Wall St. Still Doesn’t Grok Tesla


Wall St. still doesn’t fully understand yet that Tesla is not just a car company. Analysts and traders treat Tesla on traditional car company metrics like next-quarter units sales, while the big picture is largely ignored. The big picture is much more interesting (and profitable):

1) Tesla is as much a software company as anything else

The over-the-air updates have made numerous headlines, but look closer and you see it’s in Tesla’s DNA to think, hire, act, and iterate like a software company. For example, Tesla just hired ex-Googler Chris Evans as Head of Security. Here’s a snapshot of his linkedin profile (which, fittingly, he hasn’t updated recently):

Chris Evans LinkedIn

Pretty strong software cred. From writing vsftpd, a popular unix tool, to working on security at Google; this guy lives and breathes code; specfically software-security.

By contrast, let’s look at GM’s Chief Product Cybersecurity Officer:

Jeffrey Massimilla LinkedIn

Mr. Massimilla is a lifer in the car industry, and primarily an automotive engineer. This is a *very different* skillset than Mr. Evans’ above. It’s widely acknowledged, even in the traditional car sector that these machines are becoming computers on wheels. Which of the above skillsets looks more suitable for managing data-security over fleets of these things wirelessly connected to the internet at all times?

2) Tesla is a data company

Google has released striking numbers regarding the 1,000,000+ miles they’ve autonomously driven in the past few years, mostly in beautiful, Mountain View, California with its pot-hole free roads and perfect year-round weather:

Mountain View, CA
Castro St, Mountain View, California

By contrast, Tesla is collecting 1.5 million miles *per day* of real-world driving information from their fleet of computers-on-wheels. This includes places like…New Jersey:

New Jersey Turnpike

…and the cars are already using these data to self-improve, just three weeks after the launch of Tesla’s “auto-pilot” feature. GM will release Super Cruise control in a couple years, maybe.

3) Tesla is not just about cars

On the hardware side, Tesla is as much about pioneering battery technology as it is driving experience. Their Lithium-Ion tech is unmatched at their price-point and scale, and Tesla’s under-construction giga-factory, which is ahead of schedule, will “produce more lithium ion batteries annually than were produced worldwide in 2013.

On the back of this battery prowess, they’re soon releasing Home and Utility-scale storage batteries that are already changing the calculus for traditional utilities. This line of business is shaping up to be critical in allowing renewables like solar and wind to be cost-competitive with traditional power in the short-term, and far cheaper in the long-term. $Trillions will be spent revamping global power systems in the next few decades, and battery technology is key.

A Wall St. analyst may look at the above as hype, and maybe it is. But if Tesla succeeds, the magnitude of their success will be shocking.

Edit: Here’s an excellent post by Chamath arguing that Tesla will become the first HaaS (Hardware As A Service) company at scale: HaaS and the Future of TSLA

Disclaimer: I own Tesla shares. How could I not given that I believe the above?

Bitcoin is Simply Better Money


It’s now clear to masses of people, both in tech & finance, and beyond, that bitcoin is an interesting technological development with lasting value. But what is that value? What is bitcoin’s biggest promise?

Soon after the original bitcoin whitepaper (pdf) was published, the earliest adopters viewed bitcoin as a theoretically near-ideal money, which remained the prevailing view for several years. In the past twelve months or so, people have become increasingly enamored with the various “Bitcoin 2.0” ideas, including things like distributed markets and smart-contract engines. These are indeed powerful ideas uniquely enabled by bitcoin, but I think many in the bitcoin community are coming back around to bitcoin’s more simple promise as ideal money for the electronic era.

I recently watched Wences Casares’ “Getting to a Billion Bitcoin Users” talk from Bitcoin2014:

This is a must-watch for anyone following bitcoin, or anyone attempting to understand bitcoin. In just 31 minutes, Casares eloquently defines the great experiment, breakthrough, and potential that bitcoin represents. Beginning with an overview of 100,000 years of human exchange, Casares aptly addresses many concepts in bitcoin and money, ranging from money as memory, bitcoin’s role against gold, reserve currencies, store of value, exchange rate volatility, getting to 1-billion bitcoin users, and alt-coins.

The key takeaway is that

“[bitcoin] may very likely be the best form of money that we’ve ever seen in the history of civilization.”

Indeed, Casares isn’t the only thought-leader reiterating the core of bitcoin’s promise amidst the current hype of alt coins and app coins. Fred Wilson recently commented:


Hear hear. Now how do we get this to happen? How do we get to Casares’ billion bitcoin users?


It’s not going to be glamorous (like Ethereum or the hype surrounding various alt tokens). What it’s going to be is a slow penetration into the core mechanics of commerce, exchange, and payment.

I’ve said for a while that two of the most important things to happen recently are Bitpay‘s payroll API, and Overstock’s plans for supply-chain penetration. Both of these efforts close the loop. Merchants need to accept bitcoin from consumers, but consumers also need to be paid in bitcoin. And similarly, merchants need to be able to pay suppliers and employees in bitcoin. The core demand for bitcoin as money is what drives the entire concept and all the other follow-on applications that may result.

In order for that next era of bitcoin commerce to begin; i.e., moving beyond Casares’ “Store of Value” phase, bitcoin needs liquid, sophisticated, regulated, US-based exchange infrastructure. Businesses need to be able to hedge the current bitcoin/fiat exchange rate volatility in order to use bitcoin as money. Many in the bitcoin space realize this, and there are now several well-funded exchanges with great teams solving this problem (itBit, SecondMarket, etc). This inevitably allows bitcoin to seep deeper into core commercial uses.

While ambitious, exciting, theoretical blockchain-based projects are grabbing attention, the next year or two is about building the core infrastructure for bitcoin that truly enables its broad use as the ideal money that it is.

Proof of Solvency is a Big Deal


Leave it to programmers to look at a catastrophic $350M financial-company collapse, and immediately think:

“Why not just code that sort of inelegance out of the economy?”

That’s exactly what’s happening in response to the recent implosion of early bitcoin-exchange MtGox. On the day MtGox filed for bankruptcy protection, CoinSetter, a bitcoin trading-market startup based in NYC, began a public process to determine how to do cryptographic proof-of-solvency.

This idea has profound implications for all financial institutions. Cryptographic proof of solvency refers to a way to publicly prove, beyond any possible doubt, that an organization’s finances are in order. The idea is essentially to link all deposits/liabilities of an organization and use cryptography to prove that they sum to a certain amount. The company can then use the public bitcoin blockchain to provably demonstrate control of at least that quantity of funds. Critically, this proof would not rely on the company’s own statements, or statements by its auditors, but on cryptography; in other words, the laws of mathematics. As we’ve seen so many times before (Enron, Worldcom, MFGlobal, Madoff), it’s probably not a good idea to unilaterally trust what companies, or their auditors, say.

Bitcoin gives the world completely new financial possibilities through the combination of the Blockchain (bitcoin’s public ledger) and cryptography. Proof-of-solvency is just the obvious first-step in giving financial companies the ability to provide customers with unprecedented transparency and control of funds. This has very large potential benefits to society, given the financial-system costs associated with insurance, fraud prevention, auditing, etc. Not to mention multi-trillion dollar public bailouts when those measures fail to be enough anyway.

Do Bitcoiners Want a Bailout? No.


MtGox filed for bankruptcy protection today, and in so doing, disclosed that it has 127,000 customers who are owed on average the equivalent of $3500 each. One might expect this sort of thing to trigger angry cries from customers for government intervention and/or bail-outs.

Indeed, some do think this is the case:


While that tweet may have been mostly in jest, it did strike me that I’ve noticed ZERO calls for government intervention from MtGox customers. People are obviously angry; mostly at MtGox management, and somewhat at themselves. The various calls for action are mostly calls for new, better-run, more transparent businesses, better redundant storage of funds, and development of decentralized exchanges that cannot become insolvent. In short, even at the height of customer shock and anger, the calls from within the community are mostly for a change in consumer behavior, and development of better technology. Bailouts are not considered a desired or long-term viable solution.

On one hand, this doesn’t come as much of a surprise, with bitcoin’s roots and early userbase coming from a libertarian ethos. But usually when people lose money, real and/or irrational feelings come out. The lack of calls for intervention shows a deep belief in bitcoin’s potential to serve the greater good without explicit central management. Here are some quotes from the “Official Money Lost in Mt. GOX Thread”:

“417.8923 BTC…
Stupid me… Was going to withdraw and move elsewhere, but the price kept falling so… Greed.”

“8 BTC (0 EUR/USD)
I bought the BTC less than 24 hours before the trading stopped…
I don’t even regret it. Yes, I am a little said [sic], but I was aware what I am doing and I would do this again.”

“Looks like 38BTC gone. I knew better but trading was fun.”

“$0 and $0 BTC. The only person I trust with my private keys is myself.”

“2.08 BTC. 274 USD… Should’ve cashed out earlier, but I got greedy.”

“About 4k in USD…I should have seen the writing on the wall and converted back to BTC and pulled it.”

“they better go bankrupt and stay bankrupt, for bitcoin”

“I pretty much have my life savings on Gox/MtGox whatever. When I first joined gox and the bitcoin community as a whole back in 2011 I had £1000 to my name.

I took a lot of huge gambles over the last 2 years and in my opinion did fairly well in fact I had over 17k euros by the “end” sitting on gox. Not counting the money I withdrew to live on.

Easy come easy go and with the risks I was taking along the way this was always a very real possibility.

Bitcoin was still a great experience for me and I’m glad I was in for the ride (yes I’m still a believer).

I wouldn’t want a single donation from anyone and would refuse it respectfully as I was a risk taker from the get go Grin

I think the best thing this community can do is offer support in a form that would potentially prevent the very real chance of suicides.
Its ow so easy to forget there are real people behind the curtain of the internet and many of them are hurting and suffering.”

The above quotes are not cherry-picked. At 11-pages long, with some people claiming millions-of-dollars equivalent in losses, there’s not a single call for intervention in that thread. Bitcoin enthusiasts are a consistent bunch.

What MtGox Did Wrong


tl;dr: Everything.

A friend emailed me yesterday and asked “Why aren’t others vulnerable?” That’s a good question. For those of us who pay attention to bitcoin every day, it’s been clear for months (even years for some) that MtGox was a unique risk in the bitcoin ecosystem. It’s always been considered unwise to leave significant funds in *any* exchange for very long, but starting in summer 2013, it started looking downright insane to keep money in Gox.

The problems arguably started much earlier. A timeline of MtGox’s troubles:

May 20th, 2011 – Files incorrect banking application.

MtGox CEO Mark Karpeles opens a business banking account at Wells Fargo, and fails to declare MtGox as a “Money Transmitting Company”.

June 19th, 2011 – Customer database hacked. Market compromised.

MtGox gets hacked, and a single massive sell order is executed, causing the price to drop to pennies within minutes. I had the fortune of watching this flash-crash in real time; a fascinating lesson in market liquidity. MtGox’s failure here was tangential: as a result of this incident, it became clear that MtGox was hashing their customers’ passwords with MD5, a hashing algorithm long considered inappropriate for modern use by even novice security consultants. This was a very telling early insight into MtGox’s security and technology practices.

April, 11-12, 2013 – Trading halted due to bad technology.

MtGox suspends trading, calling it a necessary “market cooldown”. In reality, it was due to their inability to mitigate DDoS attacks and/or handle high-load on their systems due to high bitcoin trading volume. Either way, MtGox was a very profitable business and had months of warning (years, really) to realize they needed to upgrade their systems.

The trading halt on MtGox was the trigger for the end of the massive Spring 2013 bitcoin bull market. Prices crashed from over $200 to $50 in one day. This was the 2nd time failures at MtGox caused a market panic.

May 2nd, 2013 – Bad deal with CoinLab results in lawsuit

MtGox’s alleged failure to honor the terms of their merger deal with then pseudo-exchange CoinLab (now effectively defunct), is aggressively terminated by CoinLab with a $75M lawsuit. To be fair, it’s unclear who was at fault, but it’s likely both parties made serious faulty business decisions.

May 15th, 2013 – DHS seizes $5.5M from MtGox.

MtGox’s real trouble begins. The US Department of Homeland Security seizes MtGox’s Dwolla account, apparently containing $5.5M in funds. This is a direct result of Karpeles decision in 2011 to not check the “Money Transmitting Business” box on his Wells Fargo banking forms.

While clearly an egregious error, especially after FinCEN‘s guidance, to be fair, bitcoin was essentially a toy until 2013. Few took it seriously, and in that context, it was easy for many non-diligent early bitcoin business operators to dismiss existing money services regulations as not applicable.

June, July 2013 – Dollar withdrawals restricted.

MtGox suspended US dollar withdrawals on June 20th, and resumed them on July 4th. Unfortunately, despite the resumption of withdrawal processing, customers were unable to get funds out in a reasonable timeframe. Withdrawals usually took in excess of 4 weeks to complete. Rumor has it that MtGox’s tenuous banking partnerships (or the DHS) were imposing wire-transfer limitations on the company.

If the prior incidents were not sufficient warning, this was the huge red-flag. Naturally, this was also the point at which the price of bitcoin on MtGox started to diverge from the price on other exchanges. Due to the dollar withdrawal issues, traders had to buy bitcoin and transfer it out in order to withdraw funds from MtGox in a timely fashion. The MtGox price therefore started to steadily trade 10% (or more) higher than increasingly popular exchanges Bitstamp, Coinbase, and BTC China.

Many in the bitcoin community began more vocally advising traders to retain control of their own funds, and to specifically remove their funds from MtGox. The writing was on the wall.

February, 7-10 2014 – Bitcoin withdrawals suspended.

MtGox suspends bitcoin withdrawals, citing a known-since-2011 issue in the bitcoin protocol called “transaction malleability”. They claim that the issue is preventing them from reliably processing bitcoin withdrawals and that they have to freeze withdrawals while they sort it out. Not good.

The thing about transaction malleability is that it’s been a known issue/quirk of the bitcoin protocol since 2011. Briefly, there’s a several minute window between when a transaction is broadcast and when it’s confirmed in the bitcoin blockchain. It’s possible during that window to broadcast an identical transaction (same sender, same recipient, same quantity of bitcoin), but with a different transaction-hash. Only one of these transactions will make it into a block, with the other being considered a double-spend, and therefore dropped. Since this is a known issue, no diligent bitcoin service implementation uses the transaction-hash as a sole identifier for transactions in their internal accounting systems.

But MtGox apparently did. That meant that malicious individuals could withdraw bitcoin from MtGox, immediately issue a re-broadcast of the transaction with a different hash, and then if that re-broadcast transaction made it into the blockchain, the person could then contact MtGox support and say “Hey! My withdrawal never happened; see, the original transaction hash is not in a block! Send it to me again!”. Apparently MtGox even had an automated process for withdrawal resends!

While other exchanges did end up temporarily suspending withdrawals to evaluate their own code in this context, they all re-opened quickly and without issue. MtGox was the only exchange demonstrating such careless accounting and withdrawal processes.

February, 24th 2014 – MtGox finally dies.

MtGox suspends trading entirely, deletes their twitter history, and leaks documents alleging 744,000 missing bitcoin. What?!

We still don’t know the details, but CEO Mark Karpeles said today that the leaked documents are “more or less” legit.

Which begs the question: How on earth do you lose track of 744,000 bitcoin?! The document says the bitcoins “are missing due to malleability-related theft which went unnoticed for several years.” If true, that implies some unbelievably bad accounting practices, business operations, financial management, executive diligence, etc, etc. It’s not hard to check a bitcoin cold-wallet balance, and at least roughly reconcile accounts on a frequent basis.

The document also states: “The cold storage has been wiped out due to a leak in the hot wallet.” Again, What?! That can’t happen in a properly implemented system, and reeks of even more egregious technical incompetence.

Other possibilities, of course, include insider theft, or far more damage from the 2011 hack than has been admitted to date. UPDATE: Or MtGox may have simply lost the private keys to their coldest & oldest storage, or maybe the US Government has them. We may never know the truth, but one thing is for sure: Bitcoin is better off without such amateur-hour incompetent businesses as MtGox.

UPDATE: February, 28th 2014 – Bankruptcy.

MtGox declares bankruptcy, disclosing 127,000 customers owed an average of $3500 equivalent each.

In Summary

MtGox’s failures were many: regulatory, technical, business-strategy, accounting, management… The specific failures that made MtGox uniquely vulnerable to this kind of catastrophic implosion were:

1) Using a custom bitcoin implementation and not sufficiently updating it or handling long-known issues.
2) Not treating regulatory issues seriously.
3) Poor general security practices.
4) Poor business decisions/relationships.
5) Technology unable to handle predictable load and/or DDoS attacks.
6) Improper bitcoin funds management (cold/hot wallet).
7) Egregious accounting practices.

All these factors led to the situation MtGox is in today. No business should operate with this level of incompetence. MtGox was the last big holdover from early-bitcoin, where enthusiasts built initial services whose popularity quickly exceeded the innovators’ ability to manage the business. As Roger Ver said:

“Gox is the worst-run business in the history of the world.”

And that’s coming from “Bitcoin Jesus”.

Ultimately, the dramatic failure of MtGox marks the transition from early-adopters and a niche market, to seasoned professionals increasingly serving a mass-market. The current crop of bitcoin businesses is a different breed than the first generation: venture backed, run by proven talented entrepreneurs, and aggressively compliant with existing regulatory frameworks. These are the businesses that are driving bitcoin’s next phase of adoption.

Bitcoin Phase-1 is Over. On to Phase-2


It’s one of those days in bitcoin. MtGox internal documents allegedly leaked. 744,000 BTC potentially “missing” from MtGox’s books. NYTimes and Wired running articles with dramatic headlines and several FUD paragraphs…

Nobody ever said bootstrapping the world’s first truly global, ideal-for-our-times, decentralized currency was going to be easy. As the media circus surrounding MtGox’s likely demise begins in earnest tomorrow, let’s brush off the attacks on Bitcoin in general, and look to the next generation of bitcoin businesses.

MtGox was a holdover from early bitcoin, where clearly incompetent people/operations handled massive amounts of customer funds. That phase of bitcoin’s development has been ending, with the termination of MtGox being the final chapter.

The next phase will be driven by professional, larger-scale, audited, transparent companies. They will look to use the transparency, proof, and segmented control features of bitcoin to build trust, and demonstrate the unique power of bitcoin. Look soon for an exchange offering real-time proof-of-reserves, and multi-sig account control.

The next phase may not be as roller-coaster exciting as bitcoin’s birth, but it’ll change many more lives for the better. The next 100 million users await.

ASICS – Are They Evil?


As the arms race in bitcoin mining continues unabated, the flurry of misinformation and bad logic surrounding the issue is as intense as ever. Since litecoin originally launched and attempted to boast itself as having an “ASIC resistent” mining algorithm, people have been creating and touting various marginal alt-coins as the ultimate bitcoin successor because of supposed resistance to ASICs and mining centralization. This is flat out wrong. Any successful proof-of-work based crypto-coin that develops high enough value will experience the same kinds of mining dynamics we’re seeing with bitcoin. It’s all about the money.

The Arms Race

Now that each bitcoin is worth hundreds of dollars, the 25BTC block-reward distributed by the protocol to bitcoin “miners” every 10 minutes is very enticing. More and more serious, and well-funded, mining operations are appearing. You only need to glance briefly at a bitcoin-mining hashrate chart to understand that something explosive is going on here:



What are ASICS?

ASIC stands for Application Specific Integrated Circuit; ie, a specialized computer chip. Back in late 2012 when it became clear to some that bitcoin was likely to keep gaining in value, engineering teams started to work on developing ASIC chips for bitcoin mining. These chips could mine at 10-100x greater power-efficiency than the standard GPU (graphics-card) mining hardware at the time.

So what’s the controversy?

ASICs are expensive. A single top-of-the-line ASIC rig (the chip + supporting hardware) can cost $5,000-$10,000. That makes cutting-edge bitcoin-mining hardware out of reach for many people. No longer can someone spend a few hundred dollars on a fast GPU card, stick it in any old computer, and profitably mine bitcoins.

That has some people in the bitcoin community forecasting doom at the hands of big-money, centralized, corporate bitcoin mining operators. The fear is that, eventually, there will just be a few huge bitcoin miners that are susceptible to less-than-honest practices or government interference.

How is this a problem with ASICs?

It isn’t. People are just associating “big money” and centralized power structures with ASICs because ASICs cost “big money”. The problem is not ASICs; it’s the fact that when a coin achieves enough value, it suddenly becomes rational to throw significant money into mining it. This has already started happening to litecoin, with multi-thousand-dollar GPU rigs fairly common, and scrypt-ASICs around the corner (something that litecoin’s proponents originally said would never happen).

It’s simply the case that people are going to invest money into mining gear if there’s profit to be made. Whether the specific mining algorithm lends itself to ASICs, GPU farms, CPU farms, lots of memory, or something else, those with the ability to throw lots of money and compute power at the problem are going to get a greater share of the mining market. Eventually, this centralizes to those with the most power-efficient hardware, no matter what the algorithm.

So make no mistake: proof-of-work mining will be done at data-center scale in any mature and valuable coin.



First Take on Ben Lawsky’s Reddit AMA


New York Superintendent of Financial Services, Ben Lawsky, took to Reddit today to do an hour-long “Ask Me Anything”. He seemed reasonably open and thoughtful about the bitcoin space, taking care to mention several times that his team wants: “…to move carefully and not go so fast that we fail to see the unintended consequences of the framework”.

Some highlights…

Regarding banks’ unease with bitcoin-related activity:

“I think new, careful regulations, especially related to preventing money laundering, will make banks more comfortable with Bitcoin-related activity over time.”

Clarifying his innovation-quashing comment from January’s NYDFS hearings:

“In context, I was also trying to emphasize that money laundering is not to be taken lightly — in many ways it is the lifeblood of terrorism around the world. My hope is that if we can get appropriate guardrails in place to prevent money laundering, we can take a deep breath and really focus on trying to ensure that virtual currency firms flourish and continue to develop and innovate. I’m very excited about what the future could hold for this very powerful technology.”

In response to an “on-ramp” for small virtual currency companies/startups, and the similarities to regulating small banks that don’t have big budgets for compliance:

“We’ve had some success in getting these regulations amended so they don’t crush smaller community banks. Any regulations we issue for virtual currency firms will have to be carefully tailored with this in mind.”

On the existence and potential of bitcoin and crypto-currency in general:

“Hard to put the genie back in the bottle. I can’t predict the future but Bitcoin is certainly a new powerful technology that holds a lot of promise for the future if we can mitigate some of the potential negatives like money laundering.”

“Bitcoin holds the potential to bring the costs of international transactions way down. That could be huge for the thousands and thousands of New Yorkers who today send money back to their families in their home countries at great expense.”

What does Superintendent mean?

“No one knows what Superintendent means anyway.”

Comments on incenting US-based exchanges:

“We hope regulatory clarity will attract exchanges to the United States. I suspect that they are staying offshore right now because they don’t know what the rules of the road here are or will be. 2. We do hope that regulation will create a level of certainty that could incentivize banks to promote not stifle these innovations. I also suspect there are banks who are quite interested in the technology but are being risk averse for now in the absence of regulatory clarity.”

He noted that his own thoughts/impressions on bitcoin have evolved significantly, saying:

“I’ve personally evolved a lot on the issue the more I have learned. I wouldn’t compare it to a Rocky-IV-final-scene about-face and it has taken time for all of us at DFS to get our minds around it, but certainly our views have changed.”

Regarding bitcoin mixers/tumblers:

“We are looking closely at “tumblers” and have been getting some feedback both pro and con. Don’t have answer yet on that and would welcome additional thoughts people have. At our hearing, it was clear the use of tumblers was something that had created issues for law enforcement in their investigations. At the same time, we understand there can be legitimate uses for tumblers and we get that there can be real value in having privacy when it comes to financial transactions. Again, it becomes a question of getting the balance right.”

On financial privacy:

“I think financial privacy is an important value. …. At the same time, there is an important competing value in preventing money laundering which often requires that those engaging in financial transactions (especially when large) provide some identifying information so we can make sure we’re not permitting things like terrorist financing…”

MtGox [Update: below quote is from before MtGox's Feb 24th complete shutdown]:

“The Mt. Gox shutdown was a reminder that this is still a young industry and there are still problems getting worked out sometimes on a daily basis. I think we should stay positive about that. We’re seeing a shaking out of the industry and that’s as it should be — it will lead to improvements. … Maybe more importantly, the Mt. Gox issue underscored for us that it would be far easier if we had some exchanges locally that we could interact with, allowing us to better understand these issues so as to protect those engaging in trades with the exchanges. We’re hopeful that clear regulations, if done in a smart, modern way, may incentivize some of these exchanges to come ashore (hopefully here in NY).”

Bitcoin in general:

“I think Bitcoin or the underlying technology has a lot of potential on numerous levels. As Professor Athey said at our hearings, even the experts don’t know today how the technology will evolve and what it will ultimately look like. But I do think it holds a lot of promise (if money laundering can be adequately addressed), both on its own and in terms of causing existing payments system technologies to up their game.”

All in all, it’s clear that Mr. Lawsky is looking deeply into the bitcoin space, and both sees the potential as a technology as well as the regulatory challenges. Let’s hope Mr. Lawsky takes special care to allow the innovation to happen by keeping compliance burdens for innovators and small startups to a bare minimum. If you have a comment for Mr. Lawsky, he’s active on Twitter: @BenLawsky

Bitcoin: Too Good to Hoard



At one point during last night’s bitcoin debate between Jeffrey Tucker and Andrew Schiff, Andrew asked the audience: “How many of you have bought something with bitcoin?” Half the audience raised their hands. He then asked: “And how many of you regret it, given that bitcoin is worth 100 times what it used to be?” Almost all hands went back down.

There’s something about bitcoin that traditional economists and finance people keep missing. Having spent their academic and professional lives theorizing about “rational” economic actors, they can’t get over the fact that bitcoin’s purchasing power changes a lot from month to month, sometimes hour to hour. Why would anyone use it under those conditions when they can just use something stable like dollars?

What they’re missing is that bitcoiners expect the price to be volatile, and view that as a necessary and obvious price-discovery step in the rapid-adoption phase of a fascinating new technology. We see the potential, we understand how ground-breaking it is, and we want to use it now. We know it’ll either be worth a lot more or a lot less in the future, but we’re jump-starting the next phase of money here, and we’re not gonna wait for “stability” to make use of it.

But don’t take my word for it. How about the guy who bought 10,000 BTC pizzas less than four years ago? Writing a week ago, he said:

“…I was pretty happy to trade 10,000 coins for pizza. I mean people can say I’m stupid, but it was a great deal at the time.”


He actually did this several times, eventually spending over 80,000 BTC (worth $50 million today) on pizzas:


“The pizza thing was a lot more popular than I thought so I made good on as many trades as I could.Other than a little bit of single digit change, I spent everything I mined.”

Lazlo's Address - Blockchain.info


Bitcoin is simply better money. It’s a pleasure to use. When I made my first bitcoin transaction, it struck me full-force that “THIS is how money should work.” Frictionless, secure, private, instant, decentralized. Using dollars online has none of those properties, and using bitcoin makes it obvious just how much of a problem that is.





[Re-Running] Bitcoin Fair Value: A First Assessment


We model this assessment on David Woo's December 2013 report: "Bitcoin: a first assessment" (Bank of America / Merrill Lynch). Mr. Woo begins with an extensive and apt summary of the bitcoin ecosystem, and we highly recommend reading his report. He goes on to analyze bitcoin's fair value using an equity-equivalence framework. We re-run Mr. Woo's value analysis (and then some) below, using what we consider more appropriate methodology and comparative metrics for a currency/commodity hybrid such as bitcoin.

We agree with Mr. Woo that bitcoin is both a medium of exchange and a store of value. We also agree that it's easiest to assess fair value by treating these uses separately. Additionally, we would like to note that the below analysis represents various bitcoin success-scenarios which may or may not occur, and that fair present value is therefore some weighted discount to the below success-case values. We treat this further in our conclusion.

Value as a medium of exchange

To assess bitcoin's potential value as a medium of exchange, we will look to existing fiat money flows and supplies, and ask what total value of all bitcoin is necessary to support various fractions of that economic activity. We do this as a starting point for rational, data-driven determination of bitcoin's fair value, and will leave it to the individual reader to decide whether our underlying assumptions and reference points are sensible.

Economic Activity, Money Supply, and Velocity

To determine the supply of money necessary to sustain a certain amount of economic activity, we must look at how quickly that money changes hands. This concept of monetary velocity is a key value for modern economies. Let's look at velocity in the bitcoin ecosystem.

We can see from blockchain data that average daily transaction volume for bitcoin over the last 6 months is roughly 200,000BTC:


while total supply of bitcoin averaged ~10,000,000BTC over the same period:


That yields an annual velocity of roughly 7.3*. This is much higher than the monetary velocity of dollars, which averages under 2.0. In our view, this seems a natural consequence of bitcoin being a far more frictionless medium of exchange compared to fiat money such as Dollars or Euros. Since bitcoin requires no third-party settlement intermediary, it's simply easier and cheaper to send/receive; thus, one would indeed expect it to move around the economy more quickly than other currencies.

The other side of the equation when determining value of a single unit of something is supply. Due to the algorithmic nature of bitcoin, we know the supply exactly; there are currently 12,151,075 bitcoins in circulation as of this writing (see chart above, or visit blockchain.info/charts for real-time data). Additionally, we know that there will never be more than 21,000,000 bitcoins ever issued. We will use this latter supply figure in value calculations below.

* Money Velocity, V, is defined as: V = T / M, where T is the aggregate value of all transactions over a given period, and M is the avg total money supply over that same period. In our discussion, T = (200,000 * 365) = 73,000,000, and M = 10,000,000. Thus, V = 7.3.

Bitcoin as 10% of remittance market

In contrast to Mr. Woo's comparative equity/enterprise-value analysis, we think it's more relevant to analyze bitcoin's potential share of the remittance market as a currency, not as a single corporation/equity. The equity comparison Mr. Woo undertakes is ultimately vague and difficult to justify since bitcoin is not a company. Luckily, since bitcoin is used as a medium-of-exchange (ie, currency), we can look directly at existing demand for currency and determine what value bitcoin must have in order to satisfy various slices of that demand. Using such methodology, the calculation is simple:


Chart source: World Bank

Global remittances in 2012 totaled $478 Billion according to the above World Bank data. If bitcoin accounted for 10% of that activity, the equivalent of $47.8B worth of bitcoin would need to be transacted. Using our monetary velocity of 7.3 from above, the supply of bitcoin would need to be $47.8B / 7.3 = $6.55B.

Table 1. Bitcoin Money Supply Summary 1
Domain Domain Penetration Supply Required
Remittance Market 10% $6.55B

In our view, it seems reasonable that bitcoin eventually becomes widely used in the remittance market due to its frictionless, borderless, and near-zero fee properties. For these reasons, we see 10% of this market as a conservative reference point.

Bitcoin as 10% of "black-market" transactions

Total black market transactions have an estimated annual value of $1829B. 10% comes to $182.9B, yielding a total necessary supply of bitcoin, at our money-velocity of 7.3, to cover this economic activity of $25.05B.

Table 2. Bitcoin Money Supply Summary 2
Domain Domain Penetration Supply Required
Remittance Market 10% $6.55B
Black Market Transactions 10% $25.05B
Total: $31.60B

Like Mr. Woo, we offer no opinion on whether or not bitcoin is suited to black-market transactions, but merely provide the above analysis as a reference point for potential data-driven valuation discussion.

Bitcoin as comparable to one medium-sized nation

We'll (subjectively) use a GDP of $200B as the definition of "medium" for our purposes here. That roughly corresponds to the GDP of countries such as Algeria, Peru, Kazakhstan, and the Czech Republic.


For comparison, as can be seen in the above chart, the GDPs of France, the UK, Brazil, and Russia are all more than 10 times higher, and the GDPs of Estonia, Uganda, Zambia, and Afghanistan are all 10 times lower.

Once again using our velocity of 7.3, we calculate that a money supply of $27.4B worth of bitcoin would be required to support $200B in economic activity; ie, the equivalent of a single "medium" sized country.

Table 3. Bitcoin Money Supply Summary 3
Domain Domain Penetration Supply Required
Remittance Market 10% $6.55B
Black Market Transactions 10% $25.05B
M2 of "Medium" Size Country 1 Country $27.4B
Total: $59.0B

Bitcoin as 10% of global eCommerce

Total eCommerce can be approximated as the sum of Business-to-Consumer (B2C) and Business-to-Business transaction volume. B2C is somewhat readily tracked; estimates for 2013 are about $1.3T. B2B figures are more difficult to reliably determine, but some studies (pdf) suggest B2B eCommerce volume is more than double B2C volume.

In our analysis, we'll assume equal volume for B2C and B2B transactions, yielding total eCommerce volume of ~$2.6T for 2013. To support 10% of that economic activity in bitcoin, the total supply of bitcoin would need to be $35.61B

Table 4. Bitcoin Money Supply Summary 4
Domain Domain Penetration Supply Required
Remittance Market 10% $6.55B
Black Market Transactions 10% $25.05B
M2 of "Medium" Size Country 1 Country $27.4B
Global eCommerce 10% $35.61B
Total: $94.61B

Bottom-Line: Estimated total value for bitcoin as medium of exchange = $94.61B

As the astute reader will note, the above figures are not necessarily fully additive, but we approximate to provide a reasonable upper-bound on bitcoin's medium-of-exchange value if bitcoin garners 10% of the markets noted above plus the general economic equivalent of one medium-sized country.

Value as a store of value

We further agree with Mr. Woo that bitcoin as a store of value most closely resembles precious metals (specifically gold) and cash balances since it generates no interest or dividends in and of itself, and is credibly scarce. We will treat each separately:

Bitcoin as 10% of gold's store-of-value demand

Here we will diverge from Mr. Woo, and instead look at bitcoin garnering 10% of gold's investment demand. While Mr. Woo instead looks at silver, arguing that bitcoin's volatility makes it inappropriate as a gold substitute, we note that we're evaluating potential success-cases and medium/long-run possibilities. As bitcoin gains further adoption and liquidity, its volatility will lessen. Thus, for the purposes of this valuation-grounding exercise, we believe it's both fair and interesting to look at bitcoin's value if it were to achieve 10% of gold's investment demand.

What's the total value of gold as an investment? It's estimated that 50% of gold is used as jewelry and about 10% in industrial processes, leaving 40% of gold consumption for investment purposes.

With ~174,000 tons having been mined, that yields a total above-ground investment-gold supply of $2.7 trillion.

Ten-percent of total investment gold is $270B.

Table 5. Bitcoin Money Supply Summary 5
Domain Domain Penetration Supply Required
Investment Gold 10% $270B

Bitcoin as 1% of "offshore accounts"

A headline-grabbing research paper from 2012 estimates that the world's high-net-worth individuals have hidden between $21T and $32T in untaxed "offshore accounts". While it's difficult to know much about the nature of this money or validity of the analysis, it's worth noting that bitcoin could eventually be seen as a potential vehicle for discretely storing liquid wealth.

Bitcoin is extremely confiscation-resistant, and essentially impossible to block from a flow-perspective. It is not anonymous, but its pseudo-anonymous/user-defined-anonymity properties seem likely to hold privacy advantages relative to traditional money flows. With the recent precedent of the Cyprus bail-ins, Portugal's pension seizure, and the IMF's musings on global wealth confiscation, we believe the world's wealthy may come to look toward bitcoin as a safe-haven for a small percentage of their non-public holdings.

Using the $21T lower-bound from the above report, we see that 1% of such wealth amounts to $210B.

Table 6. Bitcoin Money Supply Summary 6
Domain Domain Penetration Supply Required
Investment Gold 10% $270B
HNW "Offshore" Holdings 1% $210B
Total: $480B

Bottom-Line: $480B in potential store-of-value demand if bitcoin captures small fractions of existing store-of-value assets.

Final Tally

When we add our estimated market capitalization of bitcoin if it captures 10% of common medium-of-exchange uses to our estimate if it captures up to 10% of store-of-value uses, we arrive at a total market-cap of ~$574.6B.

Table 7. Bitcoin Money Supply Summary 7
Domain Domain Penetration Supply Required
Remittance Market 10% $6.55B
Black Market Transactions 10% $25.05B
M2 of "Medium" Size Country 1 Country $27.4B
Global eCommerce 10% $35.61B
Investment Gold 10% $270B
HNW "Offshore" Holdings 1% $210B
Total: $574.61B

At full-issuance of 21,000,000 bitcoins, each bitcoin's fair-value would therefore be $27,381.


Our analysis determines that one bitcoin must be worth $27,381 in order to support 10% of common medium-of-exchange economic activity, plus well under 10% of existing common store-of-value demand. Whether bitcoin will achieve on the order of 10% market-share for those activities is another analysis entirely; one that is far more subjective, and requires a framework for evaluating both micro and macro economic dynamics, viral technology adoption, network effects, and other domains that are beyond the scope of our analysis.

That said, the following conclusions can be drawn from our analysis above:

1) If bitcoin achieves close to 10% market-share of the above uses, it is undervalued by more than an order of magnitude today.

2) The bitcoin market is either inefficient, or is assigning a probability of less than 5% for bitcoin to achieve the success-scenarios outlined herein.

Is Bitcoin a bubble?

The answer to this question depends entirely on how much bitcoin adoption, both as a medium of exchange and a store of value, grows in the future. From our analysis, it's clear that there is significant upside if bitcoin does continue to gain market-share.

To arrive at a fair value for today, one must determine the probability that the above 10% market-share "success scenarios" will occur. If we say there's a 10% of this success itself, then a simple analysis (ie, ignoring discount rates and duration), puts a fair value of one bitcoin at (0.10)($27381) = $2,738 today.