Bitcoin tear! Should I be getting in on this and what’s it mean for startups?

What’s been happening recently with Bitcoin? The value of bitcoin has been on a tear lately into all-time high territory last week as investors bet the digital currency will gain further acceptance globally as an investment vehicle. On the back of the high value, new countries are embracing bitcoins, venture capitalists are investing big and retailers are offering bitcoins in-store. It certainly looks like bitcoin and other cryptocurrencies have come along way since it was conceived by a ‘Japanese mystery man’ in 2009.

I thought I’d deep-dive into how much bitcoin has gone up, the reasons why, followed by how this could affect startups as an investment vehicle.

Let’s have a look at the price rise: How much has it risen?

Over the last few months, the traditionally volatile cryptocurrency has trended upward to the US$1,500 mark last week and has only increased in value since passing US$1,700 earlier this week on CoinDesk Bitcoin Price Index.

Google Search current shows Bitcoin at US$1,788.45

At $1,700, bitcoin prices are up 70% already on the year, and from my sketchy-at-best bitcoin research, but I did read a report on CoinDesk that in the last 30 days, $25bn has flooded the market. 🙀

Seems to be a good time to be in the Bitcoin business.

This graph shows it all…. hockey stick growth. Gold price per ounce is $1,290.60 as of 15th May 2017. #goodasgold (I had to put it in — sorry).

Critics will be cautious, however market observers were more optimistic, asserting that cryptocurrency prices have significant room to grow past current prices. A sentiment that a friend of mine Asher Tan is eager to see continue, after-all he’s the co-founder of CoinJar.

The recent spike has led to an influx of interest from not only the internet community but from often critical parties who have typically sat on the fence with embracement of bitcoin (i.e Banks).

Source: Asher Tan of CoinJar — Business Insider

My guy in the Bitcoin community a fellow Australian fin-techie; CoinJar’s Asher Tan suggested his take on a shared Slack account. Speaking about the bitcoin rise in value has more to do with ‘global macroeconomic factors accompanied with better infrastructure for buying, selling and trading’. He’s quick to point out that a factor to the recent rise isn’t only for large global powers embracing cryptocurrencies, but more so emerging economies.


The rise of bitcoin: Why is this happening?

I thought I’d analyse some common indicators that I found interesting about bitcoin and why now is this hockey-stick growth only now starting to occur, 8+ years after bitcoin was launched initially.

These include:

  • Traction: Gaining Traction of the years
  • Adoption: The rise of adoption and availability to consumers
  • Removal of GST in Australia for purchases of digital currencies
  • Asian Influence: Major Asian countries now embrace bitcoin
  • ICO’s: Initial Coin Offerings.
  • VC Money in: Starting to see value

Traction: Gaining traction over the years

I was shocked to find that there was now over 700 cryptocurrencies in existence. I’m not a bitcoin ‘insider’ but that seemed like many ‘soft folks’, versions and complexities were in play. Bitcoin is the major one we all know, however Ethereum is now a major player since it’s initial release mid-2015. Bitcoin’s current market-cap is $29.4bn versus Ethereum at $8.2bn.

On a side note, many of the 700 cryptocurrencies are niche market currencies and not intended to be mainstream, so I doubt that you’ll hear of any of them outside the top 20 in market cap unless you’re into this sort of thing.

‘A rising tide lifts all ships’ and the bitcoin ship is a ever-growing super-tanker’

While the value of bitcoin has had a few runs, and also been very volatile, the daily transaction numbers have steadily increased. In 2014, the number of bitcoin transactions hovered around 8 million per day to 41 million per day in 2017 — according to CoinDesk.

According to Coinbase.com, back in 2013, there were 13,000 wallets on Coinbase. Today there are 6.8 million and this recent growth suggests that consumer adoption is starting to gain momentum. Recent spikes in bitcoin value will lead to a host of ‘new bitcoin millionaires’ and who wants to miss out on being an ‘overnight’ millionaire?

A Norwegian Man invested $26, forgot about them, somehow remembered he had them (must be the Vodka) and made $850,000. Stories like these are now commonplace on the net.

Part of the rise in value of bitcoin is to do with the ever-growing list of cryptocurrencies. As bitcoin is the major one, many of the initial and ongoing transactions are still using bitcoin as the primary trade currency. If you want to invest in a cryptocurrency that isn’t bitcoin, you can still invest using bitcoins which means more bitcoin transactions. ‘A rising tide lifts all ships’ and the bitcoin ship is a ever-growing super-tanker’.

Adoption: The rise of adoption and availability to consumers

Source: RT.com

The rise of retailers and technology companies that have adopted cryptocurrency payments is also on the rise. Thousands of major vendors including Tesla, Home Depot, Subway and Sears in the US, or a host of online services including Wikipedia, Microsoft, Expedia and Dell are now accepting bitcoin as a form of payment.

An often overlooked aspect in the rise of adoption is Braintree Payments, Square, Stripe and other payment gateways enabling SME’s and online retailers to accept cryptocurrencies with ease. 2 years ago, enabling bitcoin required a developer and a valid reason to accept bitcoins. Now there are a few good plugins on Wordpress and a host of payment gateway friendly plugins for websites.

Retailers don’t want to miss out on sales — even if it’s from a currency they aren’t necessarily familiar with. In 2016, Ladbrokes partnered with Blueshyft to enabled 1200 Australian Newsagents to accept bitcoin as a payment method on a dedicated tablet located in-store. Based on the press release, the partnership expected about 15 million transactions in the first year.

Removal of GST in Australia for purchases of digital currencies

Just this month, the federal government of Australia removed GST for purchases of digital currencies like bitcoin. This is a clear attempt to make operating a cryptocurrency business easier in Australia and good news for CoinJar.

From the 1st July 2017, purchases of the digital currency will no longer be subject to GST.

I’m not out to give investment advice, but from the 1st of July, I’d be amazed if bitcoin doesn’t move up a little further.

GST will still be applied for purchases of goods and services using bitcoin and other cryptocurrencies, however if you want to purchase bitcoins, then you wont need to pay GST.

It will be interesting to see if the removal of GST from cryptocurrencies starts turning the wheels in favour of an investment from VC’s in startups.

In Australia, there seems to be some movement and embracement in regulations around bitcoin, however other larger markets are only starting to understand and embrace the cryptocurrency markets.


Asian Influence: Major Asian countries now embrace bitcoin

Source: Reddit

Asia has started to embrace cryptocurrencies with 🇯🇵 Japan last month announcing that it approved bitcoin as a legal form of payment. That’s big news since China has been luke-warm to cryptocurrency adoption.

Bitcoin has been accepted in other major Asian countries like Vietnam, Singapore and India for a while now and current trends show that Asia has shown the highest rate of daily transaction growth in cryptocurrency transfers.

China’s bitcoin exchanges recently announced major upgrades to their services in response to requests from regulators and the Chinese Central Bank. This is an ongoing issue for bitcoin users and since April 2017, chinese banking regulators have placed a suspension on bitcoin withdrawals.

On the back of the major updates, the regulators are currently reviewing the new upgrades and common sentiment is that bitcoin investors will begin being able to withdrawal in the next few days. In theory, Bitcoin was designed to be a peer-to-peer currency, free from interference from government and central banks, however in places that are careful with what goes on — Facebook in China as an example, — China government interventions are now common.

Amid a never seen before price rise of bitcoin, you’d expect eager bitcoin investors to cash-in on increasing value. Some of these traders are making £116,000 a month, under the radar of the taxman as well.

As Asher noted, emerging economies embracing bitcoin are just as critical as the leading powerhouses. Ever heard that it takes $100bn for a loaf of bread in Zimbabwe? We’ll it’s not as bad as that these days with ZWD$1m = AUD$3,734.58 per Xe.com. Emerging countries are starting to embrace bitcoins in favour of USD or other currencies.

One Hundred Billion Dollars
On a side note, Bitcoin’s ‘claimed father’ Satoshi Nakamoto is obviously of Japanese descent, and one feels like Japan should embrace such innovation, even if the whereabouts and facts about Nakamoto are sketchy.

Rise of ICO’s: Initial Coin Offering

Like an IPO (initial public offering) on stock markets, an ICO (initial coin offerings) aka ‘crowd sale’ are becoming more common with the rise of new cryptocurrencies available.

I mentioned above that I was amazed that there are over 700+ cryptocurrencies currently active and based on trends, in the next few years, that number will become thousands.

New cryptocurrencies are being crowd-funded and tokens of the new currency are sold to raise money for technical development before being released. Unlike an IPO, ICO’s does not grant ownership, nor is there much in the way of government regulation.

Ethereum’s ICO raised over $18 million in 2014. Some ICO’s are smaller and raise $20k, while other like Ethereum’s are much bigger. Smith and Crown has a website dedicated to ICO’s.

ICO’s are a little more like Kickstarter campaigns, rather than IPO’s. Check out the leading ICO platforms: Waves, Iconomi or TokenMarket.


VC Money in: Starting to see value.

Reports indicate that there is now $1.5bn in venture capital backing various cryptocurrency ventures. Most of whom are startups working to make blockchain and cryptocurrencies more accessible.

Hedge Funds are starting to embrace cryptocurrencies and one firm has created their own version after a rough 2016 in the markets. SF based Hedge Fund Numerai recently released its own cryptocurrency to help solve a fundamental problem in finance: more collaboration between hedge funds without cutting each other’s throats.

As you can see, there is a lot of activity going into the recent rise of the value of bitcoin. Ups and downs will continue to occur, however current sentiment is that bitcoin has grown up and is emerging as a more stable, less volatile and safer alternative currency. It also helps that the sector is backed by VC funds and producing some returns for investors.

Blockchain, the ledger technology behind bitcoin has attracted a great deal of interest from the big players financial services. Blockchain could drastically simplify and disrupt a host of backend processes that are a minefield in today’s increasingly complicated banking architecture. Due to the interest with just about everyone in the fintech community, VC’s have been invested heavily in blockchain companies like Veem ($44m) & Bitfury ($90m). Blockchain was built for financial services, however, blockchain principals can be use in a wide range of sectors including media, file storage, security and even politics.

Evolution and diversifying a customer base is music to the hears of an investor looking for a strong to-go-market strategy.


Will my startup raise bitcoins as part of capital raising?

Getting venture capital onboard is a big deal for any startup, as they bring networks, connections, knowledge and much-needed funding to the table. I know all too well that raising capital can be a difficult process and takes your attention away from your product, business and customers.

For that reason, some startups naturally consider branching out beyond the traditional forms of investment to get funding wherever they can find it. Airbnb famously sold Obama cereal to get through early stages of funding.

The current buoyancy in bitcoin value got me thinking about the startup community in Australia and the ‘woeful’ VC market as described by Rick Baker at Blackbird Ventures.

Here’s a non-traditional scenario I’d like to explore:

Could an investment company invest in a startup using bitcoins?

Data from the last few years has shown many ups, downs and ‘forks in the road’ when it comes to valuing cryptocurrencies. Surely the volatility alone would scare both VC’s and startup founders away from such a deal?

Is that still the case in say 2020? With a few more less volatile years under its belt and with the VC market starting to show signs in the form of 💰🤑 from their investments, could we see a day where bitcoin is better than cash?

An upside to being open to accepting cryptocurrency for equity is that it’s a relatively untapped source of funding. As mentioned above, several VC firms such as IDG Capital, Vinod Khosla, Lightspeed, Ribbit Capital and Union Square Ventures are among the big names to invest mightily in bitcoin and blockchain. As part of the offering, these tech firms are holding onto stock of bitcoins and other cryptocurrencies and therefore need to either trade them, or could potentially invest a portion into a startup.

For VC funds looking to make themselves stand out in VC investment, or even a new ‘bitcoin millionaire’ flush with fortune, offering cryptocurrency as a capital contribution may sway founders into an agreeable term sheet. Bitcoin investors tend to have limited options for investing, and may jump at the chance to help get your business off the ground.


A VC opinion?

I tweeted Sapien Venture’s Victor Jiang, a fin-tech venture capitalist who presented the Blockchain Summit 2016. I asked if startups in the future will accept bitcoins as a form of investment?

My Twitter Handle. @mrbretthales
Victor Jiang (@victor_jiang) from Sapien Ventures.

I agree with Victor on investing in startups with cryptocurrencies, only fin-tech focused companies would look at this simply because many fintech startups are familiar with the concept. Other startups in say; digital marketing or food delivery may not be as forward thinking.


What can you buy with bitcoins if you’re in a startup?

The founders could either then use bitcoins to buy computers, servers or software licenses, and could immediately convert the bitcoin investment or ride the typical ups and downs of the bitcoin market. Dell recently started accepting bitcoin so if you work in a non-Mac office, then this could be worth exploring.

Or you could play the market!

I read a recent post about bitcoin investments and if you invested $100 a week for the last 12 months, your total value would be $11,541. That’s more than double the value and not a bad return on $5,200. Imagine if you raised $500,000, immediately banked $250,000 of it for runway and doubled your money again after a year. Sure the metrics won’t work as flush as what I described above, and I’m sure the investor may get nervous with the volatility of the cryptocurrency markets, however with a few years of stable growth, it’s in the realm of possibility.

Source: Coinbase

Of course accepting and exchanging bitcoins can be complicated and founders will need to understand the mechanics of cryptocurrencies before going down this path. Hence why Victor Jiang from Siapen Ventures referrer to the early adopters being fin-techies first.

A bi-product of being a global VC is, if they are in San Francisco, and investing in an European company, do you invest via US Dollars, Euros or maybe a cryptocurrency might be a better outcome?

I don’t think 2017 will be the year that VC firms or PE investor start using bitcoins and other cryptocurrencies solely, however as a hybrid investment with some years of solid growth, I can see the potential for firms and founders alike to start looking at bitcoin as a means of investment. Originally, the appeal for using bitcoin was lack of regulation being that bitcoin has no aligned country. With recent issues in China, bitcoin developers have begun putting in some rigour around it’s security and acceptance. With these recent developments happening, investors may feel comfortable about utilising bitcoins for the first time with mainstream trades and investments.


Summary

In summary, cryptocurrencies have been unstable, forked, misunderstood and criticised. I own the equivalent of $10.50 in bitcoins and with the recent value spikes and the general distrust for the banking system on the rise, I'm sure to have made a few bucks. Through the mess of opinions from bankers to hackers, you can see a simple truth that I could buy into, but I’m going to need some encouragement before I start investing life savings into it.

Nobody wants their life savings to disappear to something they may not fully understand and I think bitcoin messaging as to ‘how to buy and sell them’ is noisy and could be clearer.

Asher Tan’s final comments were on what’s hedging the bitcoin rise to continue upward.

‘Network congestion and the inability for any of the Bitcoin development teams to make meaningful updates to the network to increase capacity.’

These are some of the problems the cryptocurrency are continually faced with. Due to the fact that ‘almost anyone’ can clone the open source repositories, change the name and release their own cryptocurrency is both a positive and negative. I agree with Asher and should some of the team work towards a common goal to enhance the tech stack overall.

Bitcoin and other cryptocurrencies trending currently and that’ a good thing. That encouragement I need to invest some more may not be far away.

Thank-you Asher for the assistance!