We’ll keep saying it: Bitcoin, not crypto
An update from the team including reflections on FTX + Bitcoin.
Recent appearances + interviews
Jeff was a guest on Fox Business News
Jeff’s latest appearance on Peter McCormack’s What Bitcoin Did podcast has been generating a lot of buzz
The team was on stage at the Pacific Bitcoin Conference including Lyn on Memes + Bitcoin not s***coin, Preston on all your models are destroyed, Andi discussing investing in Bitcoin Companies
Africa update
Nico just got back from the first Bitcoin Africa conference in Accra, Ghana, which has attracted some of the leaders in Bitcoin including Jack Dorsey, Elizabeth Stark and more. It’s great to see the Bitcoin community coming out in support of the continent. What’s most incredible is the builders we are meeting from Africa - young entrepreneurs who have an idea and just go out and do it - to bring Bitcoin to their communities and the entire continent. Stay tuned for more!
New portfolio company coming soon!
We’ll be announcing our third investment in mid-December, and our fourth in early January. We’re very excited to be expanding the ego death family, and to be working with even more brilliant founders building out the Bitcoin dream.
Some thoughts on FTX
Preston hosted a great podcast with Dylan Leclair discussing FTX.
It’s certainly been a wild ride in the crypto world the last few weeks! We wanted to share a bit about how it looks from the inside (of Bitcoin at least), and our thoughts on how it impacts Bitcoin & the ecosystem that’s developing.
Before diving in, we want to say it’s very sad to see so many normal, everyday people lose their money in FTX and other crypto crashes. The behavior of people like Sam Bankman-Fried in causing this is completely unconscionable and we hope he is brought to justice.
But what does it actually mean for Bitcoin? Yes there are a few short-term potentially negative implications. But overall - it’s completely in support of our thesis, and ultimately beneficial for how we want Bitcoin - and the world - to look.
Subprime meets Enron meets Madoff - on steroids thanks to altcoins
Let’s be real. What FTX was doing has absolutely nothing to do with Bitcoin, and nothing to do with why Bitcoin was created. Bitcoin was created to allow transactions between people without a trusted third party. FTX was a trusted third party. It may have been dealing with altcoins, but it was similar to any old TradFi institution - borrowing, lending and custodying users’ funds.
But FTX was using as collateral altcoins which have no substance behind them. At least pretty much everything in TradFi has SOMETHING sitting behind it, whether it’s the US or other governments, some sort of revenue generating business, or a hard asset like a car or a house. Almost all altcoins have none of that. And as a result, they are extraordinarily volatile and can rapidly go to zero, as is the case with Luna.
Managing a lending + borrowing business in this “asset class” doesn’t even make sense to begin with. How can you lend over collateral that has no value?
A recipe for disaster
Next add a megalomaniac founder. Then remove any sort of regulation - no checks, no credit and counterparty assessment + management, no audits, no public company scrutiny - and nobody inside or outside the company even thinking these should be in place.
Top it all off with a massive hype - an environment where no amount of evidence or rationality can break through the rose-tinted glasses through which normally smart people see the world (e.g. Sequoia Capital). Hype cycles are great instances of mass group-think.
All of this together? The perfect recipe for the collapse of FTX. A complete and utter “sh**show”.
Framing the conversation: Key challenges for Bitcoin
I want to start by zooming out and setting a framework for Bitcoin. At a very high level - there are a few challenges inherent to Bitcoin which need to be solved in order to achieve Hyperbitcoinization. These include:
Scalability - the base chain prioritizes decentralization and security, at the expense of scalability (i.e. speed + cost of transactions)
Custody - most people feel scared of self-custody, and third party custody is unsafe
Privacy - it’s pretty easy to track wallet addresses and where money is moving
Volatility - until everything is repriced into Bitcoin, the volatility of Bitcoin vs. fiat is problematic for its broad use
Network strength - to reduce the vulnerability of Bitcoin to e.g. 51% attacks by increasing hashrate + the number of validator nodes
The Lightning Network is rapidly becoming an incredible solution to scalability - allowing for almost free transactions at better potential size and speed vs Visa and Mastercard. New custody solutions such as multisig and Fedimints are being created. Hashrate is at an all time high.
The Bitcoin price had actually become remarkably less volatile and more stable in recent months. It tends to go through periods of tight correlation with the S&P (magnified of course), and then has moments where it decouples. The chart below compares trading of BTC vs. the S&P 500 - indexing Bitcoin price volatility vs. the S&P 500 to approximately equal over the initial Jan-Jun period, to show that the volatility of BTC has significantly reduced since then.
Everything is heading in the right direction as it relates to the core challenges for Bitcoin!
Potential negative impacts of the FTX collapse
The bankruptcy of FTX has rattled faith in “crypto”. And most people out there are not able to differentiate Bitcoin from “crypto”. This could impact adoption of Bitcoin as well as investment into Bitcoin and the Bitcoin ecosystem, at least in the short term. We have, unfortunately, seen large generalist investors put on hold any investments into anything “crypto” related - even Bitcoin.
Often there are individuals within larger organizations who are Bitcoin advocates, and are the ones convincing others of the Bitcoin narrative. Unfortunately, even though FTX has nothing to do with Bitcoin, there is even more resistance to Bitcoin. At least in the short term.
It’s not just that people lump Bitcoin in with broader crypto. The collapse of FTX has also reduced trust of people in any form of custodial storage option. It is also difficult for institutions who, due to fiduciary obligations, cannot self-custody funds. So in the short term, people and institutions looking to invest in Bitcoin may choose not to, simply because they do not have a good custody solution.
The price volatility of course also has increased as a result of FTX, albeit perhaps not as much as some might expect. It seems that there has been around a 15% downwards rebasing which is not too bad. And since that one-off downward move, the price has not experienced significant volatility, staying within that $16-17k range.
The lower Bitcoin price reduces profitability for miners, and is leading to many miners exiting entirely. Network difficulty dropped by 7% in the latest difficulty adjustment, the largest since July-2021. Lower hashrate has some impact on the resilience of Bitcoin, but it is a small drop in the overall upward trend.
Ultimately, the impact is very positive
It’s the inevitable shakeup that needed to happen. Yes there will be some near-term fallout, but now what really makes sense, what really has long term value - i.e. Bitcoin - can come through.
Bitcoin vs. altcoins. The collapse of FTX forces people to think. It forces people to wake up and question their beliefs and views on “crypto” and altcoins. And for many people who are involved in the space, who do have a degree of understanding - the collapse of FTX may begin to shine a light on the vacuous nature of altcoins, illuminating the emptiness behind the facade. It will help people to start understanding the difference between Bitcoin and altcoins, and to appreciate why Bitcoiners are so adamant about “not your keys, not your coins”. Sometimes it takes an earthquake to reform a landscape.
It was interesting that Fox News reached out to Bitcoiners like Jeff to comment on the collapse of FTX - hopefully allowing the Bitcoin vs. altcoins narrative to get to a broader audience, to bypass the pathway that so many people need to tread of first investing in a bunch of altcoins, getting burned, and then making their way to Bitcoin.
Many entrepreneurs and engineers will also start understanding that Bitcoin is the most solid foundation, and the only foundation you want to be building on. We are already starting to see submissions through our website from entrepreneurs from altcoin ecosystems seeking to understand Bitcoin Layer-2, and how they can build on Bitcoin instead. This is an exciting development - one we have been anticipating - and that we continue to watch and nurture closely!
Self-sovereignty. The collapse of exchanges makes people realize how important it is to not rely on third parties to custody your coins, and how important it is to self-custody. I.e. to get back to the origins of Bitcoin.
The companies we have invested in to date as well as those we continue to look at are working towards this goal, including Fedi which is bridging the gap between the difficulty of self-custody and the insecurity of third party custody by creating a second-party custody option using Federated Chaumian Mint technology. The third company we have invested in (to be announced next week), also creates a very powerful non-custodial solution to enable significant use of Bitcoin and the Lightning Network in a highly scalable way.
Regulation. There will also be increased regulatory scrutiny of anything that involves custodying a person’s funds. Anyone considering integrating or using Bitcoin will now be looking for non-custodial options, rather than taking the risk that their customers’ funds might end up on an exchange or custody platform that disintegrates.
Is regulation the answer?
Maybe. You need regulation when there is trust involved. When you have ordinary people placing their trust in institutions which hold power over their assets, and ultimately, over them.
You need regulation because power corrupts. And absolute power corrupts absolutely. Greed is in the nature of being human, as is temptation. It is simply how we are wired, as we have been since biblical times if that’s your view, or the drives which helped us to evolve to where we are, if you prefer the Darwinian thesis. Without regulation or some other form of accountability, there is little incentive for people in a position of power to do right by the people they have power over. This is why we need constitutions, checks and balances on governments, multiple points of power - and regulation of corporations.
We have learned this over centuries of banking - without regulation, banks do stupid and greedy things with other people’s money. It’s that simple.
Should Bitcoin be regulated? Absolutely NOT. Bitcoin is not an altcoin. There is no central authority. There is no trust involved. There is no trust required. That’s the whole point. Power in Bitcoin is not concentrated, and hence no regulation of that power is required.
Nor is regulation required for companies which build in the Bitcoin ecosystem that adhere to the original principles and values of Bitcoin - i.e. peer to peer without a trusted third party.
andi, nico + jeff // founding partners
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