Blockchain Bitcoin & Crypto Weekly CXO Briefing for week starting 5th June 2017

The Blockchain Bitcoin & Crypto 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 8. For the index and the intro, please go here.

News Item 1: Ethereum Blasts Above $20 Billion Market Cap, Over Half Of Bitcoin

This week we have gone all ethereal (in case any of our subscribers think we are Bitcoin maximalists).

We could have picked any number of headlines like this. This one is from a site that is dedicated to investors/traders (Seeking Alpha), which is part of the story. It is significant because for a long time Altcoins were simply a rounding error compared to Bitcoin.

This happened while Bitcoin was rising in value – a lot. It was just that ETH was rising even faster.

Decrypted: Most people trading ETH, such as those reading Seeking Alpha, have virtually no understanding of the technology fundamentals of Ethereum. But that is nothing new. Only a few investors actually research the fundamentals of a company. Most trading is done based on market signals aka technical trading and in that world it matters not whether the asset is ETH or IBM or USD or GLD or whatever.

The lessons we can draw from the market price of ETH are:

  • Hard fork could be soft problem. Ethereum had a hard fork and look at it now. Bitcoin may have a hard fork. So maybe we should all chill about hard forks.

 

  • Crises are bumps in the road when seen in the mirror. Remember the DAO? Remember Mt. Gox? In short the old mantra remains true – invest when there is blood in the streets – not when the peace treaty is signed. Yes, there will be another gut wrenching crisis in Ethereum. Sorry, I don’t know when or why, but there is still technical risk in Ethereum, so the chance of something going wrong is high (ditto for Bitcoin).

 

  • Ethereum was the original ICO in 2014. It is hard to remember how controversial it was at the time. Now it is simply fuel to the fire of ICOs (see later). This is dangerous. It is like assuming that all social media sites can be like Facebook (or even Twitter or LinkedIn).

 

  • When the market is developers, technical risk matters less than market risk. There is still plenty of technical risk in Ethereum – the sort of risk that traditional VC run a mile from. Yet developers know how to evaluate technical risk and they are voting with their keyboards for Ethereum and that is market traction.

 

Our Take: The rise of Ethereum points to 3 possible scenarios:

 

  1. Ethereum overtakes Bitcoin. This is possible short term if we get a hard fork in Bitcoin and longer term if Proof Of Stake proves better than Proof of Work.
  2. Other Altcoins rise to the same level. The next one in market cap is Ripple at about half of Ethereum and a total of 7 coins have a market cap over $1 billion.
  3. Bitcoin goes mainstream and uses Sidechains to deliver more complex functionality, leaving all other coins, including ETH in the dust and the Altcoin market crumbles.

Nobody can say which one will happen (despite some folks talking their book who will tell you what will happen with great certainty).

News Item 2: ICO Fever – party like its 1999.

The ICO in that news item was Gnosis, but I could have picked from many examples of ICOs raising big sums in very short time. Gnosis trades on Kraken and Poloniex and the price tripled from ICO at $30 to $90, giving it a market cap of almost $1 billion.

Decrypted: Is this the end of the VC pitch process and the journey from Sand Hill Road to Wall Street?   Gnosis used a Dutch Auction process that is very good for price discovery and which bulge bracket investment bankers don’t like, despite a successful Dutch Auction IPO for Google in 2004. A Dutch Auction process should make investors more comfortable as it is good for price discovery and is transparent and may become the norm for ICOs and ITOs as the market evolves towards a self-regulatory code of conduct for ITOs.

Our take: What does Gnosis do? Does anybody care as long as the price is going up? Real world traction made BTC and ETH rise long term, so while it does not matter for momentum traders/speculators, it does matter for investors. Gnosis is a prediction market. Is it better than Augur? Gnosis raised traditional VC. The fact that this is remarkable is what is news.  The VCs backing this include Polychain Capital, Blockchain Capital and Pantera Capital. Gnosis are planning an ICO later this year. I am not sure that traditional VC and ICO mix well. Does the VC get special terms and an inside track? Some of the funds investing in Gnosis raised their own fund via an ICO. That can mean it’s all a Ponzi (cue gloomy sounds from Eeyore) or it can signal a fundamental paradigm shift in innovation capital (cue excited sounds from Tigger).

News Item 3:  Second Act of Coinbase Co-Founder Launches without an ICO

Coinbase co-founder Fred Ehrsam launched a decentralized cryptocurrency exchange protocol called 0x. It went from white paper to functioning early-stage application in three months.

Decrypted: Last week we reported on the Coinbase outage and opined that “a centralized broker model like Coinbase and a decentralized network may not mix well.” So it is no surprise that a Coinbase co-founder should fund a decentralized exchange. 0x OTC is designed to let counterparties exchange tokens built using the ERC20 token standard (which we also reported on last week). Coin interoperability is a big deal. I cannot imagine coffee shops listing 400 Altcoins that they support.

Fred Ehrsam did NOT raise money via an ICO, but is signalling that he may do so later. He is a bankable entrepreneur who was presumably not short of VC interest, but he also has the cash and tech smarts to fund his own MVP.

Our take: The most fundamental shift is from the Centralized Internet to the Decentralized Internet. In the future we may look back on the 20 odd years from 1997 to 2017 as a brief period that we refer to as the Centralized Internet when vast sums were made by a very few people to when we returned to roots of the Internet, the Decentralized Internet. Coinbase co-founder Fred Ehrsam is on the right side of this big shift with his decentralized cryptocurrency exchange protocol called 0x. Coinbase, a Centralized Internet venture following the traditional Sand Hll Road to Wall Street journey is maybe on the wrong side of this shift; it will be interesting to see how Coinbase do with their next big raise.

Opinion: Will Regulation kill Bitcoin?

This week we link to an opinion from a another Greek who lives and breathes Bitcoin, Blockchain and Crypto called Ilias Louis Hatzis. In case you missed the reference to “another Greek”, I was referring to Andreas Antonopoulos. Of course, Daily Fintech has a lot of Greek input already in the form of famed Femtech leader, Efi Pylarinou.

Betteridge’s law of headlines states: “Any headline that ends in a question mark can be answered by the word no.” That is the conclusion of Ilias’s post which, after a review of the issues and regulatory initiatives around the world, concludes with:

“The best way to regulate it, is to allow Bitcoin and cryptocurrency exchanges to operate. Bitcoin companies can implement identity checks and reporting mechanisms for suspicious transactions, but aside from preventing illegal use of digital currency, regulatory frameworks can give room for various initiatives to adopt the use of Bitcoin and to thrive.”

Three years ago, in the summer of 2014, when I first started seriously exploring Bitcoin, Blockchain and Crypto, my explorations ended with the question “Who will create the iTunes of the Bitcoin era?

The basic idea was that something radical, free and illegal like Napster may be the disruptive catalyst, but the mainstream is more interested in useful, low cost and legal – like iTunes, Spotify and Netflix. The Internet is disruptive but using the Internet does not free you from abiding by the laws of the land. What has changed is that regulators and governments don’t have total freedom any more, because they face jurisdictional competition. We will be tracking how this dynamic plays out on The Other BBC News.

Bernard Lunn is a Fintech thought-leader and deal-maker. 

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