplace, and Digital Wealth in June 2016.
On January 25, 2018, newly minted financial services unicorn Robinhood announced a waitlist for a commission-free cryptocurrency trading service called Robinhood Crypto. By the end of the first day, the waitlist had grown to more than 1,250,000. By November 2019, crypto trading was available on Robinhood Crypto in 46 states and the District of Columbia.
The Robinhood brokerage platform founded in April 2013 by Vladimir Tenev and Baiju Bhatt, who had previously built high-frequency trading platforms. Robinhood is known for letting users invest in U.S stocks and ETFs, commission-free, and a premium service called Robinhood Gold, a paid service for active investors that supports margin and extended-hours trading.
Ease-of-use issues and general weariness of crypto-trading, for a good reason, have been obstacles to achieving a greater acceptance and adoption of bitcoin and cryptocurrencies. As noted above, there is growing momentum behind solving these issues by various already successful players and a slew of startups, which should draw in more participating traders.
The crypto wallet boom
In the first chapter of the blockchain revolution, payments, led by bitcoin, emerged as the dominant blockchain use case. Traditional cash apps like Square CashApp, Venmo, Zelle, and WeChat, and the corporate titans (i.e., Google, Apple, and Samsung) that followed, have already converted over 1 billion people into making online payments. Mobile peer-to-peer (P2P) transactions in the US are expected to grow from $310 billion in 2019 to $396 billion in 2020, according to eMarketer. The study estimates that were 69 million users in the US in 2019 and that base will grow to 74 million by 2020.
Bitcoin trading is getting a big boost from the cash app boom. Square CashApp’s bitcoin-related revenue in Q1 2020 ($306 million) topped US dollar revenue ($222 million) for the first time. Square’s Cash App’s profit on bitcoin transactions was $7 million in Q1 2020, compared to earning $8 million in bitcoin profit in all of 2019. Square’s Cash App has been the fastest growing digital wallet in the US, with monthly active users tripling in two years to 24 million by the end of 2019, achieving an active user growth rate of 60 percent.
Not to be outpaced, PayPal plans to roll-out direct sales of cryptocurrency to its 325 million users. Rumor has it that PayPal will allow users to buy and sell crypto directly from PayPal and its subsidiary company Venmo with a built-in crypto wallet functionality. Venmo surpassed 25 million monthly active users at the end of 2019 and grew its active user base by a whopping 50 percent year-over-year.
Consumers now have the opportunity to choose between traditional platforms like Venmo and CashApp, and crypto pioneers like Coinbase and Circle to buy and sell digital currencies. As both new and old entrants jump into the crypto game, the digital wallet market continues to boom, with 44 million users driving a daily trading volume of over $100 billion. The growing interest and competition in the crypto wallet sector can only result in greater distribution and liquidity of crypto assets.
Can Bitcoin scale?
The Bitcoin platform itself represents one of the original ‘peer-to-peer electronic cash payment systems,’ having first appeared on the scene in 2008. Twelve years out, however, bitcoin is not yet widely accepted as ‘electronic cash.’ Due to historically high transaction fees, the vast majority of merchants don’t accept bitcoin. Who wants to pay $5 in fees for a coffee? Bitcoin transaction time is also slow — now a few ticks more than 9 minutes and is limited to a maximum of seven transactions per second.
Proponents believe Bitcoin still has the potential for widespread adoption as a retail payment platform. Bitcoin bull Tim Draper recently told us about a seamless coin payment processing company called OpenNode he believes solves these issues. ‘OpenNode bundles small transactions off-blockchain and then consolidates the trades later at a faster, and cheaper, rate than the Visa network,’ says Draper, who has invested in the company.
Square’s announcement that they are working on a Development Kit to help integrate the Lightning Network (an off-chain peer-to-peer layer two payments protocol) into bitcoin wallets to boost bitcoin transaction rates is also a very positive sign. Blockchain developers are now leveraging open source tools to help alleviate bitcoin scaling issues and allowing the cryptocurrency to move into the realm of our everyday payments finally.
Pantera has invested in a slew of portfolio companies addressing the calling issues, including Polkadot, Matic Network, and StarkWar, who have launched mainnet releases. Joey Krug is projecting that by the end of the year, solutions offered by startups such as these three will boost processing times to a couple of hundred transactions per second. ‘By the end of 2021 or 2022, we believe it’ll be easy and the norm to integrate scalability solutions. This is huge news because many of the most interesting decentralized finance applications require scale for their markets to be usable and more efficient,’ says Joey.
Ironically, The cost of doing business can also be drastically reduced for the wealthy and powerful and crypto, thanks to relatively low fees. In 2019, for example, a $1 billion BTC transaction cost a frugal whale a mere $690 in transaction fees — such a low fee would be impossible to achieve in the foreign exchange markets with inter-banking rates applied.
Banking the unbanked
Much like the digital divide, the lack of access to online financial services negatively impacts socio-economic growth, especially in emerging markets where many additional challenges threaten inclusivity. The inspiration to create bitcoin was a response to the banks' failure and the desire to protect the common people all over the planet in dire times. Ironically, the biggest opportunity in cryptocurrencies may well come from serving and protecting the unbanked rather than the banked.
If the virus taught us anything, it highlighted the need for new mobile-based digital payments. Matthew Davie, the chief strategy officer at the microlender Kiva and board members of the Libra Association, observed to the New York Times, ‘If you look at those who are getting left out, it is those who are not digitally connected.’
For the 1.7 billion people who are currently unbanked — that means they operate without an account at a financial institution or through a mobile money provider. The combination of mobile payments technology, crypto-wallets, and cryptocurrencies will allow these pilgrims to finally join the modern economy. This combination will radically reduce the costs and pain to transfer money across borders (think Ripple), secure microloans, and even buy insurance.
Whether people need to transact internationally or with a neighbor, they can send crypto payments cheaply anywhere and settle within seconds, 24/7. An additional advantage to blockchain-based tokens is that they are programmable and could, for example, automatically make loan payments and pay other bills without using a traditional intermediary like a bank.
Bringing online the unbanked with crypto might arguably end up being the single greatest economic achievement of the blockchain revolution and boost bitcoin’s global distribution and liquidity.
Central Banks go crypto
The future of programmable money could come out of a central bank, not a startup. A growing number of central banks worldwide are serious about fiat digital currencies (CBDCs), including planning pilot programs to test the feasibility.
The transformation of cash and equivalent to centralized, programmable money would also enable consumers to open banking accounts directly with the federal reserve. Similarly, if implemented, the wholesale payment system — which has traditionally been an exclusive Big Bank-to-Big Bank transaction arrangement — could be opened up to consumers too, which would pass through huge savings to the people and flatten the entire correspondent banking system.
American crypto entrepreneurs such as Ripple CEO Brad Garlinghouse, and Bitcoin bull Mike Novogratz, have been warning US Regulators that the Chinese Communist Party is more than a step ahead of the US.
Promoting blockchain innovation is a top Communist government goal, and China has filed over 80 Central Bank Digital Currency (CBDC) patents to prove its commitment. China’s President Xi has stressed on several occasions that the acceptance and use of blockchain and digital assets will be crucial for the country’s continued supremacy. Some experts predict China will launch its CBDC as early as by the end of 2020.
China is well-posed to make the digital yuan jump, with more than 80 percent of its population, or more than 1.2 billion people, are already using smartphones to make digital payments. In recent months, China’s central bank has completed its development of the e-RMB, set to be the first digital currency operated by a major economy.
The Communist-run Chinese media has reported that e-RMB currency trials have begun in several cities, including Shenzhen, Suzhou, Chengdu, and a new area south of Beijing, Xiong’an, and areas that will host some of the events for the 2022 Beijing Winter Olympics. A state-issued, programmable, digital currency has a lot of appeal to the Communist Party of China (CPC) because they could further track and control their citizens, guard against black-market activities, and better micro-manage the Chinese economy.
Meanwhile, the US is lagging far behind several countries in acting on potential CBDC strategies. US Secretary of the Treasury Steven Mnuchin recently explained, ‘[Federal Reserve] Chair Powell and I have discussed this at length. We both agree that soon, in the next five years, we see no need for the Fed to issue a digital currency.’
Chair Powell elected similar caution: ‘There are many questions that need to be answered around a digital currency for the United States, including issues of cyber issues, privacy issues, many operational alternatives present themselves. And so we’re going to be working through all of that and doing that work thoroughly and responsibly.’
According to Garlinghouse, the digital yuan will have a major impact on the global economy and could make the dollar obsolete as a global reserve currency in the long run.
At the end of last 2019, Ripple set up a subsidiary in Washington, D.C., to cooperate more closely with the local regulatory authorities. Ripple founder, Chris Larsen, joined the Alliance for Innovative Regulation (AIR) last year, aiming to bring together politicians, financial institutions, regulators, and executives from the fintech industry to drive digital currency adaptation by the US government forward.
The digitization of the yuan would invariably be a boon for bitcoin’s long-term price appreciation, but, in my opinion, also represents the greatest threat to America’s position as the most powerful economy in the world. I agree with Brad Garlinghouse — it’s time for the US to step-up its digital currency game.
The Libra factor
The third world opportunity has not gone unnoticed by Facebook. Between Facebook, WhatsApp, and Instagram, the company that Zuck built touches nearly half the world, including deep into many developing nations. Facebook has been working on the development of a permissioned blockchain digital currency since 2017. On June 18, 2019, Facebook announced the formation of the Swiss-based Libra Association, a non-profit where the proposed new currency and related transactions would be managed and cryptographically entrusted. Facebook-proper, however, will own and house Novi, a crypto-wallet for storing and exchanging the Libra coin, and the payments platform to facilitate the transactions.
The Libra project was originally described as ‘futuristic global money that could serve as the foundation for a new kind of financial system.’ In this newly imagined world, Facebook would essentially play its own Central Bank to as many of its billions of customers who want to buy and sell products and services with the Libra coin, which would be technically a stable coin, as it would be backed by the US dollar, US Treasuries, a basket of stable fiat currencies, or gold.
Interesting note: Steve Forbes, Chairman and Editor-in-Chief of Forbes Media, published on June 25 an open letter to Mark Zuckerberg, advising to back Facebook’s cryptocurrency Libra with gold. In the letter, Forbes strongly encouraged Facebook’s crypto initiative, emphasizing Libra’s potential to become one of the greatest inventions in the world, which eventually ‘could replace the US dollar as the global currency.’
After concerns that the Libra coin might diminish local currencies, the Libra Association announced a modified plan on April 16, 2020. The new plan is more of a high-bred currency scheme that strives to protect local currencies better. In its updated white paper, the Libra project states it will first focus on creating an infrastructure for a more traditional payment network that would support digital coins tied to each national fiat currency. The goal is to make local commerce easier, much in how PayPal has done with its digital dollar account service.
Members of the Libra Association say they wanted to ‘complement, rather than compete with, national currencies.’ Frankly, I can not see how this could play out well with many local currencies that regularly suffer from high-inflation and mismanagement. Why wouldn’t any person living in a country with high inflation not immediately convert to a stronger currency-backed Facebook token? We shall see. The launch is planned to be in 2020
Libra support and opposition
Despite the unceremonious departure from the Libra cause by Visa, Mastercard, Stripe, Paypal, eBay, and other major financial institutions, Libra remains well-backed and is regularly adding new members. Investors in Libra include Lyft, Shopify, Uber, Temasek, and venture capital firms Andreessen Horowitz, Thrive Capital, and Union Square Ventures. Two new companies — Shopify and the financial firm Tagomi — have also recently joined the Libra Association, which now has 22 members.
Libra still has many forces aligned against it, however. In October of 2019, the Federal Reserve chair, Jerome Powell, said Libra raised a host of ‘serious concerns’ around ‘money laundering, consumer protection, and financial stability.’ ‘I just think Libra cannot go forward without there being broad satisfaction with how the company has addressed money laundering and other issues,’ Powell testified before the House Financial Services Committee.
Mr. Powell is the latest central banker to express skepticism about Libra, which Facebook announced last month. Central bankers from Britain, France, the European Central Bank, Singapore, and China have all voiced concerns. Separately, just over a week ago, five top Democrats on the Financial Services Committee wrote a letter to the social network calling on it to ‘immediately cease implementation plans’ for Libra until lawmaker questions were answered.
On top of the blowback from politicians and regulators, Libra inspired several countries, most notably China, to speed up plans to develop a state-owned digital currency, as noted above in this essay.
The bottom line is if Zuck can clear all the legal and political hurdles he faces with Libra, and then Facebook will become the biggest bank (or storer of gold) in the world and the first multi-trillion company. There is nothing sure about the Facebook/Libra bet, especially in an era when the privacy and security backlash against social media and Facebook, in particular, is at a coronavirus-fever pitch.
Whatever the fate of Libra, I will bet a paycheck that the 1.7 billion unbanked people will ultimately be given the crypto tools needed to join the ‘Cryptocosm,’ (as the clairvoyant economist George Gilder refers to the new crypto-based world in his best-selling book Life After Google). We will all be happily transacting in the P2P economy sooner rather than later.
Bitcoin and the black market.
One could argue that bitcoin is here to stay simply because of the growing market of people seeking maximum anonymity while performing operations deemed questionable by regulators (a.k.a. modern criminals). Bitcoin use on Darknet markets jumped a whopping 65 percent in Q1 2020, and this trend has been accelerating during the pandemic.
“This sort of gets the crypto people angry, but there are transactions that are not within the balance of the law, and there are, obviously, many laws in different countries. Normally, cash is used for these transactions. But, in order for illegal transactions to occur, cash must also be used for legal transactions. You need an illegal-to-legal bridge. That’s where crypto comes in.”
—Elon Musk, Tesla and SpaceX CEO, on the Third Row Tesla Podcast, January 2020
Recent research conducted by US non-profit think tank Rand Corporation found that ‘Bitcoin is still perceived to be the dominant cryptocurrency for illicit or criminal activities on the dark web, despite the creation of several more privacy-focused cryptocurrencies.’ Rand’s findings are in line with research conducted by The Block, which noted that out of the 31 darknet marketplaces, 93 percent of those marketplaces supported BTC.
Rand’s research noted the most prominent illicit use-cases for digital currencies: money laundering, illegal trade (primarily for drugs and weapons), and financing terrorism. Sellers of illegal goods were early to embrace the decentralized principle and were, therefore, early Bitcoin adopters. A striking example was when Silk Road launched as part of the darknet and relied heavily on bitcoin way back in 2011.
According to the Chainalysis 2020 Crypto Crime Report, the amount of cryptocurrency spent on so-called darknet markets rose 60 percent to reach a new high of $601 million in Q4 2019.
The Chainalysis report concludes: Crypto crime will likely continue to evolve in both scope and technological sophistication, just like cryptocurrency itself. As law enforcement, regulators, and cryptocurrency professionals improve their ability to prevent and respond to various forms of crypto crime, the criminals themselves will also grow more sophisticated — that’s the one constant we’ve seen as blockchain investigators.
In other words, crime will continue to pay in crypto. This criminal dependency on bitcoin alone seems like it would, at a minimum, help keep bitcoin reasonably well propped-up in the price above its production costs, if not help stimulate its long-term growth and success.
The blockchain boom
However, the Bitcoin platform was mysteriously developed — it will forever be considered in history as the first blockchain application. And whatever the ultimate fate of bitcoin will be, the blockchain revolution it inspired and the P2P economic model it proved may well be its greatest legacy.
Blockchain quick refresher: Blockchain is a shared, immutable ledger that facilitates the process of recording transactions and tracking assets in a business network according to a predetermined ‘smart contract.’ An asset can be tangible (a house, a car, cash land) or intangible (intellectual property, patents, copyrights, branding). Virtually anything of value can be tracked and traded on a blockchain network, reducing risk and cutting middle-man and traditional administrative costs for all involved.
There are several ways to build a blockchain network: they can be public, where anyone can join, private, where one organization governs the network, permissioned, where participants need to obtain an invitation or permission to join, or built and maintained by a consortium of organizations.
Along with transforming areas like data and payments, blockchain technology will shake up traditional corporate structures. Through blockchain, ‘ownerless’ companies could fundraise without stocks, operate without traditional banking or financial infrastructure, and pay employees without knowing their names. The blockchain model's economic incentives are gigantic, given the middle-management and administrative costs that can be slashed through smart-contract-driven implementations.
As Silicon Valley VC and libertarian activist, Patri Friedman (grandson of Nobel Laureate Milton ‘Freedom to Choose’ Friedman) has observed, ‘We believe the agaric potential of crypto goes far beyond the initial use-case of hard money, and will steadily bring the world’s illiquid, opaque, paper-based assets online.’
Coinbase CTO Balaji Srinivasan agrees. ‘Millions of independent blockchain applications will be spawned and suck much of the power out of current economic centers in the US I call the ‘The Paper Belt,’ says Balaji. Balaji defines The Paper Belt as the four metropolitan areas where the most important industries and political infrastructures converged during the post-war era: Boston (education), New York City (publishing, finance), Los Angeles (media, Hollywood) and Washington DC (politics, law). ‘Cryptocurrencies, virtual reality, and mobile devices are helping individuals escape failed institutions,’ Balaji believes.
As Joey Krug has observed, ‘Just as the Internet was the underpinning of a new information infrastructure, blockchain tech, and cryptocurrency will be the underpinning of new financial infrastructure. Neither was, nor will be, built overnight.’ The potential growth and acceptance of blockchain applications have the potential to re-write how we operate and transact in the world all over again.
Interestingly, the consumer behavior transition necessary to operate successfully in the P2P-oriented world Messrs. Friedman, Srinivasan, and Krug envision was dramatically accelerated during the recent pandemic.
According to Deloitte’s 2020 global blockchain survey, ‘Blockchain is now considered ‘critical and considered one of the top strategic priorities’ of over 50 percent of the organizations across industries, sectors, and applications. Leaders now see blockchain as integral to organizational innovation, and therefore investing money and resources in their blockchain projects and business models in tangible ways.’ The survey was taken between February 6 and March 3, 2020, and they polled 1,488 senior executives from 14 countries.
Deloitte’s survey results are reinforced by major players' recent projections regarding the growth in spending on blockchain-related projects. Here are just a few highlights:
International Data Corp projects that total corporate and government spending on the blockchain should hit $2.9 billion in 2019 (an increase of 89 percent over the previous year), and reach $12.4 billion by 2022.
IBM is forecasting that annual worldwide blockchain revenue will top $60 billion by 2024.
Gartner is forecasting that by 2025, the business value added by blockchain will grow to slightly more than $176 billion, then surge to exceed $3.1 trillion by 2030.
According to Shawn Douglass, co-founder and CEO of blockchain analytics company, Amberdata.io, their data shows that 1,500 new blockchain applications are being created a day.
Risk investors continued to fund crypto infrastructure in payments, protocols, and mining infrastructure in 2019, while incumbents expanded into custody and crypto trading services.
Traditionally, startups in the infrastructure space face high fixed costs that require hundreds of millions in private money to scale fast enough to succeed. This reality means many of these startups are designed to ‘build to sell’ from their very inception. This kind of consolidation is already happening in the custody provider space.
Another sign the industry is maturing is the fact that exchanges are also adding insurance for clients. As an example, Coinbase acquired Xapo’s custody business in 2019 ($7 billion assets under custody). The company also added insurance for up to $255 million on its hot wallets. Another top crypto exchange Gemini also launched a custody product in 2019, alongside the creation of its own insurance company, to provide up to $200 million in coverage on its cold storage wallets.
As both the VC and corporate investment in blockchain technologies continue to grow, and the crypto infrastructure continues to build out and gain scale and transaction speed, the prospects for bitcoin and cryptocurrencies, in general, should rise.
VCs and bitcoin
Today, the average VC thinks of cryptocurrencies as Kryptonite. They are simply scared shitless. They know deep in their hearts that crypto means the days of chasing Sequoia, Benchmark, and Draper deals to make easy money are done. Their greatest fear is to be exposed as the unglamorous money-managers they really are. As we have been observing for some time, the VC world, as we know, it is over. Through the inevitable tokenization of private company investment assets, the democratization of risk investing is on the horizon, which will lead to a big squeeze in VC margins — and we will all be happier because of it.
Risk capital is still key to the success of bitcoin and blockchain startups in particular, however. Today, the top 5 (and 7 out of 10) of the most valuable public companies were born out of the modern venture capital industry's pockets. These public tech companies' total market capitalization now exceeds $7 trillion, and they employ over 3 million people. But whenever huge innovation disruptions are occurring like today, inevitably some of the old VCs keep rolling, while others drop out, and a new generation of risk investors arrive on the scene.
The new top crypto-friendly funds are Pantera, Polymath, Digital Currency Group, Blockchain Capital, Fenbushi Capital, and Boost VC. The greats that are all-in on the blockchain are Andreessen, Draper, Sequoia, and long-time angel funds such as 500 Startups and Plug and Play.
Pantera was the first investment firm focused on bitcoin and digital currencies when they launched the first cryptocurrency fund in the US way back in 2013 when bitcoin was at $65. Pantera’s Bitcoin Fund has returned a whopping 12,000 percent in five years, sending billions back to its investors. Pantera currently manages $550 million in capital in seven funds across three product groups — passive, hedge, and venture.
In 2019 the VCs invested in only 15 fewer crypto deals than in 2018 for a total of 807 deals. The total dollars invested dropped by 34 percent, from around $4.2 billion to $2.8 billion. This drop can be largely attributed to a few large late-stage deals in 2018: Bitmain’s $400 million in equity financing, Coinbase’s $300 million Series E, and Hyperchain’s $234 million Series B. In 2019, the industry’s largest raises were from Ripple’s $200 million and Figure’s $103 million Series C funding rounds. Still, the year saw 120 percent more volume than 2017’s $1.2 billion.
CBInsights’s recent Blockchain Report 2020 offered the following summary observations for VC trends in crypto:
Equity funding to crypto and blockchain companies overtook Initial Coin Offering (ICO) funding in 2019 as the ICO boom collapsed under regulatory scrutiny. The ICO boom in 2018 ($7.8 billion raised) was largely unregulated. In 2019, total funding to ICOs fell to $371 million vs. $2.8 billion in equity funding to crypto and blockchain companies.
‘Crypto-corporate’ VCs were the most active investors in 2019. NEO Global Capital and Coinbase Ventures were the two most active by deal count in 2019, demonstrating crypto companies’ commitment to funding their own ecosystem.
Deals are moving from West to East. Four years ago, 51 percent of deals were for US-based companies while only 2 percent went to China-based companies. In 2019, the US’s share of deals fell to 31 percent and China’s rose to 22 percent.
Enterprise blockchain funding has lagged. Efforts to reduce back-office costs and improve business processes are still ongoing. However, funding to other applications has been nearly 7x higher than to enterprise blockchain over the past 5 years.
Funding to crypto infrastructure continues. Investors are still betting on custody, tax, data, and protocol infrastructure to improve the industry’s user experience.
Lending and stablecoins have driven the growth of decentralized finance (DeFi). There are over $1 billion in assets on DeFiplatforms, up from ~$300 million in January 2019. ~60 percent of assets are on the Maker platform, a stablecoin project collateralized with cryptocurrencies.
Chris Dixon and Eddy Lazzarin from Silicon Valley venture capital firm Andreessen Horowitz recently published a blog post called ‘The Crypto Price-Innovation Cycle.’ Their view is a ‘fourth crypto cycle’ is on the horizon. ‘Even though crypto cycles look chaotic, over the long term, they’ve generated steady growth of new ideas, code, projects, and startups — the fundamental drivers of software innovation,” the two VCs contend.
The 2017 cycle spawned hundreds of exciting projects primarily on payments, finance, games, infrastructure, and web apps. Andreessen Horowitz is betting on their prognostication by just recently raising over $515 million for a cryptocurrency-focused fund.
My longer-term projection is the smart old, and new crypto investors will fund the traditional VC business into extinction. Private investment ownership will be tokenized, fractionalized, and democratized in step with the P2P revolution and will result in a liquidity boom for entrepreneurs and early investors.
Time to buy bitcoin?
We are more than 10 years into the bitcoin revolution. During this decade, crypto trading volumes reached multi-billion dollar heights, with only a tiny percentage of the global population participating.
Coinbase recently announced the CoinDesk 20 which includes 20 cryptocurrencies that constitute 99 percent of ‘verifiable dollar market volume’ on eight of the largest and ‘most trustworthy’ eight leading cryptocurrency exchanges. By ‘verifiable’ trading volume means Coinbase is confident it does not include any fake trades or manipulation. Coinbase notes several studies have been done on this issue, from reputable research desks, most notably from Bitwise Asset Management, Digital Asset Research and The Block. Their research team will review and revise the Coinbase 20 list quarterly. Coinbase says its purposely limiting their selection to market-critical assets with enough verifiable trading volume to allow for sizable fund participation.
There are, of course, significant risks that bitcoin will never achieve the status of a rock-solid store of value or extend into the retail consumer space as a viable payment source. Global regulation of cryptocurrency is still maturing. With few universal rules on how trades can be executed, market manipulation is always a threat and leads to questions regarding crypto price movements' authenticity. It is hard to ignore, however, that thus far, bitcoin has outperformed every other global asset class in the last decade, including real estate, gold, and the S&P 500. There must be some there-there.
Today, if you ask me if bitcoin is a good buy I would say, at $9,182 today, yes—with the level of assets you are willing to risk on what will surely be a volatile ride up. I would, however, appropriate Joey Krug’s further advice and say, ‘With a proper selection, one can outperform bitcoin with a diversified portfolio including both large caps like bitcoin and ethereum and small to mid-cap alts through at least the end of 2021.’ If you want to know which altcoins to add to your basket, I’d tell you, ‘Go ask Joey.’
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