Some more thoughts on Bitcoin

Last Friday I was at a Seraph Group conference in Half Moon Bay, south of San Francisco. During the day I talked with a lot of entrepreneurs and investors and I was surprised to see that even among this group most people did not know what Bitcoin exactly is. I don’t think I met anybody who had his or her own Bitcoin wallet.

That got me thinking, because I had assumed that Bitcoin would be more well-known by now in Silicon Valley. It’s actually good news, because it means the current value of Bitcoins (at the time of writing $158 on Mt. Gox, so 16% higher than during my last Bitcoin post and 60% higher since my first post about this currency in June this year) is still based on a very small part of the population understanding, holding or using Bitcoin. I keep on being extremely bullish on the virtual currency and keep on putting money into it.

Since my last post on September 9 quite a lot of things have happened with Bitcoin, the most important being the shutdown of the ‘secret’ website Silk Road (secret in the sense that you had to use Tor to be able to see it, so most people had no access to it). Silk Road was the number one marketplace for illegal goods such as drugs or weapons, and people paid in Bitcoin. The moment the closure was announced the value of Bitcoin dropped to about $100 on Mt. Gox, but within a few days the value was back at the pre-Silk Road exchange rate of about $140. This was an important fact, because it means that illegal activities like Silk Road are not the main reason why people use Bitcoin anymore.

Not only that, it’s also good that Bitcoin will be less associated with shady business deals. It now has the chance to be taken more serious, instead of being seen as something that’s only used for illegal things. Looking back I am happy Silk Road was closed, it was a scary but defining moment for the currency.

Another interesting development is that SecondMarket.com now gives accredited investors the chance to invest in Bitcoin without buying and storing these yourself. For most people holding Bitcoin is still something scary, because they don’t fully understand how it works and they are afraid of hackers. Especially if you put larger amounts into Bitcoin you want to make sure that your money is safe.

Therefore Second Market set up the Bitcoin Investmen Trust where you can buy certificates based on the current Bitcoin rate, and wherre you can sell them again at any time (at least after March 1 next year, until then there is no liquidity). I think this is a super smart idea that I should have thought of myself. I would advise any accredited investor who wants to put more than $25,000 in Bitcoin to look at Second Market, at least until the Bitcoin market will be more developed and wallets are easier to set up and use.

Last weekend David Lee of SV Angel (a well-known investment fund in Silicon Valley) wrote an interesting piece on Bitcoin: 10 Things I Think I Think on Bitcoin. Like me he seems to be very bullish on Bitcoin and he even says that if he would be in his 20s right now looking for a start-up idea and willing to do things others would not be doing (like most entrepreneurs!), he’d spend all his time trying to understand this topic!

David also understands that Bitcoin is much more than just a currency, because that’s just one application of the protocol. This is a fascinating thing and something I only started to see over the past couple of weeks. I won’t try to explain it here in detail, but if you are interested in what you could do with Bitcoin just read this Coindesk article about “colored coins”. Once people start to see this a whole new world of opportunities will open up.

Interesting is David’s observation that Bitcoin has many of the elements of modern “black swan” startups like Google and Facebook (I copy/paste his complete point 5 with some comments):

• highly polarizing – even and especially among early adopters and ‘experts’; –> I am surprised how many people want to argue with me about Bitcoin, the fact that I am so bullish leads to more heated conversations than with any other investment that I talk about.
• dismissive or downright hostile attitude by incumbents, usually non-technologists; –> I talked to several banks, but none is able to offer any Bitcoin related services. They don’t even look at this, likely because they dismiss it as not relevant for them.
• incompatible with and/or pushing against current legal regimes or regulatory systems; –> This is an interesting one, it remains to be seen how governments will react to Bitcoin once it becomes bigger. I believe it’s unstoppable, now they may still have a small chance to stop it from growing much bigger, but that window is closing fast.
• de-centralized thus involving crowdsourced-based content or activity; –> The whole Bitcoin protocol is based on a decentralized ledger and on the crowd for using and developing applications.
• false conventional wisdom that the service is only used for illicit or unsavory activity (e.g., everyone thought apps like YouTube, Snapchat, Facebook were used just for porn, hooking up, etc.) –> see Silk Road above
• unclear business model or applications. –> People only see it as a currency and not as a protocol which could even be used to take companies public without any authority regulating it, or for simple things as giving people a warranty coupon for a TV with a partial Bitcoin.

The more I learn about Bitcoin, the more I am convinced this may be the currency of the future. Today Baidu (the Google of China) announced that they also accept Bitcoin payments now for some of their services. I think that is a major breakthrough. China is already the biggest country for Bitcoin and this will only make it more popular. Theoretically Bitcoin could become a second currency in China, just like Tencent QQ Coins almost managed until it was more or less banned for real world transactions in 2009. The big difference is that Tencent’s currency was managed centrally (and could therefore be regulated), but that Bitcoin has no central authority.

The adoption will likely be very slow, but once the right tools are in place Bitcoin and its applications may be unstoppable. I therefore keep investing in Bitcoin itself, and with CrossPacific Capital we are also close to doing our first Bitcoin-related investment.