The Blockchain Bitcoin & Crypto (BBC) Weekly CXO Briefing is all you need to know, each week, jargon free for CXO level business leaders and investors who will use this technology to change the world. Each week we select the 3 news items that matter and explain why and link to one expert opinion.
This is week 5. For the index and the intro, please go here.
Decrypted: This is almost getting boring. For three weeks we have been reporting record highs. Last week we reported an all-time high of $1,500. The previous week it was $1,300. Now we have $1,800. In past weeks we said that this price action matters because “the Bitcoin price drives interest in this sector.” This is still true.
Our take: The relentless price rise leads to two stories. One is “this is a bubble” and the other references price targets over $1 million per Bitcoin. Our take is that both are true, depending on your timeframe. There is a short term bubble and when the price corrects it will be brutal. You can lose 50% from here easily. The trigger could be anything; a big cyber heist is one likely story trigger. However, we also believe that the over $1 million per Bitcoin stories are not crazy. It really depends on which of three lenses you use to look at Bitcoin as an investor:
- Lens 1 = currency. A $1m coin is clearly crazy seen through this lens. When/if we get there, pricing for things other than jets, yachts, islands, mansions, famous art will be in Satoshis. There are 100m Satoshis to one Bitcoin. So if one Bitcoin is worth $1m, one Satoshi will be $0.01. So you can price a coffee or a pizza in Satoshis. (We may need an interim unit, maybe a Merkle, that is closer to $1 for everyday items where $0.01 is too low). A currency rising from $1,800 to $1m is inconceivable when seen through a currency lens, because it has never happened in any other currency (currency depreciation of that magnitude is far more common than order of magnitude Fiat currency appreciation). So we have to look at Bitcoin through two other lenses.
- Lens 2 = Gold alternative. This is tail risk insurance (in case of say hyperinflation in major Fiat currencies). There are gold bugs and there are Bitcoin bugs. The debate has been had many times. Both have pros and cons. The true believers won’t listen to the other side. Pragmatists buy a little of each. Both gold and Bitcoin have value as tail risk insurance and you can never know which will be more useful in different scenarios, so a bit of both is just a pragmatic insurance policy. For example, gold might be more useful for buying food from a conservative farmer but Bitcoin would better for sending money to a distant friend/family member. However, nobody seriously forecasts gold to go up 100x unless it is pegged against a currency undergoing hyperinflation. So the $1m Bitcoin forecast makes no sense through this currency lens unless that $1m is really worth $1k in today’s money.
- Lens 3 = Equity. This is where the valuations over $1m come from. Bitcoin is like equity because the supply is limited to 21 million Bitcoin. That is like the stock of company with 21 million shares. If you have 210,000 Bitcoin, you have 1% of Bitcoin as a whole. A price of $1m per Bitcoin translates to a total market cap of $21,000,000,000,000 ($21 trillion). If Bitcoin fundamentally changes the global financial services business that is not inconceivable. It is a long shot of course. That is over 500x more than the current all-time high of $1,800. The price could also crash to zero. That is also unlikely but possible. That kind of upside and downside is like investing in a tech startup, with lots of risk, but with maybe more upside than downside; if you have say a 50% risk of total loss and 50% chance of 10x and 10% chance of 100x return, the risk/reward looks good.
When we see something totally new like Bitcoin, humans naturally search for analogies from the past – currency, gold, shares. These analogies help with initial understanding, but they get in the way as well. Bitcoin is a bit like a currency, a bit like a gold alternative store of value and a bit like equity in a tech startup. It is a bit like all three, but it is different from all three. Beyond a certain point all analogies just get in the way.
News Item 2: The ERC20 Ethereum Token Standard
Decrypted: This requires two glossaries – which you can gloss over (ha ha) if you are already a cyber afficionado:
Ethereum. There is a cyber currency called Ether (ETH) that is used on Ethereum networks and you can speculate in ETH, but comparing ETH to BTC is apples vs oranges. Ethereum is a decentralized operating system. That is as complex and game-changing as other operating systems in their day such as Windows and Linux. The currency is the least interesting part of Ethereum. (Click here for Daily Fintech archive posts related to Ethereum).
Token. Think of this like a token you put in a slot machine. It is convertible to another asset, but in its native form it is only usable within that context (slot machine in that example). The innovation, often referred to as ICO (Initial Currency Offering) or ITO (Initial Token Offering) is to use digital tokens on a blockchain network. Click here for our take on ICOs.
What the ERC20 token standard is designed for is interoperability. It is better if all slot machines take the same token. Or to put it in blockchain terms, it is better if all Distributed Applications (aka Dapps, the apps that run on the decentralized operating system) take the same digital token. If all tokens created on the Ethereum network use the same standard, those tokens will be easily exchangeable and be able to immediately work with any other Dapps that use the ERC20 standard. Technically a standardized token uses a defined set of functions, making testing and debugging easier for developers of Dapps.
Our take: This is still at the bleeding edge stage, with code on Github and some unresolved technical issues. It may or may not become the accepted standard. Given the momentum behind Ethereum, we believe that it stands a good chance of being an accepted standard. If an interoperable token standard emerges it will make ICOs more mainstream acceptable and that will be a big deal. Read this post for our take on ICOs.
News Item 3: Billionaire VC and Bitcoin fan invests in an ICO
Decrypted: Tim Draper is a renowned VC (with Skype and Baidu among his successes) and a Bitcoin bull and ICOs are billed as a way to disintermediate VCs. So when Tim Draper invests in an ICO we take notice.
The ICO, for a blockchain platform called Tezos, will launch on May 22. Draper will also invest in the creator of Tezos, Dynamic Ledger Solutions Inc, so this has a traditional VC angle as well.
Our Take: What this means is that Josephine Q Public can co-invest with a top VC and that is significant. Caution, blindly following a smart investor (social validation) is not smart. Do your own research. I see very little describing what Tezos does and what value it brings. I have no doubt that the ICO will be oversubscribed thanks to Tim Draper’s social validation, so the ICO will probably do well for speculators, but that does not make it a good long term bet (you need to be a momentum trader with strong nerves to play that game). Nor do we know the terms on which Tim Draper invested in the company. We believe that a self-regulatory code of conduct is needed for ICOs. If you are interested in working to make this happen, please get in touch as we know some people working on this.
One major theme we are tracking is regulatory competition to be Bitcoin friendly in different jurisdictions. We have written about Switzerland, Malta, Japan and we are also seeing moves by Australia.
So it matters when the EU, the biggest single market in the world, jumps into the fray. So although we class this as opinion not news, it is significant opinion. With the USA distracted by Trump scandals, the EU has a window to take a leadership position.
The opinion being expressed is from an MEP called Jakob von Weizsäcker. It was at a session on the future of blockchain regulation in the 28-nation economic bloc. He was being cautious and said:
“It’s probably too early to intervene at this stage, because we as legislators don’t yet see sufficiently clearly to know what the main issues are going to be – so in order to not to stifle innovation, we don’t want it to be now.”
As Coindesk reported “interest was evident in the room, where every seat was full and stand-ups were lining the back wall.”
Coindesk also reported that “one commentator remarked on the irony of a disruptive technology that, rather than generating chaos, adds stability” and stunningly quoted a politician making a statement that you usually here from crypto anarchists:
“What is a currency really? It’s a ponzi game.”
Bernard Lunn is a Fintech thought-leader and deal-maker.
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