Today the New York Times had a very good article by Marc Andreessen (a former very well-known Internet entrepreneur and now well-respected VC) about why Bitcoin is so important and how it will change the world.

You can read it for yourself here: http://dealbook.nytimes.com/2014/01/21/why-bitcoin-matters/. But if you don’t want to read the long article I will summarize the main points in this post. They are a good reference when I talk to people about why I believe so much in Bitcoin and why I think 2014 will be the Year of the Bitcoin. Of course I will also add a few personal comments.

Similarities to growth of PC and Internet
Marc starts his article with a couple of paragraphs in which he compares the rise of Bitcoin with the start of the personal computer in the 1970s and the start of the Internet in the early 1990s. At first people didn’t understand it, then they start to embrace it and don’t understand why they did not see the powerful promise earlier. Exactly the same as what’s happening with Bitcoin now!

Trust
Bitcoin is a breakthrough in computer science in that it can create trust between untrusted parties over an untrusted network (the Internet). This means that any digital property can be transfered securely, including digital money.

Easy of use
Bitcoin is not easy to use, right now you still need quite some knowledge in order to set up an account to buy Bitcoin or a wallet. But the ease of use is rapidly increasing with new tools and apps. I think that before the end of 2014 most people can set up a wallet on their phone without help of others (incl. putting money on it!).

Volatility
Volatility is often mentioned as a problem for merchants, but it’s not really an issue. Reality is that merchants can accept Bitcoin without actually holding it, but the press does not understand that (yet).

Why would merchants use it?
Why would merchants use it? Simple, if the margin on electronics is about 5% and you pay 2-2.5% in fees to the credit card company, you can double your profit by using Bitcoin. You can also easily accept international payments (for example from customers without a credit card) and there are no chargebacks possible, which eleminates credit card fraud. Apparently 5-10% of all transactions are not accepted because of credit card risk, with Bitcoin you could accept these people as customers.

Anonymous or not?
Bitcoin is pseudonymous not anonymous. It’s a hype that Bitcoin is being used a lot for drugs and weapons because nobody can find out who is buying something or what you are buying. Law enforcement can much more easily trace bitocin than cash or gold.

Classic network effect
Bitcoins is a great example of a classic network effect: the more people use it, the more valuable it is for everyone who uses it (just like a telephone for example). Therefore it will be hard for another crypto currency to replace Bitcoin: this currency would need to have sizable improvements and it needs to happen quickly.

Here I disagree with Marc Andreessen, because I believe a lot of currencies will eventually exist next to each other. It’s not “either/or” but “and/and”. My expectation is that we will eventually have thousands of currencies that can all be exchanged easily into Bitcoin or into other virtual currencies. I’ll probably do a blog post on this as well, it’s something that will change the Bitcoin landscape.

Remittance fees
Every year workers send US$ 400 billion in remittances to family in their home countries, out of which companies like Western Union take 10% or more in transaction fees. Bitcoin will reduce these fees to virtually zero, meaning Bitcoin will raise the quality of life for these families.

Bypass banking system
Bitcoin is a powerful catalyst to bring large numbers of people around the world into the modern economic system. Many countries don’t have well-functioning banking systems yet or people don’t have bank accounts at all (even in the US!). Bitcoin can help people to bypass the banking system and do transactions without the need for a trusted central party like a bank or credit card company.

Micropayments
Micropayments are so far not very cost effective, but Bitcoin allows you to pay fractions of pennies. This could change the way content will be delivered: you don’t need a subscription to a site but can pay a very small amount to read an article on it. This means ads will be less important, or you can decide to pay for an ad free site. For example, I don’t mind paying YouTube a small amount per video if I don’t need to click away their ads. Also spam may disappear if sending an email would cost a fraction of a penny. I believe micropayments will disrupt the Internet in ways that we can’t foresee yet.

For me this article was another sign that Bitcoin is here to stay and that it is slowly becoming more mainstream. I am happy that the emphasis is going away from the price of Bitcoin to what you can do with the platform and the currency.

Yesterday I looked at Fiatleak.com to see where most Bitcoin activity was happening in the world, and to my surprise most coins were flowing to Chinese exchanges. I thought that could not be right, because Chinese financial institutions and 3rd party payment providers are not allowed to facilitate Bitcoin transactions anymore, so it’s much harder to buy Bitcoins if you are in China.

I assumed it would be a temporary thing and that if I would let fiatleak run longer the percentages would change. But that did not happen, over the past 36 hours 85% of all Bitcoins worldwide were traded in China! The percentage only takes the major exchanges into account, so private trades may make the figure look a bit different, but there is no denying that China is still the biggest source of Bitcoin liquidity.

Interesting is that traditional media do not seem to notice this yet. The recent increase in the Bitcoin price was attributed to Zynga (the game company will start some tests for Bitcoin payments) and Overstock, but I don’t believe that most Chinese users are aware of this.

I can’t explain what’s happening in China, however. I know that over the past weeks most Chinese exchanges found ways to work around the ban. Some, like OKCoin and Huobi, use direct deposits into their corporate bank account as a way to circumvent the existing regulations. Others, like leading exchange BTC China, use a voucher system where users with cash in their account can sell that cash through a voucher to new users that want to buy Bitcoins.

But it’s hard to believe that despite these hurdles to buy Bitcoin, Chinese are still buying the majority of all Bitcoins. What is happening here? Who is buying? I don’t understand it.

CrossPacific Capital (XPCP) moved to a bigger office last week. Because I was still on holiday today is my first time in our new office. The place looks great and the views are amazing – when it’s not foggy like earlier this morning when I arrived.

It was a bit foggy when I arrived in the office

My office has big windows to the West (overlooking downtown Vancouver & Canada Place) and the North (Vancouver harbour & the mountains on the North Shore), which will make working a lot harder if the weather is nice.

The fog disappeared within 15 minutes

Next to the many freight trains that don’t seem to be moving at all, I can see the big ocean ships passing by, helicopters landing on the HeliJet airport and seaplanes landing & taking off. To top it off there is a view of all 3 Vancouver ski resorts: Mount Seymour, Grouse Mountain and Cypress Mountain’s slopes can all be seen in the distance.

During my Christmas and New Year holiday I had a lot of time to think about emerging technologies, and especially about Bitcoin. Although some people called 2013 the Year of the Bitcoin, I believe that we have only scratched the surface of the potential of Bitcoin and that 2014 will be the real Year of the Bitcoin.

The main reason that Bitcoin got a lot of press over the past year is because of its extreme price increase and volatility. People like to read stories about others accidental millionaires that just mined some coins a few years ago and then forgot about them. But it has nothing to do with the real potential of Bitcoin and its platform. In this post I will write down some of my observations and thoughts about the crypto currency and why I think it will be a much bigger deal over the next 12 months.

Bigger players entering the market

One reason why I believe that Bitcoin will be so much more important, is because some of the big players in the financial industry are entering the market. Based on conversations that I had over the past couple of months I believe quite some hedge funds have positions in Bitcoin already, but none of that got into the media. However, the past 2 weeks have seen a couple of public announcement that show the tide is changing.

First of all Goldman Sachs director Michele Burns became a board member at Bitcoin payment company Circle. That’s a big deal, not only because Circle is still a small company but especially because it shows the big players are getting into the game officially. They are well connected and can directly or indirectly influence regulations.

Next to that a well known fund, Fortress Investment Fund, is getting into the Bitcoin game by launching a fund solely focused on Bitcoin. This could give Bitcoin more exposure to entities that could so far not invest in Bitcoin, for example pension funds. Right from the start Fortress is already bigger than the SecondMarket Bitcoin Investment Trust, that currently has about $50 million under management (that fund was launched in September 2013).

What’s important: Bitcoin price or Bitcoin protocol?

The media is still quite negative about Bitcoin, most of the news you read is sceptical and shows that journalists do not really understand the concept of Bitcoin. This is partly because of the fast rise of the Bitcoin price, that made it look like Bitcoin is only about the currency itself. The media seem to neglect that Bitcoin platform, which is a protocol that could be just as important to the world as the http-protocol (the Internet). I think this is something that will change this year as well. Some journalists will spend more time on Bitcoin and will understand the significance of the platform without looking too much at just the Bitcoin price.

The Bitcoin protocol is so valuable because it allows new applications to be built that couldn’t be developed before. Which ones? Nobody knows of course, but they will disrupt complete industries. If you are studying to become a notary you’d better start stuyding the Bitcoin protocol because it could make most notary jobs disappear over the next decade. Also lawyers should watch out, a large part of their current business could be gone because of Bitcoin protocol applications. I believe the next $100 billion company may be built upon the Bitcoin platform.

Negative views of well known economists

But not only the media are negative, well known economists that I used to respect (like Paul Krugman) or that I never had a lot of respect for (like Alan Greenspan), are all dismissing Bitcoin. That would be fine if their arguments were solid, but for some reason they mainly focus on the Bitcoin currency instead of on the platform. That fact makes it hard to take their views serious.

They don’t seem to understand why Bitcoin can have a value because it is not backed by anything. But they conveniently forget that the dollar also has no real backing anymore: you can’t change your dollar bills for gold anymore. For now central banks can still convince people to hold dollars, partly because they have no real choice, but I doubt that will last forever. Government debts have spun out of control and one day these have to be paid back. Banks keep on printing money to keep up with interest payments while borrowing more money. What will happen once Bitcoin becomes more mainstream and will offer a real alternative to hold your money? Bitcoin could become Gold 2.0, a new kind of gold that can easily be used for payments as well. That will give Bitcoin tremendous value: if just 5% of gold holdings would eventually change to Bitcoin the value of one coin would be $38,000.

Generally Bitcoin derives its value from the Bitcoin protocol. That gives the tool to verify ownership (of money or anything else that is ‘stored’ on the blockchain) and transfer that without the need for a trusted central authority. As long as the Bitcoin protocol will be the most efficient way to do so Bitcoin will have value. The more transactions are done with Bitcoin the more valuable Bitcoin will become. If the Bitcoin protocol would replace both Western Union and Paypal (which is quite likely to eventually happen), the value of one coin would already be about $3000 based on the market cap of these 2 companies. All other transactions will only further increase the value of the Bitcoin.

The problem is that central bankers and other well known economists still live in the old world but that that world is quickly disappearing and being replaced by protocols with new functions. It’s a pity to see that they don’t get what’s happening in the real world. Interesting fact is that Paul Krugman not only dismisses Bitcoin, but that back in 1998 he had similar negative views about the future of the Internet: “The growth of the Internet will slow drastically, as the flaw in ‘Metcalfe’s law’–which states that the number of potential connections in a network is proportional to the square of the number of participants–becomes apparent: most people have nothing to say to each other! By 2005 or so, it will become clear that the Internet’s impact on the economy has been no greater than the fax machine’s.”

And where will the price go this year?

I hope the focus on the Bitcoin price will be a bit less this year, it’s just not that important in my opinion. Although I have some coins, so I have a vested interest to see the price go up, to me it’s much more important that the Bitcoin platform becomes better understood. I have no idea where Bitcoin will be one year from now, but based on the current developments I think it will still be one of the best investments you can make to put money into Bitcoin right now. Just remember that it’s largely speculation and that you can lose it all. And be prepared for a wild ride, Bitcoin has been a bit less volatile over the past 2 weeks, but each time positive or negative news comes you can expect wild swings again.

Coindesk, the leading Bitcoin news site, did a survey among its readers last week and a majority thinks the price will hit $10,000 next year! I believe that eventually Bitcoin could reach that number if the Bitcoin platform would take off and Bitcoin would remain the major crypto currency, but I don’t believe that will be next year already. A timeframe of 2-3 years is much more likely, the world does not change as fast as people tend to believe.

New currencies

During the coming year we’ll probably see a lot of new currencies. Now the main ones are Bitcoin, Litecoin and Peercoin, but a year from now there will be a lot more currencies that currently don’t exist yet. I believe people may launch their own currencies on top of the Bitcoin platform, starting with famous sports players and music stars. Eventually the same will happen with companies, just like they now already issue coupons or points for loyal customers (e.g. companies like Starbucks). Of course there will be regulations that will try to stop this, but in my opinion it’s just a matter of time before it will happen.

Regulation

Lots of hardcore Bitcoiners are against regulations, but I think that Bitcoin will never really become big without government regulation. So I applaud it that several countries are actively working on Bitcoin regulations. Countries that try to ban Bitcoin shoot themselves in the foot, because financial innovation won’t take place there. At the end of this year I believe most of the big countries will have basic Bitcoin regulation in place.

China

China’s Bitcoin news over the past weeks has surprised me, but I think most people misinterpret the Chinese Bitcoin rules. The country is not trying to ban it, just wants to make sure speculation is not getting out of control until they better understand it. I would not be surprised it the country itself is actually buying Bitcoin. China wants to have more influence in the financial world, but it knows it can never control the USD. It’s unlikely that the RMB can take over this role because of a lack of trust in China, even though the Chinese currency is now the 2nd biggest currencies for trade finance. Bitcoin would be a great solution to gain more global financial influence and it would therefore make sense for China to be active in the Bitcoin market.

Of course you could then come up with a conspiracy theory saying that China tried to reduce the price by not allowing banks and 3rd party payment providers to deal with Bitcoin, but I think that’s a bit too far fetched. However, I still wonder about one thing: who was buying Bitcoin on Chinese exchanges after the ban on payment providers to work with Bitcoin providers in China? Because nobody could fund their RBM accounts anymore and a lot of people were trying to sell, the price should have gone to zero. But that did not happen, after a major drop in price parties started buying again on the Chinese exchanges and the RMB/Bitcoin price started climbing up. But who was buying if no Chinese could add money to their accounts? Maybe I am overlooking something obvious here, but there is only one party I can think of…

Banks

Most banks seem to be negative about Bitcoin, it’s difficult for Bitcoin companies to open bank accounts and some even try to stop their customers from buying virtual currencies. Part of the reason is that they just don’t understand Bitcoin yet, but that will change this year. Another reason is because they see Bitcoin as a major risk for their current business models. That is true, but I think they should understand that fighting it may not really help. It reminds me of the music industry that was only trying to stop Napster instead of coming up with a new business model themselves. As a result Apple took over a large part of their business with iTunes. Banks should embrace virtual currencies instead of fighting them, it can be a big opportunity for them if they play their cards right.

But banks will only do so if there will be better regulations for Bitcoin. The banking industry is a conservative sector and without clearer regulations they likely won’t move. Another reason why I look forward to more and better Bitcoin regulations.

2014 will be an interesting year for crypto currencies and I think it could become the real Year of the Bitcoin!

A Happy New Year to all my readers!

2013 was a fantastic year for me and it will be hard to top it in 2014, but I’ll do my best. A year ago we still lived in Shanghai, now we’re residents of Canada, so life has changed a lot over the past 12 months.

What has not changed is that we still travel a lot with the family and we spent the past 2 weeks in Europe. First a couple of days in The Netherlands and now we are on Cyprus. We’re going to a New Year’s Eve party in the old town of Limassol later tonight, but before that I wanted to post a few pictures of our holiday so far. There are a lot more pictures on Flickr.

The day we left Vancouver the weather was once again fantastic (autumn 2013 has been extremely dry and sunny), so Scott and I went for a hike before driving to the airport.

The plan ride itself was uneventful, but interestingly it was my first time to fly from Vancouver to Amsterdam. Since our move to Canada I had not been to Europe anymore, partly because I had decided to travel a lot less in 2013 (that worked!).

Scott did not sleep much on the overnight flight (he watched several movies instead…) and I had expected him to fall asleep the moment we arrived at my parents place in Holland. But instead he was so excited that he stayed awake until dinner and he even rode 20 km on his bike. After that he slept for 15 hours straight!

The next day we went to Nordhorn in Germany to look at the Christmas market there. I always like to be back in Germany (I lived in Germany for almost 4 years in the late 1990’s) and to eat some food that you can’t get in Holland.

A few days later Grace and I traveled to Maastricht for the annual VCL Christmas dinner. It was great to meet many of my friends again and have a nice dinner and after party at Michelin star restaurant Tout A Fait. We also visited the Christmas market on the Vrijthof in Maastricht and walked all over the city where I studied Economics in the early 90s.

We also met Joop Dorresteijn during this trip. He has settled down in The Netherlands after we worked together in Shanghai for a couple of years. Nice to catch up  and see some of his daily life (we visited not only his house but also his office). Too bad Suna had to work, so we did not meet her.

I had not yet been to the new Spil Games campus in Hilversum, so I visited the new offices and met up with some friends and former colleagues there as well. I should have taken pictures from the inside of the main building: it’s quite impressive, but I only took a picture of the exterior when I arrived.

On Christmas morning Scott and Elaine were very excited to get presents from Santa Claus. They were happy that Santa could find them in The Netherlands and that he did not send their presents to Vancouver.

Christmas day we had a big family dinner with my parents, my sister and my own family at De Bokkepruik in Hardenberg, always a good choice for great food.

During the holiday I ran a lot, also longer distances. Scott rode his little bicycle with me, even on a 18.3 km run! The woods around my parents place are perfect for sports.

My favorite red wines are Californian Cabernet Sauvignon’s, so for years I had wanted to try the famous Opus One. However, the high price was always a bit of a psychological hurdle, I could afford the wine but felt it was just too expensive. But this year Bitcoin went up so much that I just sold a few bitcoins and bought a case of 2009 Opus One. Was it worth it? For me it was, Opus One is a very smooth Cabernet and for sure the best I had so far. However, it’s not a wine I would drink regularly. But for special occasions I might open a bottle every now and then!

Scott turned 6 during our holiday, time flies… And of course he got a birthday cake. He chose one himself, decorated with cars and trucks.

The second part of our trip was in Cyprus (the kids stayed in Holland), where my sister now lives. Sonja joined us on the 4-hour flight from Amsterdam to Larnaca and we are staying at her place.

Also on Cyprus the good dinners continued, among others with lots of fresh seafood and very nice Cyprian white wines.

In December it’s too chilly for a swim in the pool, but warm enough to enjoy fresh orange juice at the pool early in the morning.

This morning we had our last meeting of the year in Limassol. After the meeting we went to the rooftop of the office building to take some pictures. Then we were invited to a barbecue with zivania (Cyprus liquor) – at 11 AM… Very enjoyable, but I needed some coffee afterwards to stay awake!

We ended December 31 with a drive and walk along the coast. First in the afternoon without Sonja (she had to work), and just before sunset we returned with her to take some pictures. Cyprus is a beautiful island, I look forward to coming back in 2014. Happy New Year!

I am happy to announce that Vancouver-based white label Bitcoin exchange Bex.io closed a $500,000 seed round. I led this round on behalf of CrossPacific Capital Partners (www.xpcp.ca)

I have known the 2 founders of Bex.io, Jesse Heaslip and Yurii Rashkovskii since June this year when I first started looking at Bitcoin-related investments for XPCP. I am impressed by the progress that they made over the past couple of months, and the company is now ready to roll out its first Software as a Service (Saas) white-label virtual currency exchange.

I joined Bex.io’s board of directors and will be actively involved in helping the company grow into one of the leading Bitcoin companies in the world. A great way to end my first year as a venture capitalist in Vancouver!

Below the text of the press release that just went out.

 

 

Another sign that China is really taking the lead in the Bitcoin world: China Telecom lets customers reserve a new phone by making a downpayment in bitcoin!

On December 20 a co-branded China Telecom and Samsung phone will be launched (model W2014). If people want to get it on that day they will have to pay 0.1 bitcoin to reserve it. The value of 0.1 bitcoin on December 20 in RMB will determine how much your downpayment was and how much you have to pay for additionally in RMB to get the phone.

This is another endorsement for Bitcoin in China. The news will further increase Chinese consumers’ awareness of Bitcoin, which is very positive for the currency. The website shows exactly how to transfer the amount in bitcoin to China Telecom so also new users can make their first bitcoin payment. The first BTC payment is often a big hurdle for new users, so this is an important step.

Because China Telecom is a giant state-owned enterprise, it likely can’t endorse a payment in bitcoin without the government agreeing to it. This will increase consumer’ confidence in Bitcoin as something legitimate.

(Thanks for the link Bing Dai)

One of the tools that I use to watch what’s happening in Bitcoinland is a site called fiatleak.com. It shows a graphical representation where in the world people are buying bitcoins, or actually what currency they are using to buy them. I let it run for a couple of hours tonight and it’s clear that China is the main buyer right now: out of the 27,000 BTC that were traded 24,000 were bought using Chinese Yuan!

Of course it’s daytime in China and a Sunday night in the US, but this is still a remarkable difference and it clearly shows which country is purchasing all the bitcoins. Now the question is whether it’s the government or local Chinese who are buying, I would not be surprised if it turns out to be both.