The Five Phases of Bitcoin :: IBNYC Keynote

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Pantera CEO Dan Morehead recently gave a keynote presentation for the Inside Bitcoins conference in New York City entitled, “The Five Phases of Bitcoin”.

Below is a combination of his speech text and slideshow from the keynote. We’ve featured additional analysis and graphics exclusive to this version of the presentation.

Some topics include:

  • An Approximation of the Bitcoin Industry’s USD Value
  • Bitcoin Venture Investment “Cheap” Relative to U.S. Equities
  • The Five Phases of Bitcoin


Thank you for the kind introduction

I’ve managed Pantera Capital for the past 12 years, managing hedge funds that invested in currencies, bonds, and equities. However, my true passion has been investing in large, disruptive ideas, fromglasnost to Tesla Motors.

When I found Bitcoin in 2011, I was blown away. It combined all the facets of my professional experience and economic/political beliefs with the potential to positively impact billions of lives. Two years ago, our firm transitioned to be exclusively focused on digital currencies. We’re now part venture fund and part hedge fund, in that we invest in building out the digital currency ecosystem as well as in the currencies themselves.

Bitcoin is going to change the world. I just want to tell my grandkids that I was a small part of it.

Bitcoin Market Comparisons & Analysis

A Better Industry Value Approximation

The following chart depicts the market capitalization of bitcoin over time:


This should be a familiar picture. It’s the same old price chart we’re all accustomed to looking at, the only difference being that each price point is multiplied by the total bitcoins in circulation at the time.

Some see the performance of the currency only and jump to conclusions about the industry’s value. With close to two-thirds of a billion dollars in venture investment, the value of the currency taken alone is far from the whole story of the industry’s true value.

Leveraging our internal database of over 400 Bitcoin companies, we wanted to get a sense of the industry’s true value. The market capitalization of the currency plus adjusted company valuation estimates should give us a picture closer to the mark. Here is what we found:


The gold line represents the combination of the bitcoin currency market capitalization and our adjusted company valuation estimates. You can interpret that as the rough total industry value in USD over time, which right now is currently a little less than $8 billion.

Next, the same look at the industry’s overall value but on a log scale:


We can see first and foremost that the value of the ecosystem has held steadily at around $8 billion since the November 2013 price bubble.

These charts speak quite well to investor faith in Bitcoin’s technological potential, seeing as venture investment has increased despite the performance of the currency. Although an idea that’s just beginning to emerge in media, smart investors have long known that bitcoins could be worth $50 and the technology’s full benefits could still be reaped.

What the venture (company valuation) line of the chart tells us is that investor interest has been consistently high, if not increasing, and the quality of ventures has been consistently enticing, if not becoming more attractive over time — all despite any change in price. Executives from high-profile startups like Square, PayPal, and Google, defectors from renowned financial institutions like Goldman Sachs and Morgan Stanley, and former heads of major government agencies are taking on leadership roles at or investing in Bitcoin startups. Goldman, UBS, NASDAQ, and other major traditional finance players have become some of the first to invest or seriously experiment with Bitcoin.

Bitcoin is trending on Wall St. and in finance abroad — a true watershed moment.

Interestingly, the November 2013 bubble could be perceived as one of the better things to happen in the space in 2013-2014. After the dust settled, the industry rose 9x in value essentially overnight — value, on the whole, that has persisted through now. Although this value now is denominated more so in venture dollars than bitcoins, the mainstream awareness that came with the $1,200 price point has been quite profitable for the ecosystem. Just look at Bitcoin venture investment in 2013 versus 2014, before and after the bubble — a 3.5x difference.

Following the 2016 block reward halving, Wall St.’s snowballing adoption of blockchain technology, and greater commercial cross-border payments adoption, supply-side downward price pressure could soon dissipate and price may very well do a complete 180 at some point in the next couple of years.

Bitcoin Venture Investment “Cheap” Relative to U.S. Equities

Here’s a different perspective. Compare the ratio of bitcoin market cap and our adjusted company valuation estimates, to the ratio of U.S. M0 market capitalization and the market cap of all U.S. equities:


If the U.S. market is any model, the total value of Bitcoin companies could appreciate approximately 4x in the long-run, eventually valuing the industry at, at least, $31.2 billion.

Another way of looking at it: Bitcoin venture is currently ¼ of the price of U.S. equities, making the Bitcoin opportunity that much more compelling.

The Five Phases of Bitcoin

We believe Bitcoin is progressing through an evolution of phases as shown in the table below:


Phase 1: Early Adopters

During this phase, Bitcoin was first imagined as a new currency for consumers or a form of new gold (digital gold). After the initial publication of Satoshi’s white paper, cryptographic experts and cypherpunks adopted the technology, began mining coins, and spread the news of the innovation primarily through mailing lists and, later, channels such as and Reddit. During this era, Bitcoin’s legitimate uses were mostly confined to theory as there was no adoption, platforms were far from being realized, and scalable infrastructure did not exist.

Pantera’s early principals — myself among them — saw a huge opportunity here and began investing in the currency through what would become the Pantera Bitcoin Fund.

Phase 2: Infrastructure

During this phase, awareness of Bitcoin had grown significantly — in tandem with a surge in media coverage (although much of it negative). Bitcoin exchanges, wallet solutions, and early payment networks based on Bitcoin were venture focal points.

It is here where we saw the venture opportunity — to have a hand in the bedrock of a soon-to-be booming industry. We launched Pantera Venture Fund I to invest in scalable Bitcoin infrastructure — wallets, exchanges, and payment networks. Pantera Venture Fund I invested in Bitstamp, Xapo, Circle, Ripple Labs, BitPagos, and other essential, basic Bitcoin services.

It was during this epoch that the first Bitcoin use-case emerged in the United States: e-commerce payments. For e-commerce purposes, Bitcoin minimizes fees and transaction times, eliminates chargebacks and other fraud, and prevents certain types of information leak.

Companies like BitPay and Coinbase led the way, recruiting early-adopting merchants like Overstock. Even though Overstock reported an impressive $1 million worth of bitcoin sales in its first month of adoption, Bitcoin e-commerce transactions have since significantly decreased, mostly due to a lack of consumer incentive to purchase and spend bitcoins — one of the industry’s most perplexing challenges.

Phase 3: Real World Applications

During this phase, Silicon Valley fell in love with Bitcoin and many more new companies were seeded as the pace of venture investment rose rapidly. In November 2013, a bubble in the currency price formed. Overall no bueno, but it drove mainstream awareness and venture investment to new heights.

Bitcoin startups were finally able to realize many of the applications that, until then, only existed in theory. These applications included micropayments, cross border payments, and remittances, among others.

This is when we launched Pantera Venture Fund II in order to take the infrastructure of Phase 2 to the next level. Pantera Venture Fund II has since invested ChangeTip, BitPesa, Align Commerce, and 21.

Phase 4: Blockchain Applications. (The Present and Near Future)

Whereas Phases 1 through 3 were focused on Bitcoin as a currency or as a financially-focused technology, Phase 4 anticipates the use of the blockchain primarily as a non-payment mechanism — blockchain 2.0 applications, so to speak. As we anticipated, applications in the management of physical and digital rights, smart contracts, and escrow have begun to emerge.

In a sense, blockchain technology leads to the “end of paper”. In the future, all contracts and signatures will be digital, distributed consensus will take the place of notaries, any and all intermediaries or third parties will be forgone, and the centralization of most systems or processes will be no more or in the process of adopting a blockchain-based solution.

Imagine being able to combat counterfeiting by recording ownership and transfer of ownership on the blockchain for tickets, collectibles, and pharmaceuticals. Nasdaq is doing precisely this for private equities.

Imagine being able to create your own contracts that would release international payments instantaneously after certain data conditions were met, eliminating much of friction and cost involved in B2B payments. APIs and blockchains were and continue to be made for each other.

Phase 5: Disrupting Payment Oligopolies

Phase 5 is the culmination of all the previous phases. Non-financial blockchain applications will continue to make up most of digital currency ventures  — a hot venture segment worth several tens of billions by this point. The force and momentum of the Bitcoin industry has become sufficient to take on the trillion dollar payment giants, if they haven’t already (wisely) integrated with the Bitcoin network or acquired one of the Bitcoin payment processors.

As the sun sets, Visa/MasterCard and Western Union/MoneyGram users no longer feel pain, both on the merchant and consumer sides. A society where global payments are not virtually instantaneous nor virtually free will be a faint memory.

We are at Phase 3. There is a recent movement away from bitcoin as a currency and towards Bitcoin as a payment rail. A couple a years ago, we were talking about remittances, micropayments, and cross-border B2B payments, and now these are reality.

Bitcoin is being used to transport value without end users needing to know it’s Bitcoin. Exchanges are the individual routers in this global, collective Internet of Money. As per companies like Circle Internet Financial, consumers now have the option to hold their bitcoin in fiat wallets, without exposing themselves to volatility and while still enjoying the payment rail benefits the technology affords. Even the word “Bitcoin” is becoming sparse and the word “blockchain” the new trend.

I work with bitcoin every day, and I’m the first to admit that it is still an awkward teenager — maybe even an ornery toddler. After all, it is just six years old. But when I look at Bitcoin’s venture capital investment — much more than the Internet at a similar age — increased developer interest, its growing merchant, consumer, and traditional financier adoption plus the generally favorable comments made by regulators, it’s clear that its long-term prospects are stronger than ever.

Thank you.


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