Why London could become the Bitcoin capital of the world

Editor’s Note: this is the 8th post on Daily Fintech, written in 2014 – before all the political craziness of Brexit

To give our authors a break over the holidays, we are re-posting from our archive of over 1,000 articles. Rather than pick favourites we elected to simply repost the first 8 articles (as that was over 5 years ago you may have missed them; we were pretty unknown then). 

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Fresh insights will be coming from our knowledge bakery tomorrow.

This is one of a series called Explorations down the Bitcoin rabbit hole.

First, my bias. I am a Brit. When I left the UK in 1990, the start up scene was dismal, new ideas were greeted with skepticism and the status quo was glorified. It is a great pleasure to see that point of view so totally reversed now. There is a vibrancy, optimism and big ambition change-the-world thinking that is “oh dear, so Unbritish”.

The UK tech scene has had false starts before. 8 years ago I was writing about how innovation was going global and yet Silicon Valley still dominates to an extent that I did not envisage when I wrote this post on ReadWrite in 2007.

I think this story about London as a leading global Fintech/Bitcoin center has legs for 3 reasons:

  1. Critical mass of techies and rich people. Paul Graham of Y Combinator fame famously said that all you need for an innovation center is (i paraphrase) techies and rich people. There is one caveat. The rich people must have made their money from the domain you are asking them to invest in. If the rich person made their money in property or manufacturing, a digital startup just looks ridiculous. London has plenty of people who made their money in Finance. They know that even the most venerable institutions are “data centers with fancy lobbies”, so a new tech powered innovation is not too big a stretch for them.
  2. A light regulatory touch. Compare what the Cameron government is proposing vs what the New York State Department of Financial Services has proposed. It is clearly a fine line to walk. It is counterproductive if a center becomes a haven for scamsters and consumers to lose a lot of money. Bitcoin is a global phenomenon and many Bitcoin startups have global teams who can decide where they want to be based and regulation (along with talent and capital) is key to that decision. Regulation to protect consumers is good. Regulation to protect incumbents from competition is bad. New York has a lot of incumbents that certainly want protection; if they succeed in getting it, London will have a playing field tilted in their favor.
  3. Talent with the right mix of domain expertise and deep tech. Fintech needs both. Deep tech expertise can be found in any location with good Computer Science colleges. Fintech startups need those engineers in the same room with people who understand the nuances of things like credit rating, derivatives, exchanges, asset management and so on. The devil is in the details that sit at the intersection of both deep tech and. domain expertise.

I see three “straws in the wind” to indicate that this is happening now:

  1. MeetUp attendance for hot new Bitcoin 2.0 platforms such as Ethereum. These could be huge or they could be flashes in the pan. What matters is how the techies are voting with their time. London is doing well on that score.
  2. The VC funding for Bitcoin startups. The numbers from Coinbase show Europe ahead of Asia in Q2 ($30.9 vs $20.8). This is still a long, long way from the $186m for America and I would like to see the regional numbers (e.g NY vs Valley and London vs Berlin) but I suspect that London is far ahead of any other European center. The Valley will always score on access to big Funds. What matters is London vs New York i.e two centers with deep Financial Services domain skills and networks.
  3. Big Silicon Valley Funds such as Accel see the trend lines and are setting up in London or strengthening their operations.

This is one of a series called Explorations down the Bitcoin rabbit hole

 

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My top 11 songs about money

Daily Fintech is about the business of money, so for some light relief on New Year’s Day here are my top 11 songs about money:

The Romantic view:

 

A slightly more jaded romantic view:

 

The practical view:

 

Anticipating derivatives (“you never give me your money, you just give me your funny paper):

 

What we all want:

 

Jaded realism:

 

The yuppie anthem:

 

Sadly real: 

Resisting the sadly real:

 

Celebrating the practical: 

 

Ask and ye shall receive:

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Bitcoin VC Funding is now over 30% of Fintech and catching up fast

Editor’s Note: this is the 7th post on Daily Fintech, written in 2014 – to close out 2019. Happy New Year to our Western readers

To give our authors a break over the holidays, we are re-posting from our archive of over 1,000 articles. Rather than pick favourites we elected to simply repost the first 8 articles (as that was over 5 years ago you may have missed them; we were pretty unknown then). 

As we close out 2019, make a resolution to be smarter about Fintech in 2020 by subscribing for just US$143 a year (= $0.39 per day). You will get all our fresh daily insights and participate in our forum. You can also read our archives with over 1,000 articles, an example of which you are reading from over 5 years ago.

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This is one of a series called Explorations down the Bitcoin rabbit hole.

Actually this understates it, but more on that later. First the basics. I looked at data from Coindesk on Bitcoin VC funding and data from CB Insights on Fintech.

The Coindesk data is for Q2 and the CB Insights data is for 2013, so I multiplied the Coindesk data by 4 to get an annual run rate of $960m vs total Fintech over $3,000m. Thus the 30% headline number.

This understates the Bitcoin number. Where would we record the pre-mining that funds a lot of Bitcoin 2.0 start-ups?

However the bigger story is around momentum. Bitcoin startups only started to get serious money in the last 12-18 months. As some of these like Coinbase and Bitpay get real traction, this will pull in more funding. More importantly, the Bitcoin 2.0 platforms such as Ethereum, Maidsafe and Counterparty are getting funded through pre-mining and they are platforms to attack Fintech markets well beyond what we narrowly think of as Bitcoin today.

My guess is that if did the same analysis in Q4 of 2014, the Bitcoin run rate would be closer to 50% of total Fintech. Some time during 2015, this analysis will no longer be useful as most Fintech startups will use Blockchain technology in some way. By 2016, it will be like saying “we use the cloud”.

This is one of a series called Explorations down the Bitcoin rabbit hole.

As we close out 2019, make a resolution to be smarter about Fintech in 2020 by subscribing for just US$143 a year (= $0.39 per day). You will get all our fresh daily insights and participate in our forum. You can also read our archives with over 1,000 articles, an example of which you are reading from over 5 years ago.

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What kind of year will 2020 be for Bitcoin?

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The new year will shape up to be one of the brightest years for Bitcoin and the cryptocurrency industry. Not to be misunderstood, this is not a price prediction. I expect 2020 to be a year the industry matures at an accelerated pace. On the crypto-native side, we will see continued innovative technical breakthroughs. On the institutional side, we can expect an increase in sophistication, in terms of education, infrastructure and more attractive product offerings. Bitcoin has demonstrated the ability to bounce back from almost anything. The first decade was defined by Bitcoin, but the next will define which cryptocurrency emerges to rival traditional currencies. 

Ilias Louis Hatzis is the Founder at Mercato Blockchain Corporation AG and a weekly columnist at DailyFintech.com.

For those of you that don’t follow the ups and downs of Bitcoin, you probably missed how terrible 2018 was, with the price falling by 83 percent from a historical all-time high in late 2017.  This year has been a rebound year, After the first three months of the year, we’ve seen a steady recovery take place, with increasing optimism returning to the market.

As we are about to start the new year and Bitcoin’s second decade, let not forget that in its first decade, Bitcoin has been the best performing asset making unimaginable returns for investors.

What we’ve seen in 2019 is a continued evolution, that’s been happening for some years now. While the crypto industry is still in a prototype state and doesn’t scale well for the most part, we are now starting to see the beginning of scaling. These last 10 years have really been about developing a sufficient amount of bridges, roads and tunnels, the underlying infrastructure to make cryptocurrencies available to more and more people.

We now have the infrastructure to launch scalable decentralized applications on blockchain. We have blockchains that can handle large user bases, with low latency, little friction and zero fees. Now we can build just about anything on blockchain, that we can build on the traditional Internet. We are entering a period where the focus will shift to building services and protocols on top of the existing Bitcoin layer, by a new crop of entrepreneurs and startups.

The big event that’s coming up in May 2020, the “halving”, will be different than in the past. Every four years when the halving happens, the block reward shrinks by 50 percent. But this time it will be even more important, because of the level of maturity the industry has compiled. The diminished new supply of coins will mean that the supply and demand equation will improve. But because investors already know when it’s going to happen, there’s already been some movement in preparation, so I don’t think it will have the impact that most people think it will.

I feel more excited, much more than anytime in the last 18 months, because it feels like we are picking up momentum. Bitcoin is up this week, although it’s been down over the last month or so, but I think we are seeing a level of momentum that’s been building up for the most part of 2019. Detractors have become advocates, big money has been coming in, big tech is taking its first stab at it and governments are fueling their rockets. It feels like everyone’s putting on their jumpsuits, getting ready to take off, something we haven’t seen since 2017.

While 2017 was a crazy year with projects raising absurd amounts of money through token sales, 2018 was a down year and in 2019 it became much harder, resulting in less and less garbage. While there is some still out there, investors are getting much more discerning, being able to spot the good from the bad. I expect token sales and IEOs will rekindle this year, but with the bottom chunk of the market dropping out and less projects raising money this way, the good one’s will be in a much better position to reach their goals.

In 2020, we will continue to see cryptocurrency payments gain momentum. More governments and big businesses will announce their own cryptocurrencies, and while this legitimizes the industry, we should be skeptical. Poorly executed crypto projects will continue to be weeded out. We’ll see more and more cryptocurrencies that popped up in 2017 fade away, going to zero. Bitcoin’s halving in May could spike the price. By now Bitcoin has proven itself as a long-term investment and store of value, so expect people that believe to continue to HODL, regardless of price fluctuations.

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What will trigger Wall Street Adoption of Bitcoin?

Editor’s Note: this is the 6th post on Daily Fintech, written in 2014 – well before the ICO wild days of 2017.

To give our authors a break over the holidays, we are re-posting from our archive of over 1,000 articles. Rather than pick favourites we elected to simply repost the first 8 articles (as that was over 5 years ago you may have missed them; we were pretty unknown then). 

As we close out 2019, make a resolution to be smarter about Fintech in 2020 by subscribing for just US$143 a year (= $0.39 per day). You will get all our fresh daily insights and participate in our forum. You can also read our archives with over 1,000 articles, an example of which you are reading from over 5 years ago.

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This is one of a series called Explorations down the Bitcoin rabbit hole.

Bitcoin is:

1. A payment network

2. A currency

3. A store of value.

So far I have focused on 1 & 2. In this post, I am focused on 3.

Call it a currency or call it a commodity (as the IRS does), the store of value question is simply “will I get a better risk-adjusted total return than other alternatives?”

Let’s parse that question for Bitcoin:

  • “Total return”. This means capital appreciation PLUS Interest (Bonds) and Dividends (Equity). You receive no Interest or Dividends if you hold Bitcoin. Indeed the cost of Cold Storage makes it a cost to own Bitcoin.
  • “risk-adjusted”. Bitcoin is more like Gold, which also pays no Interest or Dividend and you pay to store it in a vault. Gold has thousands of years of price history, Bitcoin about 5. It is inconceivable that Gold value will decline to zero. It is possible that Bitcoin will decline to zero; unlikely but possible.
  • It is inconceivable to forecast a 10x or 100x return for Gold but one can paint many scenarios in which the price of Bitcoin will be 10x more than it is today (which makes it a 100x return for early speculators and miners).
  • So, you might lose everything or you might get a 10x or 100x return. Does that sound familiar? Or course it does, this is like investing in tech startups.
  • If this is like investing in startups, what stage is the deal? Is this Seed or Series A or B or C or is it IPO stage? I don’t think it is Seed stage. That was investing in Bitcoin in 2010. Today it is more like a Series A deal. You probably won’t lose everything at a Series A stage (a lot of the risk has been taken out by the time a venture gets to Series A). So the upside is also more constrained. Some ventures do get a 100x return from Series A valuation but 10x is a more reasonable expectation.

It is easy to paint the scenario in which Bitcoin declines to zero. Merchant adoption stalls and a better cyber currency emerges to replace Bitcoin. To paint the 10x or more picture, we have to imagine things like:

  1. People in a significant sized economy with a failing currency (think Argentina, more than Zimbabwe which is too small an economy to make a difference) decide to use Bitcoin rather than US$. This sounds plausible enough until you try to imagine the actual scene where the black market guys exchange tourist dollars for Bitcoins and then the tourist offers Bitcoins to the vendor.
  2. Rich people worried about taxation, store their money offshore in Bitcoin rather than in US$. Again this sounds plausible, except for one inconvenient fact, which is that this is viewed as money laundering in most jurisdictions i.e. illegal. If somebody does this illegally, they won’t want to keep it in Bitcoin, they will want to turn it back to Fiat and get Interest and Dividends.
  3. Gold bugs become Bitcoin hoarders. Despite a libertarian bent to both communities, I see this as unlikely. Gold bugs love the fact that it is physical and has thousands of years of history.

If any of the above scenarios pans out, fast money such as Hedge Funds and retail currency speculators will pile into Bitcoin and then there will be “meltup” in price. That will lead to more hoarding and so more price rises.

What I find hard to see is what sort of investor will feel drawn to this type of risk/return. If you like 10x or 100X upside with the possibility of 100% loss, you will be drawn to investing in startups.

If Bitcoin succeeds as a payment network, it won’t have much impact on the price, it will just be an enabler for lower cost payments. For bitcoin to succeed as a currency it needs to become boring and non-volatile, floating up a down compared to Fiat currencies like USD floats up and down compared to EUR. Speculators will find something else to play with.

For Wall Street to get really comfortable with investing in bitcoin, they will want an ability to short bitcoin. That of course will help to stabilize the price and ensure that it is less volatile, which will make it less attractive to speculators.

Of course, the reality is that Wall Street does not need to get comfortable with investing in Bitcoin, they just need others to get comfortable. If Wall Street firms can earn fees and commissions from selling Bitcoin, they will do so and many will become rich from doing this even if investors actually lose money (“where are the customer’s yachts?”). These periods of irrational investing last longer than a rational person might expect, but they do eventually implode.

Personally, I prefer the risk/reward of tech startups and I think that Bitcoin the payment network and bitcoin the currency is fundamentally at odds with the volatility that speculators love. If Bitcoin does become a viable currency, it can be traded just like any other currency and will have similar levels of volatility, which still leaves plenty of room for intra day trading to make money.

This is one of a series called Explorations down the Bitcoin rabbit hole.

As we close out 2019, make a resolution to be smarter about Fintech in 2020 by subscribing for just US$143 a year (= $0.39 per day). You will get all our fresh daily insights and participate in our forum. You can also read our archives with over 1,000 articles, an example of which you are reading from over 5 years ago.

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Bitcoin transaction volume through merchants is the single most important metric in the Bitcoin economy

Editor’s Note: this is the 5th post on Daily Fintech, written in 2014 – sadly not much progress on this front in 5 years.

To give our authors a break over the holidays, we are re-posting from our archive of over 1,000 articles. Rather than pick favourites we elected to simply repost the first 8 articles (as that was over 5 years ago you may have missed them; we were pretty unknown then). 

As we close out 2019, make a resolution to be smarter about Fintech in 2020 by subscribing for just US$143 a year (= $0.39 per day). You will get all our fresh daily insights and participate in our forum. You can also read our archives with over 1,000 articles, an example of which you are reading from over 5 years ago.

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The future of Bitcoin as an alternative currency is tied to one simple metric – merchant acceptance and the velocity of money through those merchants.

 

Bitcoin has potential as a) a payment network, b) a store of value that you can invest/speculate in and c) a currency. This article is only about bitcoin as a currency.

 

Like others before me, I have become more positive about the future of bitcoin the more that I learn about it. A few months ago I would have leaned to the view that Bitcoin the payment network had a great future but that bitcoin the currency would be a footnote in history. Today I am more positive, because the trend lines and motivations around merchant acceptance are positive.

 

If mainstream merchants accept bitcoin, it will thrive. If not, anybody owning bitcoin will need to first transfer bitcoin into Fiat currency and the regulatory off ramp problem will kill it as an alternative currency. Without mainstream merchant acceptance, bitcoin the currency will live on only in the shadow economy and become a footnote in history. Forget the headlines about bitcoin price fluctuations or the latest VC deal; these are “noise on the line” compared to merchant acceptance.

 

We have been through two phases of merchant acceptance and we may be about to start the third phase (phases overlap i.e. one does not have to end before another one begins):

 

  • Phase 1. Illegal online transactions, made famous by Silk Road. This got some media attention and confirms the old saying that, “there is no such thing as bad press”.

 

  • Phase 2. Attracting rich Bitcorati for legal products. This is the phase we are in today. The merchant logic here is very simple. If a rich person wants to pay me in some unusual currency, I am motivated to accept that currency. Enough people got rich speculating in bitcoin or mining bitcoin in the early days for this to be a real niche market. These Bitcorati are bitcoin enthusiasts, so if they see two objects they desire equally and one says “we accept bitcoin” then that rich Bitcorati will choose the merchant who accepts bitcoin. This is fundamentally different from phase 1 because a) it is legal and b) we will start to see merchant success stories akin to the merchants who were early adopters on the Internet.

 

The enabler for phase 2 is the elimination of the volatility problem. The same volatility that is a boon for speculators is a showstopper issue for merchants. There is no value in getting rid of those hated 2-3% Credit Card fees if the bitcoin price moves more than that before you can use it to pay your suppliers and live your life.

 

The two leaders in processing Bitcoin for merchants are Coinbase and Bitpay. At time of writing both claim 35,000 merchants. Both have raised a lot of money from top tier investors. Their pitch to merchants is that accepting Bitcoin is as easy as accepting a credit card – with lower fees. Coinbase’s pitch to merchants for example:

 

“When a sale is made, you can instantly sell the bitcoin received to Coinbase to avoid exposure to bitcoin volatility.”

 

A leader in merchant adoption could be the first VC backed Bitcoin success, analogous to the Netscape moment. An IPO would give the venture mainstream visibility and kick-start the next wave of Bitcoin innovation, funding and adoption. It’s a pity that the bar is so much higher for an IPO than it was 20 years ago, but that is another story.

 

The tipping point is simple. It comes when merchants switch from asking, “why should I bother accepting bitcoin?” to, “is there any good reason not to accept bitcoin?” When that happens and consumers see the bitcoin symbol on more merchants checkout (online or offline) they will be more interested in paying by bitcoin.

 

2014 has been a good year so far for merchant adoption with the following big e-commerce players announcing that they are accepting Bitcoin – Overstock, Dell, DISH, TigerDirect and Newegg. Overstock was the bridge from Phase 1 to Phase 2. Patrick Byrne, the founder CEO of Overstock is known as a critic of the establishment while running a large mainstream business.

 

We have to move beyond the Bitcorati to get to the tipping point. Somebody who has not got Bitcoins from mining or speculating early in the game has to be motivated to buy using bitcoin instead of a credit card. I have been talking to some small merchants to ask them what might trigger them to accept bitcoin. These are merchants who do not have an obvious Bitcorati customer base; some may do so and the merchant won’t know until they try which speaks to the “is there any good reason not to accept bitcoin?” story. Most had been totally put off Bitcoin due to the volatility issue and the story that the volatility problem has been fixed has not yet reached them.

 

However in their busy lives, there still has to be a good reason to take the time and trouble to accept bitcoin. One story that made these merchants think about accepting bitcoin came up a couple of times and this could become Phase 3 of bitcoin merchant adoption:

 

  • Phase 3. Micro-multinationals who want to accept international customers. Big businesses have already got doing business globally nailed. Small businesses don’t have very good solutions that are a) easy to implement b) inexpensive. Getting international payments via credit cards is easy but expensive; you pay a lot for the currency transfer back to your home currency. You could accept payment in foreign currencies but that gets complex. First, you have to decide which foreign currencies to offer and Murphy’s Law says that the one currency that you omitted is the one that your ideal customer wants to use (an American merchant may enable EUR and GBP and miss the Swiss customer who really wanted that high margin upmarket product as long as she can pay in CHF). Then you will have the hassle of getting your bank to accept multiple deposits in foreign currencies and when they do that you will find that you lose a lot when your bank converts it back to your home currency.

 

Doing this via bitcoin won’t be simple, but at least Bitcoin will be solving a real problem for merchants. Nobody has sized the micro-multinational market, but anecdotally it is large and tools such as VOIP now make it more natural to transact across borders, so this is likely to increase. This Phase is important because it will get more consumers (who have not mined or speculated) to use bitcoin. Lets say a consumer wants to buy something online that is priced in a foreign currency. If consumers see a simple calculator that tells them how much cheaper it is to pay via bitcoin than their credit card or debit card and it looked as easy as using their credit or debit card, consumers may give it a go.

  • Phase 4. When Bitcoin becomes universal, just another option alongside cash and the usual Credit Cards in main street shops and e-commerce sites. To look at how could Bitcoin to cross the chasm from early adopters (Bitcorati and Micro-multinationals) to a universal payment option, we need to move into some speculative futurology and understand the switchover to EMV Chip and Pin cards in America. This switchover happened in Europe before merchants had any interest in Bitcoin, but will be happening in America just as the Bitcoin story gets more mainstream attention. The switchover to EMV Chip and Pin cards will happen in America for the simple reason that merchants will become liable for fraud from October 2015. Magnetic stripe cards are terribly insecure, particularly if merchants don’t even check the signature. When the POS terminal vendor comes calling about the dreaded switchover, a few merchants will ask them “can I accept Bitcoin with this new device?” It is a logical question. Merchants don’t know if Bitcoin will take off but they would feel annoyed if it did and their neighboring store was taking orders from their Bitcoin-enabled POS terminal while they were stuck in the past. So it is likely that some POS terminal vendors will add bitcoin to their functional checklist. If this happens we will cross the chasm, go past the tipping point or whatever other analogy we use for Bitcoin changing the world. There is a lot of money at stake in this switchover and the established payment companies will be torn between lowering their fees in response to the Bitcoin threat and fighting it at the regulatory level.

 

Moving from speculative futurology to real traction today, there may be a hoarding problem. Adoption is one thing, but what really matters is transaction volume (what economists call velocity of money). I asked both Coinbase and Bitpay to point me towards any data on this. Coinbase responded quickly saying “we don’t share stats around bitcoin transactions”. Bitpay revealed that they “process over $1 million per day in bitcoin transactions” and pointed me towards the Coinmetrics site which shows Daily Transaction Volume ($ value) and Daily Transaction Value. The Daily Transaction Volume at about $44 million is tiny compared to $16 BILLION for Visa; its no surprise that Bitcoin has a long way to go. Looking at the trend-lines shows some spikes that I will be digging into in a future post (I want to find out what triggers these spikes).

 

My next post is about bitcoin as a store of value ie as an asset that you invest in/speculate in hoping that it will go up in price. This is related to transaction volume because one reason for lack of volume is hoarding by people who own bitcoin.

As we close out 2019, make a resolution to be smarter about Fintech in 2020 by subscribing for just US$143 a year (= $0.39 per day). You will get all our fresh daily insights and participate in our forum. You can also read our archives with over 1,000 articles, an example of which you are reading from over 5 years ago.

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The real value of Bitcoin is in the P2P stack

Editor’s Note: this is the 4th post on Daily Fintech, written in 2014 – well before the ICO wild days of 2017.

To give our authors a break over the holidays, we are re-posting from our archive of over 1,000 articles. Rather than pick favourites we elected to simply  repost the first 8 articles (as that was over 5 years ago you may have missed them; we were pretty unknown then). 

As we close out 2019, make a resolution to be smarter about Fintech in 2020 by subscribing for just US$143 a year (= $0.39 per day). You will get all our fresh daily insights and participate in our forum. You can also read our archives with over 1,000 articles, an example of which you are reading from over 5 years ago.

We look forward to welcoming you to the Daily Fintech membership community today!

This is one of a series called Explorations down the BItcoin rabbit hole.

Will developers use Ripple, Ethereum, Maidsafe or Open Transactions or some combination to build the killer apps of the Bitcoin era?

As I started down the road to understanding Bitcoin, one of the most confusing things was distinguishing between a payment network (“Bitcoin” upper case) and a currency unit (“bitcoin” lower case). That is now the first thing I explain to people who ask me about bitcoin.

It is lower case bitcoin – the currency – that has the media attention. It is simple enough to understand; it could be like gold or tulips or a reserve currency that replaces the US$ for international trade. It could be a currency or a commodity. Whatever it turns out to be (probably none of the above because the future always surprises) everybody understands the concept of a currency or a commodity.

It is possible that lower case bitcoin – the currency – may not change the world. For the bear case, read Felix Salmon’s post and for the bull case read Ben Horowitz’s rebuttal annotated to his post. They set up a bet:

Five years from now, in January, 2019, we’ll poll a representative sample of Americans. If 10 percent or more say they have used Bitcoin to buy something in the past month, Ben wins. If it’s fewer than 10 percent, Felix wins.

Even if bitcoin the currency becomes a footnote in history, it is possible that Bitcoin the payment network based on Blockchain technology may change the world. This is what has VCs excited. A new payment network could not only disrupt the global financial services business (for good or bad depending on your point of view). It could also return the Internet to its roots as a decentralized P2P system (aka “re-decentralization”). A decade from now, centralized cloud servers may be seen as a footnote in the history of the Internet.

For this to happen, we will need to see platforms that make it really simple for developers to create applications that reside on the unused cycles of all of our machines in order to deliver value to us in the way that Skype or Bit Torrent does.

The emerging P2P Blockchain technology stack

This got me exploring technologies that are sometimes tagged Crypto 2.0 or Bitcoin 2.0, such as Ripple, Ethereum, Maidsafe and Open Transactions. I prefer to think of them as an emerging Bitcoin stack (capital B, used for more than bitcoin the currency). If Bitcoin is as revolutionary as many believe, this stack will be at least as important as the Wintel stack that ushered in the modern digital age.

Before diving into these platforms and the sometimes-heated debates between the adherents, it is worth reading the original Satoshi White Paper. He envisaged:

“a solution to the double-spending problem using a peer-to-peer network”

“Double-spending” is the problem created by the fact that anything digital can be copied (for almost no cost). Many ventures have used this perfect copy machine capability; it’s great for communications and media. However, for anything involving financial assets, this is a problem; if I own this asset, you do not own it. If you can simply copy the record that says that I own it, then I regard that as stealing. As anybody involved in cybersecurity will tell you, anything digital that is connected to the Internet can be copied i.e. stolen.

Satoshi’s solution was to have a cryptographically verified record of each transaction stored on every computer in a P2P network, which he called the “Blockchain”. The Blockchain is fully distributed; it sits on every machine in the network. That is how the double-spending problem is solved and trust is enabled. You can “see” all the transactions. The “mining” concept is simply a way to financially motivate people to use their compute cycles to verify transactions.

Many consumers have a strange image of peer-to-peer networks. They either see something illegal and piratical like Napster or they use something every day like Skype without realizing that it is peer-to-peer. That is probably the way that the Internet will return to its peer-to-peer roots; consumers will trust the Cloud and the Cloud will move from centralized servers to peer-to-peer networks. What is a seamless transition for consumers – the same product but just cheaper – will be a revolutionary change in the IT industry. Bitcoin and the Blockchain will play a key role in this as people start to grasp the strange notion that it is trustworthy precisely because it is peer to peer. This goes against all our 20th century faith in centralized institutions.

Who will be the Red Hat of the Blockchain era?

Any platform will have to be open source. Thus the question is who will be the Red Hat of the Blockchain era?

Nobody wants “one Blockchain to rule them all”. Nobody wants to see this critical layer of the new financial services stack dominated by one company. Yet the logic of peer to peer will tend towards network effects and a winner takes all market (just like it did in the Wintel, Google and Facebook eras). Consumers will have to trust something enough to accept a download of code that will have control over their machine; this is a scary proposition and a level of trust that people won’t give to many companies.

So the prize at this platform layer is huge.

Building Internet scale decentralized P2P systems is technically really, really hard. Ask the guys who built Skype. Building a payment system is far harder than a VOIP system because the risk of loss is so much higher. Some noise on the line that forces you to ask your buddy to repeat something is OK and a small price to pay for getting something free; losing some money through a technical glitch is not OK. It is a hard technical problem because you have to deploy to millions of machines of varying power and type that are only intermittently connected to the Internet and deliver a service that is as fast and reliable as the centralized server based competition. This is not something that your average Ruby on Rails or Javascript developer can do. Yet, for the Internet to return to its roots as a decentralized P2P system, we will need the platforms and tools that make it as easy to build and deploy to a decentralized P2P network as it is to build and deploy to AWS or the machine in your closet.

To understand this emerging stack, I started by interviewed people from two decentralized development platforms that use Blockchain concepts: Ethereum and Maidsafe. Warning, bleeding edge alert, these platforms are not yet ready for live applications; despite this they have many developers spending time on them because the prize, if they can deliver on the promise, is very big.

First, I wanted to know if Ethereum and Maidsafe are competitors. It’s an obvious question that is being asked in Google searches and Bitcoin related forums, because they are both positioned as Blockchain related tools. Ethereum pitches itself as a full stack platform with a “logic layer” and a “storage layer”. However, as the Ethereum storage layer is based on Bit Torrent, Ethereum see their core competency in the logic layer and so they make friendly noises about Maidsafe which positions itself at the storage layer. Maidsafe concurred on this point about being complementary, not competitive. This sounds like a classic “stack” emerging and that’s OK, as long as layers in a stack don’t create programming complexity or latency.

This does not mean that all is happy talk in this Blockchain platform space. Asked to comment about Ripple (funded by big VC money), Stephan Tual of Ethereum put it down as “14 lines of code in Ethereum”.

I did not have time to interview Ripple before publication and I am sure that they would dispute Ethereum’s view. My perspective from online research is that Ripple is positioned higher up the stack than Ethereum. You might not use Ripple to build a whole new system but you might use it to power a consumer-facing mobile app. It seems that Ripple positions itself more to serve existing banks than it does to serve new ventures. To be fair in any discussion of Ripple vs Ethereum one should point out that Ripple has already got a product in the market, while Ethereum is hoping to release at the end of 2014.

The “sharing economy” is built on trust and that should be distributed

The most obvious competitor to Maidsafe technically is Cleversafe. Both “shred” your data and put it on computers controlled by users in the network; the data is reassembled when you need it. This enables lower cost services, because the provider does not need to pay for servers; in fact Maidsafe promises to pay users for the privilege of using their computer’s storage. Imagine a Dropbox type service that paid you!

Seen in this way, Maidsafe and Ethereum are really a part of the sharing economy, like AirBnB or Uber. You share your compute cycles like you share your spare bedroom or your car. When pressed to come up with the sort of applications that people are building on top of Ethereum, Stephan Tual talked about these kind of sharing economy services. This makes sense because the Ethereum logic layer is all about Smart Contracts (something that knows about a financial asset as well as changes related to that financial asset, such as a change of ownership) and the sharing economy is all about lots of contracts that need to be managed efficiently.

The lower cost of storing data in P2P networks has not been compelling, because Moore’s Law has ensured that costs are falling anyway; there is not the kind of massive cost arbitrage that enabled Skype to thrive. The other driver is privacy/security, because there is no centralized server to attack and sniffing the network will only get the shredded pieces of data. However, while many consumers feel like they should be concerned with privacy/security, few are willing to pay in money or time to ensure greater privacy/security. The compelling use-case for P2P decentralized storage has yet to emerge; both Maidsafe and Cleversafe have been working on this for nearly 10 years.

However, Blockchain related applications must have strong privacy/security because they relate to financial assets. A pragmatic mainstream consumer reaction goes along these lines:

“I am really not too worried if somebody wants to snoop on my chatter with friends and family or to understand my shopping habits; but I am concerned if they can steal my financial assets”.

Blockchain applications are all about financial assets, something that you own that has value. Banks currently store these assets and spend a lot of money on privacy/security. The promise of the Blockchain is that anybody can build systems that store financial assets; for that to come to reality they must have strong privacy/security controls.

There are many financial processes we go through as consumers that are klunky, paper-driven, time-consuming and expensive. Which of these could be replaced by systems using Smart Contracts? Will we see more efficient (aka lower cost) versions of existing services such as AirBnB or lending applications? Or will totally new services emerge that are only possible because of the Blockchain? The history of innovation indicates the latter scenario, but as always only time will tell. In short, the killer app for the Blockchain is out there but if anybody knows what it is, they are not telling.

There is so much at stake that developers looking to commit to one of these platforms spend a lot of time figuring out whether the platform is truly open

This led me to look at Open Transactions. I did not have time to interview them. I suspect that I would need more technical chops to understand it. I come at this as a Fintech entrepreneur and adviser who is comfortable working at the intersection of bleeding edge and leading edge, but I am not a hands-on developer. It is possible that a technical developer would opt for Open Transactions rather than Ethereum and it is possible that they serve different needs. There are usually trade off decisions between time to market and flexibility and from my perspective Ethereum looks like they have the trade off about right.

But, it is still really early days in this game and we are all learning every day Please tell me in comments if you have had experience with any of these technologies or know of any other platforms that I have missed.

This is one of a series called Explorations down the Bitcoin rabbit hole.

The post The real value of Bitcoin is in the P2P stack appeared first on Daily Fintech.

The Bitcoin off-ramp regulatory problem.

Editor’s Note: this is the 3rd post on Daily Fintech, written in 2014. How things have NOT changed!

To give our authors a break over the holidays, we are re-posting from our archive of over 1,000 articles. Rather than pick favourites we elected to simply  repost the first 8 articles (as that was over 5 years ago you may have missed them; we were pretty unknown then). 

As we close out 2019, make a resolution to be smarter about Fintech in 2020 by subscribing for just US$143 a year (= $0.39 per day). You will get all our fresh daily insights and participate in our forum. You can also read our archives with over 1,000 articles, an example of which you are reading from over 5 years ago.

We look forward to welcoming you to the Daily Fintech membership community today!

Will the Bitcoin off-ramp regulatory problem limit it to transactions within national borders?

Technically, converting Fiat to Bitcoin (on-ramp) and converting Bitcoin to Fiat (off-ramp) is easy. This is an Exchange function and the Internet is perfect for setting up Exchanges.

So, the problem is almost entirely a regulatory problem.

I don’t think there is an on-ramp problem. Regulators want to protect consumers against scams and frauds; they want to make sure that your grandmother does not buy fake Bitcoins. However it is hard to argue that one should prohibit the purchase of any commodity. The American tax authority, IRS, has declared that Bitcoin should be treated like a commodity. You can buy gold or wheat or tulips, so you can buy Bitcoin.

Bitcoin is of course different from all other commodities, because Bitcoin is a digital commodity that can be transferred as easily as an email or any other digital file.

Which leads us to the off-ramp, converting Bitcoin to Fiat.

There are legitimate reasons for regulators to control the off-ramp. This is far too easy for money launderers and other bad actors to abuse. Libertarians can rant against this, but entrepreneurs and investors are wise to treat it as a fact of life. Betting against regulatory control of the off-ramp is a huge speculative risk.

Regulators tend to be happy with a digital currency that only works within the borders of the nation state that they control. There are many of these already such as M-Pesa and and Dwolla. Google has their own currency which you can send as an email attachment – within the US only.

So, regulators will be comfortable with the idea that you can buy Bitcoins in US$ for example and then convert those Bitcoins back to US$. This will be a way for traders/investors to buy Bitcoins in the hope that the price will go up and then sell them for a profit – just like any other commodity.

Regulators are more keen to stop cross border transactions. That is hard for regulators because digital bits don’t stop at borders and present their passport. That is why regulators seek to control the off ramp.

It is possible to imagine a fully regulated global money transfer business that allows you, for example:

1. Buy Bitcoins with US$

2. Send those Bitcoins to the UK.

3. Convert the Bitcoins into UK £

This hypothetical fully regulated global money transfer business would have to go through all the usual KYC (Know Your Customer) checks that regulators have put in place to prevent money laundering and other illegal activity. In that case it cannot offer free exchange and existing money transfer businesses will be able to do exactly the same thing. Consumers who want to change currency only care about a) price and b) speed/convenience. If adding Bitcoins as an intermediate step makes it cheaper and quicker to change currency then this will happen. However, given a regulator/KYC level playing field, it is unclear how adding Bitcoin as an intermediate step makes the transaction cheaper/easier.

This is one of a series called Explorations down the Bitcoin rabbit hole.

As we close out 2019, make a resolution to be smarter about Fintech in 2020 by subscribing for just US$143 a year (= $0.39 per day). You will get all our fresh daily insights and participate in our forum. You can also read our archives with over 1,000 articles, an example of which you are reading from over 5 years ago.

We look forward to welcoming you to the Daily Fintech membership community today!

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Why I created this blog

Editor’s Note: this is the second post on Daily Fintech (way back in 2014). 

To give our authors a break over the holidays, we are re-posting from our archive of over 1,000 articles. Rather than pick favourites we elected to simply  repost the first 8 articles (as that was over 5 years ago you may have missed them; we were pretty unknown then). 

As we close out 2019, make a resolution to be smarter about Fintech in 2020 by subscribing for just US$143 a year (= $0.39 per day). You will get all our fresh daily insights and participate in our forum. You can also read our archives with over 1,000 articles, an example of which you are reading from over 5 years ago.

We look forward to welcoming you to the Daily Fintech membership community today!

I sold a lot of software to banks, but that Traditional Fintech game got old. Emergent Fintech makes it fun again.

Media likes to talk about “disruptive fintech”, but I preferto think of this more simply as “Fintech for the rest of us”:

  • Customers don’t care about disruption. Customers care about good service at the right price.
  • Banks will be partners with born-digital ventures. This is different from Banks as our only source of financial services. For all the talk of disruption and battles (good for page views and conferences) the more usual change is evolutionary and driven by partnerships.

I started this blog because I could not find anything that covered this patch/space/beat/territory the way that I wanted. Most blogs monetize through advertising, so there are lots posts that riff off a hot news story. I want more background analysis, which you cannot monetize through advertising. I am an entrepreneur. I blog in order to get my thoughts straight and to connect with people who are fishing in the same waters.

Many blogs that do cover Fintech miss the big disruption coming from people outside the current financial system. This is because most blogs are written by people who are over-banked. For example, few blogs cover the huge opportunity among the 70% of the global population that have no bank account at all (the “unbanked”). I won the genetic lottery, I was born in the developed world, but I have lived and worked for enough time in the developing world to have some appreciation of the needs of the unbanked.

It is not just the unbanked in the developing world. There are plenty of people in the West who have been left in the cold by the current financial system. Consider the 25% of Americans who have no FICO score and so find it hard to borrow. Or ask a small business owner how much they like using Factoring or pledging their home as collateral in order to get working capital. Or ask any consumer or small business how much they love paying a lot of money to change currency.

Daily Fintech is about making money by empowering people, not just papering over the cracks of the existing system.

All I want to do is learn more and connect with others who also want to learn more. The monetisation opportunities will flow from those conversations; the Emergent Fintech opportunity is so massive that there will be plenty of monetization opportunities.

 

As we close out 2019, make a resolution to be smarter about Fintech in 2020 by subscribing for just US$143 a year (= $0.39 per day). You will get all our fresh daily insights and participate in our forum. You can also read our archives with over 1,000 articles, an example of which you are reading from over 5 years ago.

We look forward to welcoming you to the Daily Fintech membership community today!

The post Why I created this blog appeared first on Daily Fintech.

Five Crypto Predictions for 2020

bitcoin_xmas_card_2020_1

Twas the night before Christmas, and all through the house
Not a trader was trading, not even a mouse;
The stocking were hung by the chimney with care,
In hopes that Saint Nicholas and Trezor were there;
Investors were nestled all snug in their beds,
While visions of Bitcoins danced in their heads;
The sell orders were posted on exchanges with care,
In hopes that a Bull Rally soon would be there;
More rapid than lightning, the rallies they came,
And he whistled, and shouted, and called them by name;
“Now Bitcoin! Now Litecoin! Now Ether and Ripple!
If Monero can double, then you can triple;
The mining rigs hummed in the cellar with clatter,
In hopes that new bitcoins would soon be there;
From Papa John’s pizza all the way to the moon,
You all will be riding the rocket ship soon;
I heard him exclaim as he checked coin market cap,
Merry Crypto to all and HODL for now!

Ilias Louis Hatzis is the Founder at Mercato Blockchain Corporation AG and a weekly columnist at DailyFintech.com

This year, 2019 was a decent ride picking up steam after the first quarter, while 2020 doesn’t seem ready to slow down or put on the brakes. Instead 2020, might be a breakaway year, especially after the halving in May.

Who would of guessed that Libra’s wheels would come off? That Wyoming would be the only US state with friendly regulations for digital assets and digital-banking? That Bitcoin would have triple-digit gains since December 2018, when the market bottomed out? That cyberattackers compromised the Binance and made off with $41 million in Bitcoin? That Wall Street moved in with J.P. Morgan rolling out their own coin? That China went from a complete ban of cryptocurrencies to a highly publicized all in attitude on the blockchain? That crypto index funds and ETFs, among other things, would show us that with crypto, wealth building is for everybody?

Nevertheless, 2020 is swiftly approaching and it’s time to start the crypto predictions.

#1 Libra: Will go live, but with limited functionality
Governments worldwide work overtime to regulate the rapid emergence of cryptocurrencies and companies in the industry. Facebook has faced enormous hurdles from regulators across the globe, for Libra. It’s not even certain whether the project will be launched at all, if regulators are fully in line with it. But iteration is part of Facebook’s core fabric. Nine years ago Zuckerberg said at a press conference, “We’re trying to be innovative and iterative with our development”. I think this will be how they approach the regulatory problems. An iterative approach can result in ever-closer approximations of a solution, as accuracy improves with each step. Most likely, Libra will go live in one jurisdiction and with very limited scope, partners and functionality, as Facebook iterates everything.

#2 Digital yuan to be followed by digital euro and dollar
While in recent years, China has moved to regulate the cryptocurrency industry, it has been avid supported of blockchain and has been developing its own digital currency, that it will launch in 2020. There has been a consensus among central banks that they need to control money. Mark Carney of the Bank of England, was probably the first leading central banker to talk about the importance for the West to embrace crypto and digitally-enabled money. Christine Lagarde, the ECB chief and former Managing Director of the IMF, thinks a digital euro is a good thing for the EU. It is very likely that Steve Mnuchin, US secretary of the treasury, will announce the digital dollar in 2020, continuing his past narrative about tracking cryptocurrencies.

#3 Developing nations will embrace Bitcoin
While the big global economies are working on the their own versions of fiat backed cryptocurrencies, there are three billion people around the world that don’t trust in their government issued money. Across developing nations in South America and Africa (Venezuela, Argentina, Brazil, Zimbabwe etc) , we’ve seen rapid adoption for Bitcoin. I expect that across many developing nations in the world, people will want to have a form of digital money that they can rely on.

#4 Stablecoin heaven
The stablecoin trend will continue. While stablecoins are still in the discovery stage, they have become the holy grail, with dozens of projects trying to develop a digital currency with low-volatility, that can withstand speculative attacks and debasement. In 2019, the stablecoin market cap grew from $3.3 to $5 billion. In 2020, the stablecoin market will exceed $20 billion, as we see the launch of Libra and a few others and multi-collateral DAI, accepting BTC and other assets as collateral.

#5 The Lightning Network will do great things
The existence of the Lightning Network on top of the Bitcoin blockchain, already enables cheap, private and instant transactions and payments. The current number of nodes are 10,861 and the number of channels is at 35,000, with the network capacity at 859 BTC (or $6.5 million). In December 2019, Bitfinex announced that their exchange would support Lightning Network transactions. Now even Airbnb allows customers to book stays using the Lightning Network via the Fold App. In 2020, we will see an increased number of applications like the Breez app, created on the Lightning Network.

The new year, we will see crypto and blockchain move from away from something that’s trying to disrupt the old, into mainstream and becoming a bigger part of daily lives. With China’s digital currency set to be rolled out in 2020, digital money will come to the front and center stage. As global governments embark on a new moon race, to launch their own cryptocurrencies, mainstream adoption is set to accelerate.

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The post Five Crypto Predictions for 2020 appeared first on Daily Fintech.