Andreessen talks about a lot of topics, and I won’t try to break it down for you. He has some intelligent thoughts about the past, present, and future especially around technology and startups. In addition, there is some good Bitcoin information that should help entrepreneurs in the broader Bitcoin/crypto/blockchain space quite a lot as well. It is definitely worth checking out. Here’s the podcast.
Princeton University is taking the lead on American Universities teaching students about Bitcoin. Their professors have already taught an online course in this space, and have now provided everyone with a free copy of their book. The best thing is, the lead is coming from their computer science department, and therefore their treatment of the subject is as it should be – teaching students about a new technology. The treatment of the subject in the course and in the book is definitely technical in nature, and provides a great overview of Bitcoin and cryptocurrencies from a technical perspective.
This, combined with Andreas’ book Mastering Bitcoin should give anyone enough knowledge to start working on Bitcoin and cryptocurrencies. Remember though that the book and course don’t cover things like how to integrate Bitcoin into your web application or other web-development topics, or even building on top of Bitcoin. The material is more towards you being able to create your own such system, or contributing to Bitcoin. If you’re ever wanted to contribute to Bitcoin Core (or Bitcoin Classic for that matter), then these two resources are all you will need to get started.
Also check out the Learn About Bitcoin section to get more resources that can help you on your journey to learn about Bitcoin and contribute to its dynamic ecosystem.
The big news last week was the company Digital Asset Holdings raising $50 million from a bunch of top-names in the financial industry. And yes, these are some of the top financial institutions in the world. Here’s a list: ABN AMRO, Accenture, ASX Limited, BNP Paribas, Broadridge Financial Solutions, Inc., Citi, CME Ventures, Deutsche Börse Group, ICAP, J.P. Morgan, Santander InnoVentures, The Depository Trust & Clearing Corporation (DTCC) and The PNC Financial Services Group.
Two things should stand out to you in this list. One is the presence of Accenture, which is the only non-financial services company in the space. Accenture is investing quite a lot into ‘blockchains’ and startups involved in this space, so keep an eye out on their moves. The second is a notable absence of Goldman Sachs, which has been very vocal in its support of both Bitcoin/blockchain and startups. The CEO of Digital Assets is a former JP Morgan executive. Don’t expect the entire financial industry to reach a consensus overnight and everyone’s happy using Digital Asset’s technology. That’s almost guaranteed not to happen.
Bitcoin to Blockchain to ‘Distributed Ledger Technology’
The other interesting thing to stand out from the press release is what it lacks. Firstly, there is not a single mention of Bitcoin (not very surprising). Secondly, there is no mention of blockchain from Digital Asset at all. The entire press release contains just one mention of blockchain, which is a quote from Accenture talking about “blockchain-enabled distributed ledgers”. The phrase “Distributed Ledger“, on the other hand, is mentioned 11 times in the press release. Interestingly, the press release contains quotes from all the institutions who invested in this round, and they too all use ‘Distributed Ledger Technology’ instead of the word ‘Blockchain’.
The industry has gone from Bitcoin to Blockchain to Digital Ledger Technology in fairly quick succession. The transition from Bitcoin to Blockchain is understandable – it is to include so-called ‘private blockchains’ that banks can use among themselves or internally within an organization. The transition from Blockchain to Distributed Ledger Technology is more interesting.
Digital Asset isn’t going to disclose the products they’re working on, so it is hard to say if there is any difference. My best guess would be a parallel creation of some sort of distributed file system like IPFS perhaps, that goes with a private blockchain, thus enabling not just the sharing of transaction-level information, but also other heavy data like documents.
Today, Gem, a Bitcoin API provider, raised $7.1m in its Series A round bringing the total money it raised to $10.4m. That’s a significant chunk of money for the California-based startup and a nice piece of news in 2016 for the Bitcoin economy. After all, another Bitcoin API company, Chain, raised a total of $43.3m and completed its series B raising $30m.
Also, it is not as if there is a shortage of Bitcoin APIs in the market – BitPay for example has several open sourced APIs into the Bitcoin network such as BitCore for getting data and statistics from the Bitcoin blockchain and Copay as a Bitcoin wallet. There are other options for developers too, such as BlockCypher to get data from the Bitcoin blockchain.
So why are Bitcoin APIs hot with investors again, pouring in scores of millions of dollars into these companies? The answer is, they are not – these companies are all pivoting into something more than just an API.
APIs Make Sense for Developers
From a developer perspective, Bitcoin APIs make a lot of sense. If you’re building an application that needs to look up the Bitcoins stored in a wallet, you can either do that through a one-line call to an API or download the entire Bitcoin blockchain, write your own parser and hope you’ve not made an error. Then, you need to keep the blockchain updated, so you’ll have to run a node.
Instead, these Bitcoin API services do all the hard work for you (presumably) and protect you from attacks, stale data, etc. so that instead of every small developer trying to reinvent how to get data off of the Bitcoin blockchain, they can instead just focus on building their application instead.
However, APIs are not too Profitable
Merely providing an API cannot be very profitable for the companies and won’t justify a $100m valuation. After all, companies in the Bitcoin space can provide these APIs with relatively low upkeep and therefore the business is fairly commoditized. It is hard to get revenue off of a product when a better capitalized rival is offering the same service for free.
Chain, which was one of the first Bitcoin API providers and one of the best funded startup in the Bitcoin space actually killed its original product of providing an (free) API to the Bitcoin blockchain for developers. It’s a shame, since they courted developers quite actively through conferences and other ways. Chain is now pivoting into ‘digital assets’ i.e. helping companies like NASDAQ track the shares that they issue on their private markets on the blockchain. Gem itself is looking to expand into the ‘blockchain economy’.
Note what’s common in all these – the blockchain. That’s where the next wave of investor interest is going into, and it is not necessarily going to be the Bitcoin blockchain, although many products that are actually live today use the Bitcoin blockchain for asset tracking using some kind of a colored-coin protocol. However, the language the companies are using is deliberate – read the Gem blog post if you want proof – “The excitement around blockchain technology is high”, “…great potential for new distributed ledgers…”, “…emergence of the blockchain economy…” etc.
It will be interesting to see how this progresses in the future. Venture capitalists are funding companies that provides the rails for developers to use. Presumably, behind the scenes, what happens is abstracted away from the developers, so it’s easy to switch to Bitcoin or another blockchain like Ethereum or a completely private blockchain like the banks are experimenting with. It’s something to take note of when Bitcoin API companies are expanding into ‘blockchain’.
As Bitcoin gains popularity as an alternate asset class, there are several ways how to invest in Bitcoin, but as an investor, it is important to note the pros and cons of each, and also learn to protect yourself. This should not be construed as an investment advice in Bitcoin. The post will just help you how to invest in Bitcoin if you’ve already decided to invest in it.
I assume you’ve already decided to invest in Bitcoin based on your research. Bitcoin is a lot of things to a lot of people – it is a currency that can be used to pay merchants, online and offline, and reduce transaction times to minutes instead of days with credit cards. Bitcoin is an asset class for investors looking to diversify their holdings. Bitcoin is ‘digital gold’ with predictable supply programmatically controlled, and can be a store of value during times of high inflation (think countries like Argentina or Venezuela). Bitcoin is a protocol for value transfer over the internet and enable new innovations in the ‘internet of things’ space and micropayments.
It is important to note that Bitcoin can be all of the things above, and that’s what it derives its value from. As an investor, you perhaps don’t need to know the intricate details of everything Bitcoin does, but it definitely helps to know, at a high level, why Bitcoin is valuable at all in the first place (this is, after all, the first step in the investment process).
Bitcoin as an Asset Class
Before learning how to invest in Bitcoin, it is important to formulate how you view your investment in Bitcoin. Remember that Bitcoin has historically been extremely volatile with wild price swings. If you can’t handle this, it is best to steer away from Bitcoin as an asset class. Also, keep in mind the investment time-frame that you’re looking at. Is it 1 year or 30 years? A lot of things can happen in long time-frames, especially in fast-changing technology fields.
It is also good to learn about the supply-side of Bitcoin. This will help you know the current inflation rate around Bitcoin. Even though ultimately only 21 million Bitcoins will ever be in existence, they are not all available today. They are created through a mining process (which is too big a topic to explain here), and the current rate is 25 Bitcoins about every 10 minutes. This corresponds to an inflation rate of around 9% per annum.
This rate is going to be cut in half sometime in the middle of 2016. Here’s a countdown, which will give you an approximate date. Unlike most other asset classes, Bitcoin’s inflation is known in advance, and there is no way to increase its supply outside of this schedule.
How to Invest in Bitcoin
The best way to invest in Bitcoin is, in my view, to directly buy Bitcoin. There are many well-established companies today that will sell you Bitcoin for dollars or Euros. If you’re in a country serviced by Coinbase (like United States, United Kingdom, most of Eurozone countries, Singapore), it’s easiest to buy from there. With Coinbase, you can buy Bitcoin directly from your bank account and store it in their online wallet, or have additional security in their vault. There are other options as well, depending on the country you’re in. See the page on Buy Bitcoin to find more options.
The next step is to determine if you want to hold your Bitcoins online with a provider like Coinbase or transfer them to your own wallet. The advantage of holding it in your own wallet is that you don’t have to worry about a company freezing your funds, or going out of business or anything else – you are in complete control of your Bitcoin and can spend them as you see fit. However, on the downside, it is very important to take good security precautions if you hold your own Bitcoins, because if you are careless and get hacked, you will lose all your Bitcoins with no protection or resources to help you regain your funds. If you plan to invest a lot of money in Bitcoins, consider buying a Bitcoin hardware wallet like Trezor or Ledger or KeepKey.
Another way to gain exposure to Bitcoin is through funds. This is not a very developed market yet, and therefore very illiquid. However, one big advantage is that you can hold it in such accounts as your IRA or retirement account, thus gaining a small exposure to Bitcoin for retirement accounts. GBTC is the only one available today in the US. The Winklevoss brothers are working towards a Bitcoin ETF but that’s not live yet.
Finally, remember never to invest more than you can afford to lose in a volatile, high-risk investment like Bitcoin.
The full effects of New York’s dreaded ‘BitLicense’ laws for startups are becoming more apparent as the deadline for compliance looms, with many Bitcoin startups and entrepreneurs closing their services to New York residents rather than spend hundreds of thousands of dollars trying to get a BitLicense. This move could have a profound effect on New York’s image, which wants to be a ‘fintech hub’ of the world, but the onerous regulations on startups make it an unattractive destination for entrepreneurs.
The biggest winners from New York’s loss could be other financial hubs like London, which have been far more welcoming of Bitcoin and cryptocurrency companies. In the US, states like California with huge venture capital funds’ presence might steal business away from New York. Catering to the East Coast, jurisdictions like Jersey might become attractive, considering its closeness to New York, which still remains a hub of traditional finance in the country.
BitLicense was issued by the New York Department of Financial Services (NYDFS) and championed by Ben Lawsky, who left the department shortly after issuing this regulation to get into private sector consulting. These regulations affect startups the most heavily and leave out the bigger banks and financial institutions, thus significantly raising costs of starting a company in this niche in New York, greatly benefiting in the incumbents and reducing competition in the marketplace.
Even seemingly well-funded startups have made the decision to leave New York rather than try and comply with the very expensive regulations. Bitfinex, the largest Bitcoin exchange by volume in USD which accounts for almost half the trading volume, has decided it is not worth their time and money to comply with BitLicense and will not service anyone from New York. Kraken, another Bitcoin and cryptocurrency exchange that was the first to trade Ethereum (ETH) has also decided to leave New York owing to BitLicense. Similarly, Poloniex, the largest altcoin exchange by volume has done the same.
The long-term effects of this regulation are still to be seen. If other states adopt a more sensible approach to regulating innovations in Bitcoin and cryptocurrency, it is very conceivable that startups will move to those states. Advocacy groups like Coin Center are heavily involved in helping law makers understand this new technology and how best to let it flourish without killing it with burdensome regulatory frameworks.
Can you create a settlement system on Bitcoin blockchain? It’s an important question, with consequences not just for the future of Bitcoin, but for the whole financial industry, and what we deem feasible in the securities industry currently.
Two big pieces of news came about in the last couple of months or so, which I feel got less attention than they deserved. The first one was a decision by NASDAQ private markets to move trading private securities to the Bitcoin blockchain, and the second was the issuance of a private bond by Overstock on the Bitcoin blockchain.
Each of these is important in its own way, showing that it is possible to settle and trade both stocks and bonds on the current Bitcoin blockchain, even without the many improvements coming to the protocol in the next few years.
Trading vs. Settlement
Current trading systems on Wall Street require extremely low levels of latency, especially in the High Frequency Trading (HFT) world. Even without that, trading engines need to be blazing fast and be able to handle anywhere from tens of thousands to several million trades per second. Bitcoin today, in contrast, has a throughput of 5-7 transactions per second, which means it is nowhere near the scale required if every trade is published on the blockchain.
However, after a trade happens, it needs to settle in the back office, which is in sharp contrast to the high trading execution. Most trades take at least 2 days to settle. The settlement process happens after the end of the trading day. This is where Bitcoin can help establish a superior technological solution than the current system.
A great book to understand what happens in the back office of securities transactions is After the Trade is Made by David Weiss, which I would recommend for any company working in the Bitcoin settlement space, any entrepreneurs working with Bitcoin-based settlement systems and anyone curious enough to learn the settlement process.
Beyond Currency: Bitcoin as a Settlement Platform
Bitcoin’s initial conception was as an online, decentralized currency, which is as easy to transfer as sending an email, thus negating the ideas of geographic closeness or extended trusted networks for commerce. The various innovations behind creating Bitcoin, however, have far reaching consequences beyond its use as a simple currency. Most notably, this includes the ability to have a decentralized database with consensus built into it in the form of economic incentives for participants in the network.
Once you look at Bitcoin beyond its first use case of a currency, it becomes clear that it can be used as a powerful settlement system, because it has the ability to reach a globally accepted consensus state, thus proving without doubt who owns what at a given point in time.
Therefore, if a Bitcoin were to represent not just a currency but 100 million stocks of a company (with each Satoshi representing one stock), then a trade could easily settle on the Bitcoin network with no disputes as to who (or rather which address) owns any number of stocks at a given point in time. This process makes this specific Bitcoin ‘special’, which is no longer the same as the rest of the Bitcoins, due to this value addition process.
As a final clarification, there has been an increasing trend in the media to talk of ‘blockchain’ instead of ‘Bitcoin’ as if the two were separable and as if one could separate out the ‘good parts of blockchain’ from the ‘bad parts of Bitcoin’. You cannot. However, if it helps in the change of perception, knock yourself out. It doesn’t change the underlying dynamics though.
Major Challenge: Corporate Actions
The Bitcoin protocol does allow for the creation of these very basic securities, simply by ‘coloring’ a Bitcoin to represent something other than currency, thus establishing a level of centralization to some Bitcoins (backed by the full faith of the company that says they represent what they represent, without which a satoshi is just a satoshi, not a stock in a company) and also destroying their fungibility in the process.
In addition, Bitcoin allows for the creation of smart contracts, which are essential for creating an online blockchain-based settlement system. However, to create a fully functioning settlement system in Bitcoin, the above process is not enough. This is because the process only takes into consideration the birth of the security. The challenging aspects are going to be in implementing corporate actions. And corporate actions can be tricky to implement with or without a blockchain.
What are corporate actions? Simply put, they are events that happen to a security (stock or bond) after it is born. The birth is actually the easy part – you can simply ‘color’ a coin to your liking, using protocols like Open Assets, or even push your tokens on a protocol like Counterparty (or NXT or other altcoins even). Corporate actions, however, affect the security after it is born and is ‘out there’ in the world.
Corporate actions for stocks can range simple cash dividends to spin-offs and split offs. They also encompass events like mergers and rights issues. Corporate actions for bonds can range from simple coupon payments to convertible bonds, call/put exercises, early redemption, tender offers, etc.
Finally, real-world issues like compliance, tax laws and reclaims, reporting requirements, and other specific jurisdictional legal quirks are essential to get right for any such settlement platform.
Futures, Forwards, Swaps, Options, MBS, CMO, CDO, CDS, and Others
In most cases, a robust smart contract system coupled with some levels of centralization (e.g. with regards to defining what a default event is, in case of a CDS) should be sufficient. However, there are plenty of very intricate nuances involved in most derivatives, that only the simplest ones are feasible at least in the near future with the tools that we currently have.
From a point of view of what is potentially possible, no one can say the state of technology in 20 years. It remains to be seen how blockchains evolve over time in terms of their technology and ability to codify a lot of these nuances, along with the willingness of the participants to use this technology.
It is important to remember that there are plenty of benefits in terms of having varying degrees of centralization. It is possible that better technological tools are made available to improve the existing infrastructure than Bitcoin and the blockchains, considering the degree of centralization already present in most securities transactions.
Near-Real Time Settlement
With Bitcoin, it is possible to have a settlement system that is near-real time. This is a major improvement over the current system that takes, in general, 2 days to settle a trade. Not all of this is due to obsolete technology, however, and it is important to understand this.
Bitcoin-based settlement systems can be quite powerful for peer-to-peer trading or cross-border trade settlement. The settlement process can be made cheaper and faster in these cases.
The Initial Push and Catalysts
There has been a very big push coming from the government agencies to make settlements faster, both for bank money transfers (ACH in the US) and securities. By making marginal improvements to the existing procedures, it is perhaps possible to settle a trade in T+1 (1 day after the trade) instead of T+2 (2 days after the trade).
However, to settle in near-real time, such as an hour, the technology needs to be radically rethought. A Bitcoin-based solution is certainly one of the most promising solutions to significantly improving the system in terms of settlement times. This also comes with additional benefits such as improved transparency, ability to create regulatory rules in the contract itself, thus obviating many regulatory rules, and cheaper trade settlement especially in a global context.
Cost savings can be another very important push towards moving to a blockchain based settlement system. This is especially true for cross-border securities transactions. If you’re a US resident and wish to purchase a UK listed company, you’ll likely have to go through the American Depository Receipts/Shares (ADR/ADS) route. However, this is a very expensive process. For example, JP Morgan is the Depository and Transfer Agent for BP shares (BP trades in the UK) and they charge $0.05 per ADS creation. This fee structure is fairly standard in the industry.
Bitcoin Value vs. Blockchain Security
It is a common media theme to talk of ‘blockchain’ instead of ‘Bitcoin’ while referring to any use of the Bitcoin blockchain beyond currency. However, it is important to note that any such use is limited in its utility and scope by the market capitalization and power of the Bitcoin blockchain. It is unfeasible to expect the blockchain to track and settle a trillion dollars worth of securities, if its underlying value is 2 billion dollars.
Price and utility need to move hand in hand. If the total value of Bitcoins in circulation is significantly less than the assets represented on it, there is increased risk and probability of a 51% attack, thus invalidating a lot of previously settled transactions.