Posts from crypto

In about a month, an important moment will happen in the world of crypto/web3. The Ethereum blockchain will move from a proof of work consensus mechanism to a proof of stake consensus mechanism. This event is known as “The Merge” in Ethereum land.

There are many reasons why this is an important moment for the world of crypto/web3, but to my mind the most important reasons are:

1/ The Merge reduces the carbon footprint of the Ethereum blockchain very significantly. No longer will miners be required to run large energy-intensive compute facilities to secure the Ethereum blockchain. There are many people out there who have serious concerns about web3 over environmental reasons. We can argue about that and have, but The Merge takes the concern off the table for the largest and most used smart contract blockchain. This is a big deal.

2/ The supply/demand balance of the Ethereum token will change dramatically. In a proof of work system, miners spend significant sums of money to run large energy-intensive compute facilities to secure the chain. They are rewarded with tokens (in Ethereum’s case, these are Ethereum tokens) and they must sell most of these tokens to pay their electric bills and hardware costs. In a proof of stake system, validators stake significant amounts of the base token (in Ethereum’s case, these are Ethereum tokens) and risk losing them if a bad transaction is validated. There is very little cost associated with staking so the tokens that are earned from staking are mostly held/re-staked instead of sold. I have seen a lot of estimates of how this shift will play out and my take is that Ethereum will move from a system that has roughly $20mm a day of structural outflows to a system that has roughly a half a million dollars a day of structural inflows. This shift in supply/demand will likely result in a very different dynamic for ETH/USDC, ETH/USD, and ETC/BTC (and other ETH pairs too) going forward.

3/ Proof of Stake systems (of which they are many in the market already like Solana, Avalanche, etc) are considered more secure because the likelihood of a 51% attack is much lower. I don’t plan to lay out the argument here, but suffice it to say that Ethereum is moving to a consensus mechanism that many consider to be more resistant to attack, making it even more secure than it has been.

There are some interesting side effects of this event. The current Ethereum proof of work blockchain will not go away. This chain, which many are calling ETH POW, could develop a community around it and live on and provide value to developers and others. This has already happened in the Bitcoin community a few times and once before in the Ethereum community. Holders of ETH at the time of The Merge will receive ETH POW tokens as a result of this fork. These ETH POW tokens could be worthless in time or worth a lot in time. There is really no way to know how ETH POW will develop.

The Merge is probably the most important change that a large scaled blockchain has ever undergone. It is not without risk and there is a chance that things will not go smoothly. The Ethereum core developers have been working on this effort for many years and have deployed many testnets and they are confident they can pull this off next month. The crypto/web3 world will be watching closely and I am rooting for them. I think this is a very important moment for the sector and that it will be very positive if things work as planned.

Disclosure: My family and USV have large holdings in ETH and other crypto assets and may continue to add to them in the coming weeks, months, and years.

New York Senator Gillibrand and Wyoming Senator Lummis have teamed up to propose a bi-partisan bill that would shift much of the regulatory oversight of crypto assets from the SEC to the CFTC, acknowledging that these tokens are much more like commodities than securities.

The details of the bill will be made public today and then there will be a lot of feedback from elected officials, regulators, and industry. It is not certain that this bill will become law and if it does, it is not certain that it will look anything like the initial bill.

But even so, I am very encouraged by this development. Crypto tokens are a foundational element of web3, a technology architecture that allows for decentralized applications which lessen the control of big tech monopolies on our lives and our data, and that allows for users to own their data and a share of the networks that the applications are built on. Constraining these user tokens as securities is not only incorrect but also would inhibit much of their utility and therefore the potential for web3 to remake the technology industry as is so desperately needed.

So I applaud the work of Senators Gillibrand and Lummis and their staffs. They are making an important statement with this bill and I believe that this is a big step in the right direction.

It is Earth Day, a day to celebrate our planet and rededicate ourselves to saving it. I plan to walk and ride my bike, avoid cars, and enjoy being out and about in NYC today.

But I’d also like to talk about something that is bothering me.

The New York State Assembly and Senate are working to pass a bill that would put a two-year moratorium on “proof of work” cryptocurrency mining. Here is the most important part of the bill:

1. For the period commencing on the effective date of this section and
    25  ending two years after such date,  the  department,  after  consultation
    26  with  the department of public service, shall not approve a new applica-
    27  tion for or issue a new permit pursuant  to  this  article,  or  article
    28  seventy  of  this  chapter,  for  an  electric  generating facility that
    29  utilizes a carbon-based fuel and that provides, in  whole  or  in  part,
    30  behind-the-meter  electric energy consumed or utilized by cryptocurrency
    31  mining operations that use proof-of-work authentication methods to vali-
    32  date blockchain transactions.
    33    2. For the period commencing on the effective date of  this    section
    34  and  ending  two years after such date, the department shall not approve
    35  an application to renew an existing permit or  issue  a  renewal  permit
    36  pursuant  to  this  article  for  an  electric  generating facility that
    37  utilizes a carbon-based fuel and that provides, in  whole  or  in  part,
    38  behind-the-meter electric energy consumed or utilized by a cryptocurren-
    39  cy  mining  operation  that uses proof-of-work authentication methods to
    40  validate blockchain transactions if the  renewal  application  seeks  to
    41  increase  or  will allow or result in an increase in the amount of elec-
    42  tric energy consumed or utilized by a  cryptocurrency  mining  operation
    43  that  uses  proof-of-work  authentication methods to validate blockchain
    44  transactions.

I believe this bill resulted from an application to fire up an old coal-powered electric plan to power a Bitcoin mining facility and I will be the first to admit that is a horrible idea. We should not be firing up old fossil fuel plants for any sort of economic activity. It is time to retire fossil fuel-powered plants and replace them with nuclear, hydro, wind, solar, and other clean energy sources.

But the idea of targeting a specific industry for this moratorium and leaving all other economic activity in NYS free to use fossil fuel is just absurd. Is it OK to use fossil fuels to power bowling alleys, movie theaters, car washes, sports stadiums, data centers, banks, homes, cars, etc, etc? Is it just not OK to use fossil fuel to power a network that secures our next-generation technology stack?

And at the same time New York State is doing this, the State of California is preparing an Executive Order that will be extremely friendly to the emerging crypto/web3 industry. New York State is already fighting an uphill battle with the crypto/web3 industry with its god awful BitLicense law and now they want to do this.

New York State should just put signs up on the Holland Tunnel, the Lincoln Tunnel, the George Washington Bridge, the Peace Bridge, and everywhere else people arrive in New York State that says “Web3 Is Not Welcome Here.” And save themselves the time and energy of doing nonsense like this.

We get the message loud and clear.

Coinbase launched the first in a series of payroll offerings:

If your employer offers direct deposit, you can deposit some or all of your paycheck in your Coinbase account and immediately convert it into USDC, BTC, ETH or any other asset that is available to you in your Coinbase account.

This is just a first step in a broader set of payroll products for employers and DAOs.

I’ve always been a fan of “averaging into crypto” instead of trying to time the market. I wrote about this back in 2014 when I was buying 1.5 Bitcoin every week. That was back when you could buy a bitcoin for several hundred dollars.

But regardless of how much you can buy, the idea is to just have a regular buy program going on.

Putting some of your paycheck into crypto is a good way to do that and Coinbase now offers that to all of its users.

The stock and crypto markets have started off the year in selloff mode, with the Nasdaq down almost 5% this week and the big crypto assets down almost 10% this week. But this selloff has been going on for a lot longer than one week. It has been going on since early November when the Nasdaq peaked at $16k and BTC hit $67k. Since then it’s been downhill and the biggest carnage has been in the highflying “cloud” stocks. The Gotham Gal and I own a few stocks that have been cut in half in the last two months. Yes, they lost half of their value in the last two months.

Of course, these highflying stocks have only given up some of their gains over the last two years. In the case of a few of our public stock holdings, they went up 10x in the last two years and are now “only” up 5x. Easy come, easy go.

Even at these new “discount” prices, none of these stocks look cheap to me. Most are still trading well in excess of 10x revenues which has always been my baseline for a subscription-based software business. I don’t know where they will bottom out, but it certainly could be lower. Or the sector could have already bottomed out in this first week of 2022 blowout sale. One never knows where the bottom is until you are well on your way back up.

The capital markets have been awash in money for the entire pandemic and it has resulted in some crazy prices being paid for public stocks and for growth rounds in high-performing privately held companies. The optimist in me sees this selloff as a return to normalcy, in the capital markets and in the world we live in. It’s hard to see a return to normalcy when offices remain closed, events are being postponed or moving to virtual. But markets tend to see things first and I do wonder if the capital markets are coming back to earth in anticipation of things getting better this year.

It also makes me wonder if the “pay any price” mentality in venture may ease up a bit this year. When the IPO markets or the M&A markets can’t/won’t be able to pay more for a business than the private markets are paying, that’s unsustainable. It can last a few quarters, maybe even a year. It can’t last forever. We will see.

So last year I made a bunch of predictions that with one exception were kind of obvious. I don’t want to do that again, so I am going to list five things that I think will happen this year that most people would not likely agree with.

1/ As the pandemic evolves into an endemic in the first half of 2022, companies will reopen their offices and their employees will largely opt to go back to working together in offices.

I qualified this with “largely” because I don’t think we will go back to everyone in the office again. Companies have become much more comfortable hiring remote employees who don’t live near a company office. Employees have made it clear that they want/need the flexibility to work from home a day or two a week. Some companies have moved to an entirely remote work environment. But I think the dominant form of working will return to “in office, with others” by the end of this year.

2/ Carbon offsets, effectively a voluntary form of self carbon taxation, will take off in 2022 and by the end of the year, we will have a global market in excess of $10bn (up ~10x in 2022).

I think the big unlock will be bridging between the existing carbon offset market and the crypto markets where decentralized finance tools can bring massive innovation and demand to this market very quickly.

3/ K12 systems around the US (and around the world) faced with teacher shortages and desperate to erase several years of learning shortfalls, will increasingly adopt online learning services in the school building in lieu of and in addition to in-class learning.

This may be obvious. I don’t really know. But there are many forms of learning that work in addition and in compliment to teacher-led classes and school leaders will need to be open to using them aggressively to turn around several years of learning losses.

4/ Twitter opens up its APIs and allows anyone to operate Twitter clients that compete with its own.

Now I am going out on a limb. But why not? That would be so amazing if it happened.

5/ As I predicted back in the spring of 2017 [8:30 into this video], only five years too soon, Ethereum’s market cap will surpass Bitcoin’s in 2022. I hope I get at least as much abuse for this prediction as I did for that one.

Ethereum’s merge in 2022, combined with the understanding that productive assets must be worth more than non-productive assets, make this a fairly obvious prediction. But I got it wrong last time, so I surely can get it wrong again.

I hope that 2022 brings us more positive surprises and less negative surprises than the last two years.

Happy 2022 everyone!

I remember about fifteen years ago, a well-known VC said to me “you need to sell a company within a few years of the founder leaving. Companies can’t sustain their innovation after a founder leaves.” I told that VC that my experience has been different on that measure and that I did not agree.

I have seen leadership teams take over great businesses from founders and get them to the next level. Etsy, where I am Chair of the Board and a large shareholder, is a great example of that. There are many others in my career as well.

However, there is a special something that founders provide companies. I’ve heard it called “moral leadership.” I’ve heard it called “the soul of the business.” I’ve heard it called “long-term thinking.”

This podcast with Brian Armstrong, founder and CEO of Coinbase, another public company where I am on the Board and a large shareholder, is a good example of that.

If you are into crypto or a Coinbase shareholder, you might want to watch the entire one hour and forty minutes of this video.

But if you want to see what I am talking about with founder-led businesses, there are a few conversations in this podcast I would direct you to. They are:

• 25:48 The Drive and Vision
• 29:36 The Future of Coinbase
• 47:30 Public Goods & Decentralization
• 51:39 Eating All the Banks
• 1:32:12 Maturing and Growing

A number of friends have been asking us how to buy crypto assets. This is not the first time we’ve gotten this question and it won’t be the last.

When I first started getting this question, my answer was “open a Coinbase account and buy Bitcoin.”

Then there was a period when my answer was “open a Coinbase account and buy Bitcoin and Ethereum.”

Today, my answer is “open a Coinbase account and buy a diverse set of crypto assets.”

A diverse set of crypto assets would include Bitcoin, Ethereum, the other major layer one blockchains (Solana, Flow, Avalanche, Polkadot, Algorand, etc), the major Defi protocols (Uniswap, Aave, Compound, etc), storage protocols (Filecoin, Arweave, etc), telecommunications protocols (like Helium), some layer two protocols (like Stacks, Polygon, etc), some gaming assets (like Axie, Decentraland, etc), a maybe some NFTs.

That last paragraph is not meant to be specific. It is meant to be illustrative. And that list contains assets that I own and USV owns as well as many assets that I and USV do not own. I am not recommending any specific assets here. I am recommending a diverse portfolio and those are some good examples of what might be in one.

I do not believe the web3/crypto opportunity can be captured by simply holding Bitcoin and Ethereum anymore. You must own a broader set of assets because the market is expanding beyond the OGs now and you need to be exposed to more of it.

I believe there will be index funds that can do this for you someday. But today your options are limited unless you have the wealth and access to the premier token funds and that is hard to achieve.

Finally, I have no idea where we are in this bull cycle we are in (that is leading to so many people asking us this question right now), so I would be conservative and dollar cost into crypto. If you want to put $10,000 into crypto, I would put $1,000 a month each month for the next ten months, for example. It is hard to be patient like that when prices are rising so fast, but they can fall even faster so it is best to be careful and conservative with an asset class like this.

Finally, these are very long-term investments. If you want to buy crypto assets, you should think of them as a ten-year buy-and-hold portfolio (or longer). That will help you make better decisions as you invest in this exciting new asset class.

I wrote this mostly to send to friends who ask but figured I’d share it with everyone else too. Good luck, be careful, be patient, and have a long-term view when investing in high-risk assets.

I’ve been hearing the term Metaverse for at least twenty years and I have always struggled with it. As I told my colleagues last week “I like the real world, I don’t want to live in a video game.”

My colleagues explained to me that I am thinking about it incorrectly. They said that as digitally mediated experiences have become a more important part of our everyday lives, we are already living in the metaverse.

I’ve started thinking about it that way and it has helped me to be more enthusiastic about these digitally mediated experiences.

I read this tweet stream yesterday and I found it very helpful in this new understanding I am developing.

But then I was passing by the Bright Moments NFT Gallery in Soho yesterday and there was literally a line around the block to get into the Bored Apes Yacht Club event. It seemed like there were thousands of Bored Apes NFT owners standing in line for hours to be able to hang out together in person. I texted my colleagues “I guess this metaverse thing is overrated”.

That’s mostly me amusing myself.

But it does suggest to me that hanging out together online is still not quite as much fun as hanging out together in person.