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 6. For the index and the intro, please go here.
Decrypted: With all the action around ICOs (see later) one might be forgiven for thinking that traditional VCs are sitting out the decentralization movement. However, the ever innovative Union Square Ventures recently led a $4 million round into Blockstack that included Silicon Valley A List investors and Blockchain specialists such as Lux Capital, Digital Currency Group, Compound, Version One, Kal Vepuri, Rising Tide, and Naval Ravikant of AngelList. Blockstack is a Y Combinator graduate formerly known as Onename, that positions as a decentralized alternative to services from digital behemoths such as Facebook and Google.
The decentralization movement is a real game-changer that can change the status quo in Silicon Valley. I have been fascinated by Ethereum since the early days in 2014 (see this post for some history) and believe that decentralization is as fundamental as the PC and the Internet as this chart shows:
|Years from Breakthrough||4||26||20||6||14|
|Years From Founding||0||14||4||1||8|
|Months Founding to IPO||8||168||48||16||96|
|$ per month Founding||1.88||0.36||2.08||8.75||166.67|
|$ per Year Breakthrough||3.75||2.35||5.00||23.33||1142.86|
Notes: Tech Breakthrough.
- Bitcoin in 2009.
- Microsoft and Apple. Integrated Circuit in 1960
- Netscape and Facebook. Browser at CERN in 1989 (debatable, could be TCP/IP at DARPA in 1982)
So there is a lot to play for, but competition for developer mindshare is intense and Ethereum and IPFS have lots of developer mindshare. Of course they are different – Ethereum aims to do a lot (many say too much) and IPFS is only at the protocol layer. That is a challenge for Blockstack to fill a gap between those two. With Blockstack positioning as not another Altcoin, but using Bitcoin, they will also bump up against Sidechains and Blockstream.
News Item 2: Bitmain partnership with Bitpay
Decrypted: Bitmain is a Chinese Bitcoin Miner that is controversial because they back the breakaway group called Bitcoin Unlimited. See our first week for more explanation of the Bitcoin scaling issues and what has been termed the Bitcoin Civil War.
For a well-balanced view of Bitcoin Miners in China, read this. The article describes two problems. One is that “the miners have no obvious media outlet to get their position across, leading to distorted narratives and the compounding of mistrust”. The other is a lazy habit of attributing a common view to all Chinese miners as if they a single “monolithic entity”.
Our take: The Bitcoin Civil War is a battle for mindshare among developers. This news indicates that the war is not yet over, although this maybe a desperate rearguard action. In developer forums the sentiment is mostly negative and this may do brand damage to Bitpay which has not raised funding in a while.
Disclosure I am part of the founding team of this non-profit venture.
For a recent hot as hell ICO, look at the one from Gnosis selling out in 10 minutes at $300m valuation. This seems like dangerous territory.
ITOs are difficult to understand because they are a new paradigm, yet all of us (entrepreneurs, investors and regulators) seek a simple analogy from traditional finance. Is it a:
- Currency (ICO) like another Altcoin?
- Equity (IEO) with a fixed supply (max = 100%)?
- Bond (IBO) with a fixed income?
- ANO Asset (IAO) (like property, art, wine)?
- Something entirely new where none of the old analogies quite work? This could be something technical like a database right or access right.
We use the term Initial Token Offering because “token” is neutral. A token represents value and that value could be a currency, equity shares, a fixed income bond or any other asset.
These are new concepts and none of the old analogies fit. Different market participants see it in different ways and some promote that view out of self interest. These competing viewpoints from interested parties make understanding even harder.
ITOs could be very valuable for both parties:
- Entrepreneurs need an easier way to raise the capital that they need to get a product/service built and into the market. The end result is a product/service, capital is simply a tool to that end. The problem is that investors, even those who claim to be early stage, want evidence of traction to avoid the chasm that so many ventures fall into before achieving Product Market Fit (PMF). This pushes more risk to founders and their friends/families. The IPO window keeps getting harder to get through, leaving a dwindling number of acquirers, making investors even more risk averse.
- Investors need a chance to get in early but also to get liquidity. By the time most investors get a chance at IPO (when they have liquidity), the best returns have often already been taken by private investors. Yet if they try to get into private rounds most investors are at a disadvantage to the top tier VC funds and they have to accept their capital being locked up with no control over liquidity. This is hard for even the HNWI and UHNWI investors, but it is doubly hard for smaller investors who are sometimes legally prohibited or have to pay a big % in legal expenses.
ITOs – done right – could help both parties because there is liquidity, which allows some investors/traders to take a short term view if they want to (and these speculators provide liquidity). ITOs also have some of the advantages of rewards based crowdfunding services like Kickstarter, because the investors in ITOs are often also the users. They use the tokens on the network/service. So they help get the venture to PMF. It is their passion and knowledge that drives the process.
However, ITOs are dangerous today.
It is very simple to raise money via an ITO. This will bring out honest entrepreneurs who are fed up with the current way of raising capital. It will also bring out crooks. It already has. So far early investors have been people playing with “found money”. For example if you invested in Bitcoin in 2009-2011, putting some of those profits into Ether in 2014 seemed pretty easy, even if you follow it up by losing it on the DAO in 2016. It is quite different when Josephine Q Public is investing from earnings that took 40 years to accumulate and which she is banking on for a comfortable retirement. If ITO scales, more crooks and more Josephine Q Public actors get involved.
The words Initial and Offering make one think of IPO and that is beguiling for both entrepreneurs and investors and that can make them blind to the downside.
The aim of the self regulatory code of conduct is to avoid either heavy handed regulation or no regulation and lots of scammers.
We want an Issuer to say “we abide by the ITO Self Regulatory Code of Conduct”. Our aim is to offer simple tools to compare any offer to this Self Regulatory Code of Conduct.
If you would like to get involved, please go to this thread on the Fintech Genome. We want people who have the rare combination of expertise in a subject that few people understand without having too much conflict of interest.
Another week with another All Time High. This opinion was tucked away in a comment on Hacker News by somebody calling themselves “hendzen”. So in this case I am not going on the reputation of the person but simply because it seems like a plausible explanation and a connection that not many have made:
“What if the upward price pressure is actually people buying massive amounts of bitcoin to pay off new ShadowBrokers-based ransomware? And the corresponding rise in alts is the perpetrators using the alts to launder the ransom?”
Bernard Lunn is a Fintech thought-leader and deal-maker.
Get fresh daily insights from an amazing team of Fintech thought leaders around the world. Ride the Fintech wave by reading us daily in your email.