Posts from crypto

Un-Super-Vised

My partner Andy and I were playing with the latest crypto craze, cryptokitties, this weekend and he suggested we sire a USV kitty.

So he contributed a parent from his collection and I contributed a parent from my collection and with the addition of some Ethereum, which I paid from my Coinbase account, we made a new kitty.

Since it is a USV kitty, we asked the USV team to send in name suggestions and Jacqueline won that contest with the wonderful name of Un-Super-Vised.

That’s a handsome cat but the thing I like most is its “lucky stripe.” God knows we need that in the startup business.

In the wake of all that excitement, Jacqueline posted her thoughts on this craze. If you want to know what to make of all of this, I’d suggest giving that a read.

Bitcoin Gains – Tax Advice For US Taxpayers

As Bitcoin has reached five figure levels this week, I have received a number of questions about taxes owed on Bitcoin gains.

That is comforting to me. Bitcoin and crypto are a bit like religion. There are a lot of true believers out there, me included.

But at least some people are stepping back and taking money off the table. I would encourage everyone to think about at least taking their cost off the table and playing with the house money at these levels.

And if bitcoin/crypto has reached an unhealthy percentage of your net worth, I would also recommend stepping back and thinking about rebalancing your asset allocation.

So, if you are US taxpayer, what do you owe in taxes on these gains?

The IRS issued this guidance back in the spring of 2014:

IR-2014-36, March. 25, 2014

WASHINGTON — The Internal Revenue Service today issued a notice providing answers to frequently asked questions (FAQs) on virtual currency, such as bitcoin. These FAQs provide basic information on the U.S. federal tax implications of transactions in, or transactions that use, virtual currency.

In some environments, virtual currency operates like “real” currency — i.e., the coin and paper money of the United States or of any other country that is designated as legal tender, circulates, and is customarily used and accepted as a medium of exchange in the country of issuance — but it does not have legal tender status in any jurisdiction.

The notice provides that virtual currency is treated as property for U.S. federal tax purposes.  General tax principles that apply to property transactions apply to transactions using virtual currency.  Among other things, this means that:

  • Wages paid to employees using virtual currency are taxable to the employee, must be reported by an employer on a Form W-2, and are subject to federal income tax withholding and payroll taxes.
  • Payments using virtual currency made to independent contractors and other service providers are taxable and self-employment tax rules generally apply.  Normally, payers must issue Form 1099.
  • The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer.
  • A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property. 

Further details, including a set of 16 questions and answers, are in Notice 2014-21, posted today on IRS.gov.

I would strongly suggest folks read that link to “Notice 2014-21” as it includes a lot more information in it.

I have always thought about Bitcoin and other crypto assets like stocks when it comes to capital gains. When you sell the coins, you owe capital gains taxes on the gains.

But how do you calculate the gains?

  • Do you need to identify the exact coins you sold and go back to determine how much you paid for them and then calculate the gain on those coins and the taxes owed? That is like identifying a “lot” when you sell stock.
  • Do you use “first in, first out” (FIFO) to determine which coins were sold and the gains and taxes owed?
  • Do you use the average cost of your entire position and then determine the gains and taxes owed?
  • And if you held the coins for longer than twelve months, do you benefit from capital gains rates vs ordinary income rates?

I assume the answer to the last question is yes and that you can use whichever of the three methods to calculate gains but you need to use them consistently and that requires you to track your buys and sells very carefully.

But I am most certainly not a tax advisor and I do not give tax advice here at AVC. We have very good tax advisors who will figure this stuff out for us.

Hopefully, there are some tax advisors in the AVC audience who will weigh in with answers (and likely more issues to be considered). So if you are an expert in this stuff, please take the time to leave all of some answers in the comments this morning. We appreciate it.

The End Of Net Neutrality As We Know It

I have written about net neutrality frequently here at AVC. I believe that for as long as we have local monopolies and duopolies for last mile broadband internet in most parts of the US, we need our federal government to actively reign in the broadband providers from doing things that are anti-innovation, anti-consumer, and pro-big business. For much of the last decade, the internet crowd has been a force to be reckoned with on this issue and we fought for and won good net neutrality rules that were put in place and defended in court. If you are a long time reader of AVC, you heard me advocating for and celebrating these wins.

The times have changed. We have a pro-big business team in the White House and at the FCC who are hell-bent to overturn those hard fought for net neutrality rules. We should fight them in these efforts, just like we have fought for these rules at every turn. Here are some things you can do:

But even as we fight for net neutrality, we also should be investing heavily in efforts to reduce our society’s reliance on the big cable and telcos for our broadband internet. That’s the core problem here.

So, in addition to fighting for net neutrality, here is what you should be doing:

  1. Don’t use an ISP who won’t commit to following basic net neutrality rules if you have a choice. Our portfolio company Tucows has a subsidiary called Ting that provides fiber broadband in some parts of the country and they are committed to following basic net neutrality rules no matter what the law says. Use an ISP like that if you can.
  2. Report abusive behavior and business practices by your ISP to the FCC. This will become even more important if the FCC overturns net neutrality.
  3. Join a mesh network or multiple mesh networks. Peer to peer wireless is our best long-term solution to the monopoly/duopoly issue.
  4. Look for blockchain projects that are seeking to solve the mesh networking issue and support them. The token-based incentive business model is a powerful way to bootstrap p2p mesh networks. This piece from 2015 explains that well.

I believe that technology is ultimately a better solution than regulation to market failures like the monopoly/duopoly issue in last mile broadband and I am confident that we will get the technology to solve it soon enough (certainly in my expected lifetime). But until that happens, regulation is a good tool to keep things moving in the right direction. That’s why I have supported net neutrality and will continue to support it until the technology arrives in the mass market to address the underlying problem.

Mexico City

Mexico City is an amazing place. The Gotham Gal and I were there around this time last year.

The people, the culture, the energy are all great in Mexico City. It feels like a place on the move where good things are happening.

So I was upset to hear about the devastating earthquake last night.

We have had so many natural disasters in the last month and I understand that we may all be fatigued from giving to all of these needy causes.

But I took some time this morning to give and thought I’d share with all of you where I sent some funds in case you want to do the same.

  1. Salma Hayek’s Crowdrise Campaign to UNICEF’s on the ground relief efforts: I donated $1000.
  2. Bitso’s (Mexico’s largest crypto exchange) Campaign to benefit Red Cross and Brigada de Rescate Topos Tlaltelolco A.C.: I donated 2 ETH.

It feels good to send some funds to organizations on the ground that are actually helping people in a difficult time.

Numeraire Is Live

Back in February, I posted about Numeraire.

I wrote:

the Numerai team has now gone a step further and issued a crypto-token called Numeraire to incent these data scientists to work together to build the best models instead of just competing with each other

And roughy four months later, I am happy to write that the Numeraire token is live on the Ethereum blockchain.

You can read more about this here.

Well done Numerai team.

Decentralized Self-Organizing Systems

Mankind has been inventing new ways to organize and govern since we showed up on planet earth. Our history is a gradual evolution of these organization and governance systems. Much of what we are using right now was invented in ancient Greece and perfected in western Europe in the 17th, 18th, and 19th centuries.

I have been thinking for some time that we are on the cusp of something new. I don’t know exactly what it will be but I think it will be inspired by the big technological innovations of the late 20th century and early 21st century and it will be based on decentralized and self-organizing systems.

The Internet is, at its core, a scaled decentralized system. Its design has been a resounding success. It has scaled elegantly and gradually to well over 2bn users over fifty years. No central entity controls the Internet and it upgrades itself and scales itself slowly over time.

Open source software development communities are also an important development of the past fifty years. These communities come together to create and maintain new software systems and are not financed or governed by traditional corporate models. The goals of these communities are largely based on delivering new capabilities to the market and they don’t have capitalist based incentive systems and they have shown that in many instances they work better than traditional corporate models, Linux being the best example.

And, for the past decade or so, we have seen that modern cryptography and some important computer science innovations have led to decentralized blockchain systems, most notably Bitcoin and Ethereum. But there are many more to study and learn from. These blockchain systems are pushing forward our understanding of economic models, governance models, and security models.

I think it is high time that political scientists, philosophers, economists, and historians turn their attention to these new self-organizing and self-governing systems. Maybe they have and I am not familiar with the work. If so, please point me to it. If not, maybe this post and others like it will be an inspiration for the liberal arts to catch up to the computer scientists and mathematicians or at least work closely with them to figure out what is next, to articulate it and put it in the context of other governance and economic systems. From that work can come progress that mankind needs to move beyond the current systems, which work, but have many flaws and are becoming stale and in need of an upgrade.

Numeraire

Late last year, USV invested in Numerai, a hedge fund that uses data scientists all around the world to “crowdsource” stock price predictions. I blogged a bit about Numerai then.

If that business model wasn’t cutting edge enough for you, the Numerai team has now gone a step further and issued a crypto-token called Numeraire to incent these data scientists to work together to build the best models instead of just competing with each other.

When I read the Numerai blog post about Numeraire yesterday, I tweeted this out:

This is all pretty out there stuff in a world, hedge funds, that has more or less done things a certain way for the last thirty years. I’m not saying hedge funds haven’t innovated, they certainly have, but I don’t think anyone has attempted to change the behavioral economics that underpin hedge funds in quite the same way that Numerai has. It is, if nothing else, a fascinating experiment that will tell us a lot about crypto-tokens, machine learning, and behavioral science.

I must admit that some of this is over my head. I’ve read the Numerai blog post as well as the Forbes and Wired posts several times now and I am not sure if I could explain all of this perfectly at a dinner party. But I am super excited that USV has invested in this audacious experiment and I look forward to seeing how it all pans out.

What Is Going To Happen In 2017

Happy New Year Everyone. Yesterday we focused on the past, today we are going to focus on the future, specifically this year we are now in. Here’s what I expect to happen this year:

  • Trump will hit the ground running, cutting corporate and personal taxes, and eliminating the preferential treatment of carried interest capital gains. The stock market has already factored in these tax cuts so it won’t be as big of a boon for investors as might be expected, but the seven and half year bull market run will be extended as a result of this tax cut stimulus before being halted by rising rates and/or some boneheaded move by President Trump which seems inevitable. We just don’t know the timing of it. The loss of capital gains treatment on carried interest won’t hurt professional investors too much because the lower personal tax rates will take the sting out of it. In addition, corporations will use the lower tax rates as an excuse to bring back massive amounts of capital that have been locked up overseas, producing a cash surplus that will result in an M&A boom. This will lead to an even more fuel to the fire that is causing “old line” corporations to acquire startups.
  • The IPO market, led by Snapchat, will be white hot. Look for entrepreneurs and the VCs that back them to have IPO fever in 2017. I expect we will see more tech IPOs in 2017 than we have since 2000.
  • The ad:tech market will go the way of search, social, and mobile as investors and entrepreneurs concede that Google and Facebook have won and everyone else has lost. It will be nearly impossible to raise money for an online advertising business in 2017. However, there will be new players, like Snapchat, and existing ones, like Twitter, that succeed by offering advertisers a fundamentally different offering than Facebook and Google do.
  • The SAAS sector will continue to consolidate, driven by a trifecta of legacy enterprise software companies (like Oracle), successful SAAS companies (like Workday), and private equity firms all going in search of additional lines of business and recurring subscription revenue streams.
  • AI will be the new mobile. Investors will ask management what their “AI strategy” is before investing and will be wary of companies that don’t have one.
  • Tech investors will start to adopt genomics as an additional “information technology” investment category, blurring the distinction between life science and tech investors that has existed in the VC sector for the past thirty years. This will lead to a funding frenzy and many investments will go badly. But there will be big winners to be had in this sector and it will be an important category for VCs for the foreseeable future.
  • Google, Facebook, and to a lesser extent Apple and Amazon will be seen as monopolists by government and individuals in the US (as they have been for years outside the US). Things like the fake news crisis will make clear to everyone how reliant we have become on these tech powerhouses and there will be a backlash. It will be Microsoft redux and the government will seek remedies which will be futile. But as in the Microsoft situation, technology, particularly decentralized applications built on open data platforms (ie blockchain technology), will come to the rescue and reduce our reliance on these monopolies. This scenario will take years to play out, but the seeds have been sown and we will start to see this scenario play out in 2017.
  • Cyberwarfare will be front and center in our lives in the same way that nuclear warfare was during the cold war. Crypto will be the equivalent of bomb shelters and we will all be learning about private keys, how to use them, and how to manage them. A company will make crypto mainstream via an easy to use interface and it will become the next big thing.

These are my big predictions for 2017. If my prior track record is any indication, I will be wrong about more of this than I am right. The beauty of the VC business is you don’t have to be right that often, as long as you are right about something big. Which leads to going out on a limb and taking risks. And I think that strategy will pay dividends in 2017. Here’s to a new year and new challenges to overcome.

What Did And Did Not Happen In 2016

As has become my practice, I will end the year (today) looking back and start the year (tomorrow) looking forward.

As a starting point for looking back on 2016, we can start with my What Is Going To Happen In 2016 post from Jan 1st 2016.

Easy to build content (apps) on a cheap widespread hardware platform (smartphones) beat out sophisticated and high resolution content on purpose built expensive hardware (content on VR headsets). We re-learned an old lesson: PC v. mainframe and Mac; Internet v. ISO; VHS v. Betamax; and Android v. iPhone.

And Fitbit proved that the main thing people want to do with a computer on their wrist is help them stay fit. And yet Fitbit ended the year with its stock near its all time low. Pebble sold itself in a distressed transaction to Fitbit. And Apple’s Watch has not gone mainstream two versions into its roadmap.

  • I thought one of the big four (Apple, Google, Facebook, Amazon) would falter in 2016. All produced positive stock performance in 2016. None appear to have faltered in a huge way in 2016. But Apple certainly seems wobbly. They can’t make laptops that anyone wants to use anymore. It’s no longer a certainty that everyone is going to get a new iPhone when the new one ships. The iPad is a declining product. The watch is a mainstream flop. And Microsoft is making better computers than Apple (and maybe operating systems too) these days. You can’t make that kind of critique of Google, Amazon, or Facebook, who all had great years in my book.
  • I predicted the FAA regulations would be a boon to the commercial drone industry. They have been.
  • I predicted publishing inside of Facebook was going to go badly for some high profile publishers in 2016. That does not appear to have been the case. But the ugly downside of Facebook as a publishing platform revealed itself in the form of a fake news crisis that may (or may not) have impacted the Presidential election.
  • Instead of spinning out HBO into a direct Netflix competitor, Time Warner sold itself to AT&T. This allows AT&T to join Comcast and Verizon in the “carriers becoming content companies” club. It seems that the executives who run these large carriers believe it is better to use their massive profits in the carrier business to move up the stack into content instead of continuing to invest in their communications infrastructure. It makes me want to invest in communications infrastructure honestly.
  • Bitcoin found no killer app in 2016, but did find itself the darling of the trader/speculator crowd, ending the year on a killer run and almost breaking the $1000 USD/BTC level. Maybe Bitcoin’s killer app is its value and/or store of value. That would make it the digital equivalent of gold and the likely reserve currency of the digital asset space. And I think that is what has happened with Bitcoin. And there is nothing wrong with that.
  • Slack had a good year in 2016, solidifying its position as the leading communications tool for enterprises (other than email of course). It did have some growing pains as there was a fair bit of executive turmoil. But I think Slack is here to stay and I think they can withstand the growing competition coming from Microsoft’s Teams product and others.
  • I was right that Donald Trump would get the Republican nomination and that the tech sector (with the exception of Peter Thiel and a few other liked minded people) would line up against him. It did not matter. He won the Presidency without the support of the tech sector, but by using its tools (Twitter and Facebook primarily) brilliantly.
  • I predicted “markdown mania” would hit the tech sector hard and employees would start getting cold feet on startups as they saw the value of their options going down. None of this really happened in a big way in 2016. There was some of that and employees are certainly more attuned to how they can get hurt in a down round or recap, but the tech sector has also used a lot of techniques, including repricing options, reloading option plans, and moving to RSUs, to mitigate this. The truth is that startups, venture capital, and tech growth companies had a pretty good year in 2016 all things considered.

So that’s the rundown on my 2016 predictions. I would give myself about a 50% hit rate. Which is not great but not horrible and about the same as I did last year.

Some other things that happened in 2016 that are important and worth talking about are:

  • The era of cyberwars are upon us. Maybe we have been fighting them silently for years. But we are not fighting them silently any more. We are fighting them out in the open. I suspect there is a lot that the public still doesn’t know about what is actually going on in this area. We know what Russia has done in the Presidential election and since then. But what has the US been doing to Russia? I would assume the same and maybe more. If your enemy has the keys to your castle, you had better have the keys to their castle. And as good as the Russians are at hacking into systems, the US has some great hackers too. I am very sure about that.  And so do the Chinese, the Israelis, the Indians, the British, the Germans, the French, the Japanese, etc, etc.  This feels a bit like the Nuclear era redux. Mutually assured destruction is a deterrent as long as both sides have the same tools.
  • The tech sector is no longer the belle of the ball. It has, on one hand become extremely powerful with monopolies, duopolies, or nearly so in search, social media, ecommerce, online advertising, and mobile operating systems. And it has, on the other hand, proven that it is susceptible to the very kinds of bad behavior that every other large industry is capable of. And we now have an incoming President who doesn’t share the love of the tech sector that our outgoing President showed. It brings to mind that scene in 48 Hours where Eddie Murphy throws the shot glass through the mirror and explains to the rednecks that there is a new sheriff in town. But this time, the tech sector are the rednecks.
  • Google and Facebook now control ~75% of the online advertising market and almost all of its growth in 2016:

  • Artificial Intelligence has inserted itself into our every day lives. Whether its a home speaker system that we can talk to, or a social network that already knows what we are about to go out and purchase, or a car that can park itself and change lanes on the highway automatically, we are seeing AI take over tasks that we used to have to do ourselves. We are in the age of AI. It is not something that is coming. It is here. It may have arrived in 2014, or 2015, but if you ask me, I would put 2016 as the year it had its debut in mainstream life. It is exciting and it is scary. It begs all sorts of questions about where we are all going in the next thirty to fifty years. If you are in your twenties, AI will define your lifetime.

So that’s my rundown on 2016. I wish everyone a happy and healthy new year and we will talk about the future, not the past, tomorrow.

If you are in need of a New Year’s Resolution, I suggest moving to super secure passwords and some sort of tool to manage them for you, using two factor authentication whenever and wherever possible, encrypt as much of your online activities as you reasonably can, and not saying or doing anything online that you would not do in public, because that is where you are doing it.

Happy New Year!