Posts from hacking finance

Bitcoin Adoption Metrics

I said in yesterday’s post that price and volume charts were not what I look at when I think about Bitcoin. I mentioned Github repos, hackathons, and teams in accelerators working on bitcoin projects. This morning I came across an excellent slideshare on the state of the Bitcoin ecosystem. It had this slide in it.

These are the kind of metrics we need to be looking at to decide how Bitcoin is doing. And on these measures, I’d say 2014 has been a great year for Bitcoin.

bitcoin adoption metrics

I bumped into a friend of mine last night who said “all you write about is Bitcoin.” That may well be true. But I write about what I think about. So take that for what it is. I’m not going to apologize for my obsession with Bitcoin.

Bitcoin – Price and Promise

I’ve written a lot about Bitcoin. I’m a believer as I think it will be the transactional plumbing of the Internet and mobile and lots more in due course.

But the story right now is the sagging price of Bitcoin.

In full disclosure I’ve started buying it again after staying mostly on the sidelines for most of the past two years.

I have never owned much Bitcoin. I give away or spend what I buy. I am not a hoarder of Bitcoin. I don’t care about that aspect of Bitcoin, although many (most?) do. I care about it as programmable money.

But, of course, Bitcoin’s price is a function of its promise. Why own Bitcoin if it has no future?

So does a sagging price mean sagging promise?

In the long run, absolutely.

In the short run, not so much.

The market price of an asset in the short term is driven by emotion (greed vs fear), liquidity, technical factors, and a bunch of other things. Right now, those factors are driving down the price of Bitcoin. Last year they drove it up.

I continue to believe that the thing to watch is not the price chart, the volume chart, or any chart. The thing to look at is Github, Hackathons, Accelerators, and everywhere else that entrepreneurs and developers showcase their work. That’s where the future of Bitcoin and its promise will be determined. And right now, based on what I’m seeing, it’s future is very bright.

For another take on this same question, William Mougayar has a post up today on the same topic.

Video Of The Week: Fred Ehrsam’s Bitcoin Presentation

Someone posted this video in the comments a week or two ago. I watched it and liked it a lot. Fred Ehrsam, the co-founder of our portfolio company Coinbase, does a good job explaining what Bitcoin is and why it is important in ten minutes, no small feat.

In other Bitcoin news, the results of the AVC poll on Bitcoin ownership are in. 40% of AVC readers own Bitcoin, 60% do not.

bitcoin poll results

I purposely did not tweet out this pool as I only wanted regular readers of AVC to participate. I think if I had tweeted out a link with the headline “Do You Own Bitcoin?”, that would have skewed the results as Bitcoin fans would have poured in to vote.

The Bitcoin Hype Cycle

Most people are familiar with the Gartner Hype Cycle. It is a great framework for looking at the development of important technological innovations:

Hype-cycle

It is interesting to look at the price chart of Bitcoin in this context:

btc prices since jan 2012

It sure feels like we’ve been through the technology trigger phase, the inflated expectations phase, and are now well into the trough of disillusionment phase.

What’s more interesting is the question of what will lead us onto the slope of enlightenment? I am thinking that we will start to see native applications of Bitcoin. These would be things that simply could not exist without this technology. Donating money to charity with Bitcoin is awesome, and I do it regularly, but it is not a native application of Bitcoin.

I plan to write more about these native applications because I think they are the key to getting to the next phase in the Bitcoin adoption cycle.

Toshi

Our portfolio company Coinbase announced something yesterday that went largely unnoticed, but might be one of the most important things to happen in the Bitcoin space in a while.

They put out a bunch of developer tools under the name Toshi, including a full open source version of their Bitcoin node. When you combine Toshi with the core Bitcoin APIs it comes with and the Coinbase APIs, you get a platform for building Bitcoin applications that is unmatched in the market.

The reality is building on top of the Bitcoin Core is not a simple task. There is a lot you need to do to make it work. Coinbase has been building on top of the Bitcoin Core for over two years and has addressed many (most?) of the obvious needs and they are now making all of that technology available to developers who want to build Bitcoin applications but don’t want to get knee deep in the Bitcoin Core.

There is a free hosted version of Toshi, you can download and run Toshi on your own servers, or you deploy Toshi to Heroku with just one click.

If you are building Bitcoin applications or thinking about it, check out Toshi. I think making Bitcoin easier for developers is a big thing and I’m pleased to see Coinbase doing exactly that.

Bitcoin and Taxes

If you had read Satoshi’s white paper back in October 2008, you would have said “there is no way this can work.” There were literally hundreds of reasons Bitcoin could not and would not emerge as a new form of money.

Coming up on six years later, Bitcoin has overcome many of those issues and every day looks more and more like some form of financial value. What remains unclear, though, is if Bitcoin will predominantly be a store of value (like gold) or a medium of exchange (like the dollar), or both (the best case for Bitcoin bulls).

And one important factor in determining what happens with Bitcoin is taxation policy.

In the US, the IRS has issued guidance that places Bitcoin very much in the store of value column. The IRS has said that in their eyes Bitcoin is “property” and will be treated like stocks and bonds for tax purposes. In some ways this is good as the IRS is treating Bitcoin seriously and telling everyone how to report Bitcoin transactions to them. That’s progress. But sadly, treating Bitcoin as property makes it less likely that Bitcoin will become a medium of exchange in the US. That’s because consumers and business don’t normally transact in property. It would be a massive pain to keep track of “cost basis” and “sale price” for every dollar you received and parted with in the course of a day, week, or month. The good news is that because Bitcoin is “programmable money”, it is possible to do this programmatically for consumers and the companies providing payment infrastructure for Bitcoin are slowly but surely doing just that. However, in the long run, it would be much better for the IRS to treat Bitcoin as a currency, and my hope is they will do that as soon as possible.

An even more problematic issue for Bitcoin is VAT tax policy in countries where that is the norm. Right now, Canada is considering applying VAT tax to the purchase of Bitcoin. VAT can be as high as 15% in Canada, so that would mean every purchase of Bitcoin would cost up to 15% more than the current market price. And then when you turn around and purchase something with Bitcoin (as I did yesterday with seats for Tuesday night’s Met game), you would be taxed another up to 15% on that transaction. That’s double taxation which, in my mind, is always terrible tax policy. If Canada goes with this approach, it is my view that Bitcoin as a medium of exchange in Canada is a non-starter.

It is also true that VAT tax on the purchase of Bitcoin would be problematic for the store of value use case. Most investors aren’t going to pay a tax of up to 15% on the acquisition of investment property (like stocks and bonds). So why would they do that with Bitcoin?

The UK went down this path with Bitcoin and VAT last year and then, after careful consideration, the HMRC decided that VAT would not apply to Bitcoin acquisition, but VAT would be applied when Bitcoin was used to purchase goods and services, just like the British Pound.

If we had to pick a country that has taken the most thoughtful and helpful policy toward Bitcoin, it would be the UK. In fact, last week the Chancellor of the Exchequer announced an effort to make the UK the leading center of Bitcoin innovation in the world. That’s forward thinking. That’s what the US and Canada should be doing. But they aren’t. Instead they are stifling innovation in and around Bitcoin with their taxation and other policy initiatives.

I am sure many policy makers would prefer to see the Bitcoin genie put back in the bottle. But that’s not going to happen. Not only is Bitcoin alive and well, it is a global phenomenon, so even if you stifle it in your country, it can and will grow and thrive in other parts of the world. And so you are eventually going to have to deal with Bitcoin, what it means, and what it enables.

It is my view that treating Bitcoin like a currency is the most helpful approach. That will allow Bitcoin to find its best use cases without overly burdensome taxation and other regulatory requirements. I’m very pleased that the UK has found it’s way there and my hope is other major economies like the US and Canada will follow suit as soon as possible.

Coinbase Vault

If you want to buy some Bitcoin and store it online and have it on your Android phone or your iPhone, then our portfolio company Coinbase has the product for you.

But what if you own a couple thousand Bitcoin? That’s $1.3mm of Bitcoin at today’s price. Well then you might want something more secure.

Yesterday Coinbase announced Vault, a more secure offering designed for people who own a lot of Bitcoin and want to protect it and are willing to put up with more security as a result.

Like the core Coinbase wallet offering, Vault is free. It is being rolled out now and about 5% of Coinbase’s customers have it already. Coinbase told Coindesk that all Coinbase users will have access to Vault by mid July.

I like to think of Coinbase as the bank and brokerage firm for Bitcoin. They have checking accounts (wallet), CD/savings (vault), brokerage (buy/sell), and merchant services.

And more is coming. Stay tuned. I will keep you posted.

The Law Of Unintended Consequences

One of the great things about getting older is you see things over and over again and you start to understand. That’s called wisdom I guess. One thing I have seen over and over is that the best of intentions often lead to unintended consequences that are exactly the opposite of what the good intentioned people wanted to happen. I like to call that the “law of unintended consequences” and it goes like this:

Whatever it is that you intend to do, you will likely do the exact opposite

I was reminded of that when I read Marc Andreessen’s comments on Sarbanes Oxley (and IPOs in general) in this interview in Vox. Marc said:

The irony of Sarbanes-Oxley was that it was intended to prevent more Enrons and Worldcoms but it ended up being a gigantic tax on small companies.

Sarbanes Oxley and Regulation FD were an attempt to make the stock market safer for the average investor. What it did is make the stock market less attractive for the average investor by removing the best investment opportunities from the market.

Marc lists investments like Netscape, Microsoft, Oracle, HP, and IBM as companies that went public at relatively small valuations and grew their valuations in the public markets. I would add Apple, eBay, Yahoo!, Cisco, and a host of other silicon valley success stories to that list.

The Vox piece points out that:

Twitter waited until it was worth about $25 billion before it went public last year. Facebook was worth more than $100 billion when it had its IPO in 2012.

Dropbox did a private financing recently at $10bn, Uber did a private financing recently at $17bn, Airbnb recently did a private financing recently at $10bn. All three of those deals could have and would have been an IPO in the 1980s or 1990s.

The public markets are not as attractive to emerging high growth companies as they used to be. The private markets have accumulated enough capital to support the growth needs of high potential companies and IPOs are no longer being used to finance growth. They have now been relegated to liquidity paths for the most part. And Marc explains why in this part of the interview:

But for young companies, everything is connected: stock price, employee morale, ability to recruit new employees, ability to retain employees, ability to sign customer contracts,  ability to raise debt financing, ability to deal with regulators. Every single part of your business ends up being connected and it ends up being tied back to your stock price.

I have lived through this (being public while you are still building the company) and it is not easy. You really want to wait until you’ve got everything very buttoned up before you run the gauntlet that is the public markets.

Of course the important question is can we go back to the way it was before the federal government messed things up with all of their good intentions. I think the answer is no. We are not going to put that genie back in the bottle.

But I do think there is another way to fix this mess and it is already happening. As my partner Albert likes to say “the line between the public markets and the private markets are blurring”.  Platforms like AngelList and our portfolio company CircleUp are allowing individual investors the opportunity to invest in startups and the amount of capital that is being invested on these platforms is growing very quickly.

If the regulators keep their hands off these new emerging markets and let them develop naturally, we will eventually fix this problem. Let’s hope they have learned their lesson from the fuckup that was Sarbanes Oxley and Reg FD and don’t try to help us out again.