Why Bitcoin is still a good bet
An interview with Adam Draper (Boost) & Sam Fort (DFJ Growth)
In January Coinbase raised a $75M Series C, representing the largest ever VC funding round for a Bitcoin-related company. Many believe that this marks an inflection point for the Bitcoin “industry” as legitimate investors make a commitment to bring the currency to the mainstream. Yet, at that time, Bitcoin was trading at its lowest price in over two years, signaling that perhaps bullish sentiment around the currency had waned.
To understand this paradox we caught up with Sam Fort at DFJ Growth, who was involved in this latest deal, and Adam Draper, founder of Boost Accelerator and one of the earliest investors in Coinbase, to get their thoughts:
Why e-currency in the first place?
Sam Fort: We believe that there is a better way to transact online. Legacy payment systems such as credit cards were not designed for digital commerce. Bitcoin and the blockchain protocol represent the first decentralized method for transacting in a secure, trusted manner online, all without the need for a central intermediary like a bank or credit card company, with high reliability at extremely low cost. Further, Bitcoin cannot be counterfeited since it is based on cryptographic technology and transactions are recorded on a public ledger. These features provide tremendous advantages to merchants and consumers alike, and Bitcoin’s programmable nature allows developers to create a variety of promising applications on top of the underlying protocol.
Adam Draper: If money was being invented now, it wouldn’t be designed to look like cash or credit cards. It would look more like Bitcoin. I describe Bitcoin as “the Skype of money.” Originally TelCos had a monopoly on long distance calling and charged anything they wanted. And then came Skype and offered free calling when both parties were in their network, charging only if a call was made outside the network. This created a market price for digital long distance calling between zero and 10c/min. Similarly, Moneygram, Western Union and the banks have a monopoly on long distance payments — they can charge whatever they want. Sending small amounts like $100-$1000 can net fees as high as 20–25%. Bitcoin charges a much lower rate, and will hopefully help disrupt the remittances market. I get excited about technologies that grow markets. Right now the remittances industry is $500B annually, but that’s from people who are willing to pay high fees. If it gets cheap enough we’re likely to see a huge increase in the size of the market.
Why Coinbase?
SF: Coinbase is led by two phenomenal entrepreneurs, Brian Armstrong (CEO) and Fred Ehrsam (President), and the company has the market-leading product for each of the three main user types in the Bitcoin ecosystem: consumers, merchants and developers.
- Their consumer wallet is easy to use, has a simple UI, and strong security. They also boast a superior anti-fraud team with experience from the likes of Paypal and Braintree, which allows them to put in place compliance processes that stem fraud and illegal activities.
- Coinbase’s merchant tools allows merchants to execute transactions at very low cost. Fees for transacting in Bitcoin are zero to the merchant up to a threshold and then 1% after that — significantly lower than the 2–3% that merchants currently pay for credit card transactions today. Coinbase has locked in large retail customers, like Overstock and Dell, and have entered into strategic partnerships with Paypal and Stripe, which opens up further customer-acquisition opportunities.
- For developers, Coinbase has Toshi — their suite of tools named after Satoshi Nakamoto, the person (or people) who designed and created the original Bitcoin software. Toshi allows developers to build apps on top of the Coinbase API and is the leading developer tool in the market.
AD: Coinbase is THE brand in the Bitcoin space. Their founder Brian Armstrong was amongst the first good entrepreneurs to emerge in this space. While others championed ideological or underground/illicit interests, Brian saw an opportunity to change the world for the better and build a big business out of it. I met him in 2012 as he was graduating YC. He pitched me a vision of a world where you get to travel from country to country and never have to cash out of a currency — a global meta-currency. He had been one of the first 150 employees at Airbnb and was leaving that rocket ship, worth about $2bn at the time, to start a company in a space with a market size of $200M tops. I wrote the check because I believed that he was either crazy or he knew something I didn’t.
What is the future of Bitcoin?
SF: Many people think of Bitcoin as a digital currency, but it is far more than that. Even if it does not succeed as a currency, the blockchain protocol is powerful for enabling various types of transactions online. It is continuously updated and publically viewable, thereby enabling online contracts without intermediaries. Having said that, we believe that the Bitcoin currency is well positioned for initial success in emerging market economies that suffer from highly volatile currencies. Additionally, Bitcoin can lower the costs of remittances, provide digital banking for the unbanked, and enable peer-to-peer money transfer — all exciting use cases in these economies. In the US population we have over 90% penetration of bank accounts. But there are many countries around the world that have 10% bank adoption, and yet 90% cellphone adoption. There is a tremendous opportunity to provide basic mobile banking services, similar to that of M-Pesa in Kenya, to these populations by utilizing Bitcoin as the underlying protocol. AD: 2014 was “repair mode” for Bitcoin. Price went down, even though per day transaction volume doubled from the last year. We had this “toy” for 5 years, unpeeled it and found that there were scalability problems and security problems. But the exciting thing about problems is that they are opportunities for companies. I see more and more great Bitcoin companies applying to and graduating from our accelerator, and these companies are growing 10–20% month-on-month. That value is going somewhere or to someone in the world. The other trend I see is great talent jumping into the space. The big thing going forward is trust. We need to be predicting what the next hacks might be, as Coinbase regularly does, and providing great insurance and hedging products for retailers and consumers alike. I also believe Bitcoin truly works even when no-one knows it is being used — it is the under-layer that makes money transfers frictionless.
Do speculative investors hurt Bitcoin?
AD: Ultimately yes, because there is a hoarding mentality. Most people hoard their money — just keep it in the bank. Bitcoin will really take off when people start spending it, creating a velocity of money. I use Bitcoin whenever I can to do things like buy Christmas presents or have lunch — about 10 places here in San Mateo accept Bitcoin. The next phase of the journey is to move from speculation to actual use cases — people getting into Bitcoin because they want to use it.
What about illegal uses of Bitcoin — does that risk ruining the currency?
SF: Many people initially came to Bitcoin due to its decentralized nature and privacy features, which made it easier to conceal illicit transactions. This is a recurring pattern with new technology platforms: the early days of the Internet, Paypal, etc. saw significant early illicit activity so it’s no surprise that an early disruptive technology like Bitcoin might attract such use cases initially. However, the reality is that these use cases are a very small percentage of transaction volumes and the industry as a whole is making strong efforts to establish regulatory standards, anti-fraud policies, and security specifications that will further eliminate illicit activities. We believe that Coinbase is a leader in driving many of these advances to the Bitcoin industry as a whole. The fact that Coinbase attracted investments from the likes of NYSE, USAA and BBVA in their most recent round is a strong vote of confidence in the legitimacy and promise of Bitcoin as an emerging mainstream technology platform.
Will we see the realization of a single, global e-currency?
AD: No. That would take more than my lifetime to happen. It’s more likely that Bitcoin becomes the payment protocol through which currency exchange happens. For the foreseeable future countries will continue to have their own currencies that reflect their economics.
