2020 Q3: Bitmark CEO’s Observations to our Investors

To: Bitmark Investors & Advisors
From: Sean Moss-Pultz

Note: This article series is taken from Sean’s quarterly letters to Bitmark investors. We share them publicly one quarter after they are written to give everyone a deeper, transparent look at Bitmark’s perspective of the world.

Dear Investors & Advisors

Bitcoin appears to be emerging from the trough of despair. The fundamentals are looking strong. Taproot, one of the most important improvements to the Core Protocol, was merged. That will enable more flexible (and private) smart contracts when activated. Or price, if that’s your signal, is again back to nosebleed levels. When Trump was elected in 2016, Bitcoin was $700. At the start of Q3 it was around $11,000. Now it’s over $26,000.

Behind this excitement is an institutional story for Bitcoin. Microstrategy Inc. (NASDAQ: MSTR) bought $425MM worth of Bitcoin in Q3. Their CEO says Bitcoin will be their primary treasury reserve asset. Square Inc. (NYSE: SQ) generated $1.63 billion in bitcoin revenue and $32 million in bitcoin gross profit during Q3 from their mobile payments Cash App. This is 11 times more in bitcoin revenue than Q2. In their earnings call, CEO Jack Dorsey said, “We believe [bitcoin] will be the native currency of the Internet, and help people thrive around the world and the economy.” Square also announced it has invested $50MM in Bitcoin. Again, touting that Bitcoin is “an instrument of economic empowerment and provides a way for the world to participate in a global monetary system, which aligns with the company’s purpose.”

While Square’s $50MM bitcoin bet pales in comparison to MicroStrategy’s $425MM, it’s arguably more important as a forcing function for other financial institutions. JPMorgan said “other payment companies will also likely follow in Square’s footsteps or risk getting shut out of a growing segment.” which is exactly what PayPal did. Their entire network of more than 26 million merchants can now use Bitcoin.

Bitcoin is a demographic mega-trend led by younger age groups — 18% of Gen Z and millennials already own Bitcoin. To put the millennial proclivity in perspective: Only 37% of people under 35 are invested in the stock market. By the way, if you want to see a beautifully simple introduction to Bitcoin you should read “My First Bitcoin” from Square.

JPMorgan sees Bitcoin’s increasing use as an alternative to gold as being amplified by millennials. “Even a modest crowding out of gold as an alternative currency over the longer term would imply doubling or tripling of the bitcoin price from here.”

It’s worth noting that the biggest US bank’s CEO Jamie Dimon said, back in 2017, that bitcoin was a “fraud” and that, “If you’re stupid enough to buy it, you’ll pay the price for it one day.” As Bob Dylan would sing, “The Times They Are A Changing”.

Fidelity announced they are getting ready to launch a Bitcoin fund. They explain their perspective for holding this asset in their Bitcoin Investment Thesis. For a fund with $3.3T under management, this is a truly shocking position. If even 5% of their clients participate the overall impact would be staggering.

Closer to home, Grayscale, a wholly owned subsidiary of one of our investors DCG, said that they attracted $1B in new capital in Q3. That was 1.5x the capital it raised throughout 2019. What’s equally exciting is that 84% of inflows came from institutional investors.

By this point I hope you’re thinking, “What exactly is the institutional case for bitcoin?” Some people like to describe bitcoin as a hedge against central banking. Right now the US central bank is running an unprecedented experiment injecting trillions of fiat money into the global economic system. How you think that ends says a lot about how you look at longtail risk in an increasingly unpredictable environment.

Having a hedge against central banking makes sense. It’s like having home insurance. You pay a small price now so that if disaster does happen you’re prepared.

Yet, Personally, I think something deeper is going on.

Institutions can be understood as mechanisms which govern the behavior of a set of individuals within a given community. In computing, a communication protocol is a system of rules that allow two or more entities to transmit information. In the digital environment, protocols can create new institutions because they can redefine the rules, syntax, semantics of transactions between parties. I believe we are witnessing a fundamental change in how institutions will operate. I believe we will see new institutions emerge that can better address the needs of a global, digital economy.

If you asked me I would say the reason institutions see value in bitcoin is because enough people inside them understand bitcoin as a protocol — an integrated system of algorithmic rules that can structure social interactions. They see a chance to fix some really fundamental problems.

How does this play out? Like most technologically driven change, it will be very slow for some time and then wickedly fast. Institutions almost never want to be first. But it’s equally as true that they don’t want to be last. This snowball will get huge as more and more institutions embrace bitcoin.

Make no mistake, bitcoin is not (just) money. It’s an alternative financial system in disguise. Bitcoin will not replace banks anymore than the Internet replaced the phone or the cable companies. But it can radically change them for the better. The shift from trust to cryptographic proof will be profound.

Even with COVID-19 and the political divisions, I’m quite optimistic about the future. Financial institutions embracing Bitcoin means that there is a path to build a more transparent financial future. And if improvements can be made to financial institutions, then other institutions will swallow this pill, too. I would not be surprised if recording value without using a blockchain will be seen as luddite within a decade.

That’s the macro view. Let me share what this means to Bitmark. In Q3, we spotted a great opportunity for us to build a mobile app and personal data server that makes individual control of Bitcoin safe and easy. I will call this a “Crypto Wallet” from here onward. But please keep in mind that it’s actually a lot more than that. The personal server component, unique to our architecture, will play a critical role in realizing our mission of giving individuals control over all their data.

In case you don’t use Bitcoin, a “Wallet” is what we call the app that stores the information necessary to transact bitcoins. It’s quite the misnomer. Unlike a physical wallet that actually holds things, a Bitcoin wallet stores the digital credentials for you to access (and spend) and spend your bitcoins. The actual bitcoins are in the cloud — they are inseparable from the blockchain transaction ledger.

The Bitcoin network uses public-key cryptography for access control. Once you have a bitcoin that is issued (by the miners), all subsequent use is with bearer objects. Control of that bitcoin can be transferred or subdivided to others who can satisfy the requirements of the script (based on either public or private keys) associated with that bitcoin. At its most basic, a Bitcoin wallet is a collection of these keys.

Managing these keys continues to be one of the most difficult tasks in information security. We are nowhere near a user experience that can go mainstream. People, like me, that do it ourselves have become a bit more experienced and a lot more numb to the risks. When I talk to people that are new to bitcoin they are baffled and bewildered by all of this.

Most individuals when they understand the problem of key management simply give up and let central intermediaries like Coinbase do it for them. That weakens the security and privacy architecture in Bitcoin. Centralizing keys has led to incidents where exchanges have lost their customers’ assets and then “compensated” them with an exchange token. (Aka “Shitcoin”.)

Crypto Wallets are necessary to secure all types of digital assets, not just money. OurBeat is actually a cryptographic wallet and server infrastructure for beats. In our work with Pfizer and UC Berkeley, it became clear that a cryptographic wallet is also critical for advancing the future of healthcare. Right now our data is trapped in institutional silos. If individuals could control their own data they could exchange it directly with institutions for better services. Right now when an institution wants access to your health data they need to contract with other institutions. Competing commercial interests oftentimes prohibits access. As we showed with Pfizer, going direct to the individual radically simplifies that flow. Giving individuals control over their digital assets also helps the bottom line: Compliance with regulations like HIPAA and GDPR are trivial; the transaction is “peer-to-peer”.

This is why Bitmark is building a mobile app and personal data server to make individual control of digital assets safe and easy. The initial architecture makes individual control over Bitcoin keys safe and easy. This might be surprising to many of you. A fair question to ask is, “Does the world need another bitcoin wallet?” Probably not. However, that misses the point, unless you understand our larger plan. The mission of Bitmark is to give individuals control over their own data. Bitcoin has the biggest user base that pays for control over their data (digital assets). There’s at least 60 million active Bitcoin wallets. These users suffer from complicated and unsafe key management. Bitmark can solve this problem and, in the process, drive down costs and optimize the technology to provide control over any type of data. We can then go down market from Bitcoin users and give individuals control over things they never dreamed possible.

So in short, the master plan is:

  1. Build a crypto wallet and personal server architecture that makes individual control of Bitcoin safe and easy.
  2. Extend that architecture to provide control of Facebook data. Experiment with ways for individuals to monetize (opt-in).
  3. Extend that architecture again to control more data (eg: health) and more ways to monetize.

The vision is that, in the future, you will carry a crypto wallet that holds not just money and your ID, but also what you like, where you’ve been, your medical records, health data, exercise habits, and more. This wallet will have a multi-dimensional record of who you are.

We are building on Gordian from Blockchain Commons. Gordian is secure open infrastructure for mobile clients to access Bitcoin full-node services with exceptional security and privacy. After we make the basic Bitcoin features like multisig a joy to use, we will bring in Cryptographic Object Capabilities to the Bitcoin and Bitmark protocols and make more powerful authorizations possible. (That’s what I wrote about in our Q2 update.)

The founder of Blockchain Commons is Christopher Allen. He’s the co-inventor of SSL/TLS — the cryptographic protocol that provides end-to-end security of data sent between applications over the Internet. When your web browser shows the green lock in the address bar you’re using his work. Without TLS, sensitive information such as logins, credit card details, and of course your personal information can be seen by eavesdroppers and hackers. In short, our goal is to bring to that level of safety and security to all types of digital assets, starting with Bitcoin.

History doesn’t repeat itself, but it often rhymes. In the early days of the Internet, we had a collection of protocols for file transfer, email, newsgroups, etc… but we lacked a central place that made the benefits of these protocols accessible to everyday people. That’s why, when the Netscape web browser came out, the Internet rocketed to the mainstream. It wasn’t that Netscape was a radically new piece of technology. Rather, it was a friendly user experience for existing communication protocols that were (previously) difficult to access.

This Crypto Wallet is a “browser-like” opportunity. Done right, it has the potential to revolutionize our economy and society at a scale that could make the Web seem small.

That’s all for now. Stay hopeful.

Best,
Sean