sunstone capital, avalanche 2014 - bitcoin: primer, state of play, discussion
DESCRIPTION
Every winter, Sunstone hosts an offsite event with the participation of executives from our portfolio companies, fellow VCs, and various thought leaders. The event is designed to mix informal networking, stimulating discussions around key topics shaping our industry, and intense skiing. We find that the best inspiration and ideas are generated when you least expect it, and in company with people that challenge your thinking. This year's edition took us to Courmayeur in the Italian Alps, and Bitcoin was on the list of topics we discussed. Here are the supporting slides from our Jan 24th presentation "Bitcoin: Primer, State of Play, Discussion". http://www.sunstone.euTRANSCRIPT
Primer, State of Play, Discussion
Yacine Ghalim & Max Niederhofer
Courmayeur, 24 January 2014
1.2m 1m 1.5m 1.5m
11.1m
Data: Google Keyword Planner
Bitcoin is becoming ever more popular in the public eye
GOOGLE TRENDS & SEARCH VOLUME
Data: Google Trends
Average Monthly Search Volume (Google, past 12m)
Bitcoin is a technological tour de force.
It will be everywhere, and the world will have to readjust.
Bitcoin is the beginning of something great: a currency without a
government, something necessary and imperaBve.
Bitcoin is Evil.
A virtual currency scheme.
Bill Gates
John McAfee The European Central Bank
Paul Krugman
Nassim Taleb
?
A dividing topic
PERSONALITIES QUOTES
Source: bitcoinquotaBons.com,, ecb.europa.eu
Bitcoin’s origin as the experiment of an anonymous cryptographer, Satoshi Nakamoto, is a boon to libertarian hero worship HISTORY / MYTHOLOGY
2008 - Bitcoin.org registered by “Satoshi Nakamoto” - “Bitcoin: A Peer-to-Peer Electronic Cash System” paper posted October 2008 (link: PDF) - Bitcoin projected registered at Sourceforge
2009 - Satoshi mines “genesis block” of 50 BTC – January 2009 - Bitcoin v0.1 released on [email protected] mailing list… and Usenet – January 2009 - First bitcoin transaction, #bitcoin-dev on Freenode, v0.2 released 2010 - First offline transaction: 10K BTC for two pizzas - v0.3 announced, Slashdotted, Mt Gox founded – July 2010 - First specialized GPU hash miners and pooled mining operations - Bitcoin economy surpasses $1 million, $0.5/BTC - Satoshi hands project lead to Gavin Andresen, fades into background with est. ~1 million BTC
- Bitcoins are digital units of account issued, authenticated and transacted through a peer-to-
peer network
- The network/ecosystem is Bitcoin, the units are bitcoins - Attractive due to low transaction costs, no taxation, (some) anonymity - Key features safeguard issuance, authentication, ownership and independence - For the first time in human history, a medium of exchange with no intrinsic value without a trusted
central authority
What exactly is Bitcoin?
DEFINITION(S)
- A bitcoin is simply a chain of digital signatures using public and private keys
- This is based on previous work, like hashcash, bit-gold and many other e-cash attempts - The main problem of a digital currency is verifying ownership - double-spending and its most
obvious solution, a trusted central authority - Bitcoin solves this through a public ledger, which creates a time-stamped history of all transactions - This is known as the blockchain
Bitcoin works like previous attempts at digital currencies, but uses a public ledger of transactions instead of a central “mint”
HOW BITCOIN WORKS (1)
- Bitcoin transactions are public, traceable and publicly stored…
- This is similar to the idea of stock exchanges, where a tape of transactions is public, but the identity of the transacting parties is not
- Preserving privacy on Bitcoin requires effort: discarding Bitcoin addresses constantly
A public record of all transactions implies a very different model of privacy, one that is arguably more strict
HOW BITCOIN WORKS (2)
- The blockchain is built by the nodes in the network attempting to generate new blocks by solving a difficult proof-of-work problem, and thus making fraud highly unlikely
- In Bitcoin, this proof-of-work is incrementing a nonce, or arbitrary number, to the point of where its
SHA-256 hash yields a value beginning with a set number of zeros (getting more difficult over time) - Once a new hash has been found, the node broadcasts the new block to the network - The first transaction of the new block is a new issuance of bitcoins (currently 25), a reward for the
“miner” - Other nodes accept the block only if all transactions in it are valid, ie no double-spending - In case of a conflict (branch), nodes will work on extending the longest chain - In the long run, as issuance slows, Bitcoin allows for transaction fees paid to nodes for extending the
blockchain
Nodes in the peer-to-peer network compete to validate transactions and thus being allowed to issue new bitcoins through “mining” HOW BITCOIN WORKS (3)
- While transaction validation in the blockchain is costly, single transaction verification is simple and cheap
- However: all of this assumes that a majority of honest nodes control the network - The blockchain generation means transaction confirmations take up to an hour
While Bitcoin solves key digital currency problems elegantly, some vulnerabilities remain
HOW BITCOIN WORKS (4)
• 2,500+ brick & mortar places (mostly mom & pop shops)
• 50,000+ online places • Large online players accep<ng it:
• Officially banned it:
• OAen compared to:
• Shares the most aCributes with precious metals:
• Limited supply increasingly difficult to extract
• “Decentralized” crea<on
• Non yielding asset
Store Value Transact Move Money
• More easily fungible than precious metals
• No storage costs • (Temporarily) unclear tax
treatment of capital gains
vs Cash: • Dematerialized
• Circumvent EM countries’ capital controls (China, Argen<na, North Africa)
• Faster and cheaper than some tradi<onal transfer services
• Pseudonymous
Bitcoin’s current use cases are threefold : store value, transact and move money
THE CURRENT BITCOIN USE-CASES
• Transfers
• Interna<onal remiCances
Data: Coinmap.org
vs Cards: • Lower
transac<on fees • No charge-‐back • Pseudonymous
-‐
5,000,000
10,000,000
15,000,000
20,000,000
25,000,000
2009
2013
2014
2017
2021
2025
2029
2033
2037
2041
2045
2049
2053
2057
2061
2065
2069
2073
2077
2081
2085
2089
2093
2097
2101
2105
2109
2113
2117
2121
2125
2129
2133
2137
2141
12.2m (58%)
21m (100%) 99%
Most of the bitcoin creation is designed to occur between 2009 and 2025
MODELED BITCOIN CREATION OVER TIME
Data: BitcoinWiki
$1,203
$584
$210
$0-‐1 $35 $2-‐15
75x
1
2
3
Data: blockchain.info, Bloomberg
• Trading in step func<on (low liquidity, binary events, buzz factor)
A wild ride up…
HISTORICAL PRICES ($)
• Trending up…best performing asset in 2013 (75x)
• Tremendous vola<lity (2013 realized vol. = 100)
$14
$1,045
6.3%
1.3%
Average Daily % Move
0.4%
€/$
Biggest up day: +42%
Biggest down day: -‐49%
$1,300bn
Data: blockchain.info, BoFA Macro Research
$1,500bn
Value of the outstanding stock – low, but not negligible
VALUE OF OUTSANDING STOCK ($)
ETFs
(private hands)
(foreigners deposits)
(large denominated bills)
# Outstanding Bitcoins * mkt. price = $11.5bn $50bn
$11.5bn
$17,559m
$9,863m
$7,562m
$2,434m
$397m
$216m
$100m (normalized)
$15m
$487m
Data: blockchain.info, coinometrics, companies’ reports
Transaction volume – once again: low, but not negligible
DAILY TRANSACTION VOLUME ($)
Circa $100m
Infrequent transac<ons: 41/min (2,000/min Visa)
Large transac<ons: $1,700 avg. ($60 avg. Visa)
Miners
-‐Validate transac<ons and confirm ownership
Exchanges
-‐Buy/Sell Bitcoins against fiat currencies (p2p)
Wallets
-‐Store bitcoins -‐Send/Receive bitcoins w/o fric<ons
Payment Processing
-‐Enable merchants to accept bitcoins payment w/o fric<ons
ETFs & Funds
-‐Tradable vehicles with bitcoin underlying -‐Buy bitcoins in the open market, repackaged into financial securi<es
-‐Winklevoss twins filed plans to list a Bitcoin ETF -‐SecondMarket launching Bitcoin Investment Trust (BIT), non listed -‐Fortess Investment forming a Bitcoin Fund, non listed
32% mkt. share
26% mkt. share
20% mkt. share
ghash.io BTC Guild
Equipment Makers: -‐Avalon Clones -‐Cointerra
38% 26% Exis<ng Hash Power
Increasingly consolidated value chain & ecosystem – centralize to decentralize?
THE BITCOIN ECOSYSTEM
Data: bitcoinity
Data: The Bitcoin Database ( compiled by Joel Eriksson Enquist at Creandum), Crunchbase
Flourishing startup ecosystem, relatively muted VC Involvement despite large outliers
VENTURE HISTORY
319 startups 80 startups
VC/Angel Funded 33 startups (10.3%)
Total Funding $ $87.5m
Median $ Funding $540k
Outliers $31.7m (USV, A16Z) $9m (Accel, GCP)
$59m
$13m
$4m
-‐
10,000,000
20,000,000
30,000,000
40,000,000
50,000,000
60,000,000
70,000,000
Exchanges/Wallets Payment Processing Miners/Mining Equipment Other
Coinbase $10m
Data: The Bitcoin Database ( compiled by Joel Eriksson Enquist at Creandum)
The most central parts of the “value chain” have attracted most of the funding
$ VC/ANGEL FUNDING BY CATEGORY
- Bitcoin Foundation and others call Bitcoin a “crypto-currency” - Bitcoin is “currency” in the most general sense, since it can be accepted as a means of exchange - Fulfills most criteria of a medium of exchange, but limited utility due to limited adoption - Widespread acceptance as a means of payment is key to meet definition of a currency - Problematic as a unit of account given volatility – hence Bitcoin becomes an intermediate asset
traded into or out of following a transaction in a more commonly accepted currency - Speculative interest fuels growth in value versus actual transactions, which suggests it is a store of
value rather than a means of exchange
- Related key question whether Bitcoin will be treated like cash or asset: income vs capital gains tax
Bitcoin has currency features, but viewing it solely as a currency ignores its more widespread application
THE CURRENCY QUESTION
- Bitcoins have no intrinsic value: there is no interest (cash deposits), no promises of future cash flows (stocks/bonds), nor is there a use value (gold/silver/commodities)
- However, Bitcoin has significant and interesting features that make it a possible alternate store of value
- outside of the current financial system - semi-anonymous - easily concealable from tax authorities - low/no correlation
- Volatility, high barriers to transaction, lack of eg FDIC insurance currently preclude larger asset base moving into Bitcoin
- As volatility decreases, the utility of features above will likely cause significant capital in-flows
Bitcoins’ acceptance as a store of value currently relies on speculation… “fiat” of a different kind
THE ASSET QUESTION
As Bitcoin volatility decreases, capital will flow into the market based on utility rather than speculation
VOLATILITY VS UTILITY
Capital Inflows (BTC)
Time
Speculation
Utility
Value Store
- If Bitcoin becomes an accepted alternative medium of exchange - Powering ~10% of global ecommerce transactions: approx. $5B annual transaction volume - Rising to become a player to rival Western Union/Moneygram: approx. $4.5B market cap
- If Bitcoin becomes an accepted store of value - Similar to gold: no cash flows/interest, limited supply, limited traceability - Total gold outstanding in coins/bars/ETFs is ~ $1.3T - Based on silver (1/60 value versus gold): ~ $5B potential value
- Medium of exchange + store of value = ~ $15B market, or $1,300/BTC
- However, what if BTC becomes truly widely accepted? - Total currency in circulation: ~ $4T - If we assume BTC makes it to 1% of all currency = $400B, or $34,000/BTC - …and the upside is high from there
Bitcoin’s “fair value” will be determined by how widespread its use becomes as a means of exchange
THE $1B QUESTION
- Hype or reality: what do you think?
- Friendster/Napster or Facebook/Spotify?
- Vast economic, social, political, financial implications - What happens to an international financial system if you can opt out? - Kiss AML/KYC goodbye: say hello to drugs, terror and tax avoidance
- And yet, this is thinking too short: - For the first time ever, Bitcoin decentralizes trust - You can deal with a perfect stranger at low/no transaction costs - And a Bitcoin is just a hash – you can attach anything to it contractually…
The implications of Bitcoin are as far-reaching as the advent of the transistor, the PC, the internet…
DISCUSSION