Notes on Bitcoin: Disruptions

(This is mostly derived/combined from several emails I sent to a couple people, both professional investors, to spark a conversation about bitcoin. If you are interested in or working in this space, please contact me. Let’s talk.)

Some thoughts….

In recent months, I’ve been heavily researching bitcoin, crypotocurrencies, and the innovation explosion brought on by the bitcoin protocols and blockchain technology. Although this is a complex subject and I’m humbled by it every day, with my research I’ve begun to get a more and more solid grasp on the issues, technologies and opportunities. And with this comes an improving ability to form and articulate explanations and opinions, which in turn gives me access to conversations with much smarter people…and so the learning compounds and accelerates.

My big takeaway: this is huge. Bigger than the Internet. It will change economies, disrupt long-standing institutions and industries, empower the powerless and underrepresented, and potentially stabilize governments and out-of-control economies in countries like Argentina and Venezuela. Or at least, it will certainly empower the citizens of those countries.

I’m beginning to form a number of startup and/or investment theses that are compelling enough to push me to dedicate more and more time to this; more research, more discussions with key players (engineers, startups, angel investors, legal experts, VC).

I haven’t yet written up a comprehensive review of my notes and investment hypotheses. And that would include an explanation of bitcoin, the technology, how it works, what’s possible, etc. A good understanding of bitcoin is key to seeing how massively impactful this all can be. I’m not writing that here/now: I’ll plan to write up some notes form my research, with lots of links for reading, to help accelerate the learning process for others.

(One thought for now…The most important thing to know about bitcoin is that the currency you’ve heard of is really only the first app of the much broader, more impactful technological innovation of the blockchain: a decentralized, trustless, secure, concensus network for direct person-to-person transfers of value without a need for a middleman or central authority of any kind.)

So… Just to get the conversation going, here are several thoughts that I’m working on…

I’m confident that the technology/protocols/platform of bitcoin (which is separate from the Bitcoin currency, which I see as powerful in itself, but just the first app), is sparking innovation that will bring a series of major disruptions of existing power structures, starting with the disintermediation of a number of industries that consolidate power through gateways, charge high fees, and add little value.

One of the first will be international bank wiring and remittances; mainly individuals working outside their home country, sending money home to their family. With the ease of sending value anywhere in the world that bitcoin provides, Western Union and similar companies are going to be a fast-dying breed. And there’s no pivot for WU. Or brand plays. They just aren’t needed anymore. Their 9-17% fees are being replaced with 1-3% fees by already-functioning bitcoin startups (and these fees are likely to decrease further). Their value will dissipate quickly as the myriad of well-funded startups work to create tools that disintermediate them.

http://www.forbes.com/sites/techonomy/2014/08/07/bitcoin-momentum-grows-in-emerging-markets/
http://www.economist.com/node/21554740

Next up will be clearing and settlement of banking transactions. The few powerful players in that industry will begin to lose their leverage very quickly. Startups are developing tools and infrastructure to enable banks to use blockchain technologies for remittances, clearing and settlement. Actual use cases are beginning to happen. This is not theoretical. Several regional banks, for example, have announced they are using the Ripple platform and protocol to clear transactions and transfer money to other regional banks and internationally without the need for intermediary correspondent banks. And once it picks up steam, and gains acceptance, broad adoption and change will happen nearly overnight. Or it will feel that way in 5 years when we’re looking back on this.

http://blogs.wsj.com/moneybeat/2014/09/24/ripple-signs-first-two-u-s-banks-to-bitcoin-inspired-payments-network/
http://blogs.wsj.com/digits/2014/10/27/ubs-cio-blockchain-technology-can-massively-simplify-banking

Next up to be disintermediated…possibly credit card companies themselves, or at least many of the middlemen entities in merchant processing. Something I’m pondering: credit cards are a means of convenient payment essentially with in insurance; protection against fraud. Existing credit card fees, typically 2-3%, is composed mainly of the cost of the fraud insurance. With blockchain transactions, there is no possibility of fraud. Or chargebacks for that matter, since transactions are irreversible. Fully secure, instant, non-reversible, and with zero fees for merchants or consumers.

Lots to consider.

And so this all can play out in different ways for an investor. In my next phases of research, I’ll be working on how to implement an investment strategy that is bullish on the new technology innovation and development in this space.

-m

And as sort of a postscript thought…And this part isn’t for me, but maybe something to consider in your investment strategies:

It also occurred to me that as the rise of new innovation seriously disrupts existing business models, investments that attempt to capitalize on the disruption might also include smart short positions.

There will be existing, substantial companies that will be big losers in this shakeup. It may be worth considering the implications this all may have on the present OVERvaluing of companies and industries like the ones I mentioned above. If not short positions, which I understand can be tricky, this should at least inform thinking on existing bullish outlooks on existing companies that are in the cross hairs of this revolution.