Dear Community,

Bitcoin’s volume-weighted price on the Bitstamp exchange rose 29.6% in the month of December. Year-to-date, bitcoin has appreciated 123.6%. An investment one year ago would return 2.2 times ones’ investment.

UPCOMING TRAVEL

We will be visiting several cities over the next few months to discuss the blockchain ecosystem. Some of our dates include:

New York City & Connecticut, February 7–8

New York City & Connecticut, February 22–24

London, Geneva & Zurich, March 13–17

New York City & Connecticut, March 28–29

BITCOIN :: 2016

Bitcoin has been the best performing currency in six of the past seven years.

In early January, the price of bitcoin surged to levels not seen since the highs of late 2013. The price has come off a bit and a number of commentators are predicting similar weakness that followed the 2013 price spike. Although this price surge may have gotten a little ahead of the fundamentals, we feel it is only by a matter of a month or two.

Our preferred metric to assess the fundamental value of bitcoin is as a function of the demand for its actual use. The graph below shows the price of bitcoin overlaid on the number of transactions per day processed on the bitcoin network. In hindsight, it is now clear that the price in late 2013 was well ahead of the fundamentals. It took 14 months for the falling price to be caught from below by the exponentially increasing fundamentals. Once they were reunited in January 2015, they’ve stayed pretty much in lockstep. Prior to the bubble in late 2013 and since the beginning of 2015 the BTC price has moved in line with increasing transactions.

Bitcoin seems to be about fairly valued now. The BTC price is likely to continue to appreciate in pace with the compound rise in use. If both series continue their long-term growth rates, a forecast of the value of bitcoin at year-end is $2,288. In normal securities market terms, something like that sounds ridiculous. However, given bitcoin’s historical performance, it would actually appear mundane.

The following graph shows the strong growth in transactions year in and year out. The use of bitcoin more than doubles each year. It stands to reason that when demand more than doubles for a finite asset, the cost of each bitcoin more than doubles each year.

In addition to the increasing use of the network, a contributing factor to the recent price increase is demand from China. Bitcoin is like the Miracle Whip of protocols — it has so many uses: cross-border payment network, wealth storage, QE hedge, etc. Many of its features are particularly popular in China. The Chinese currency has been depreciating for three years. Many market participants think the Chinese banking system is insolvent. When countries recapitalize their banking system, depositors/citizens take the hit. China does not have an open capital account and tightly controls its currency flows. Citizens are typically prohibited from transferring more than $50,000 abroad.

Bitcoin is the polar opposite. As discussed above, bitcoin is one of the best performing currencies on Earth. Bitcoin does not require a potentially-insolvent bank for custody. Bitcoin cannot be confiscated to pay for losses in the event a nation’s banking system is bankrupt. Bitcoin protects one’s wealth as a password in their head. Borderless cloud money.

The premium that Chinese buyers pay for bitcoin has increased in recent months. The average premium over the world price since July 2014 has been 1%. Since November 2016, the premium the Chinese have paid for bitcoin has been consistently above the long-term average. This increase demand has likely contributed to the recent price spike.

CRYPTOCURRENCY MARKET CAP

In 2013 Pantera Capital transitioned its investment strategy to focus exclusively on bitcoin and the blockchain ecosystem, hoping to fuel the adoption of Bitcoin for the mainstream. Soon after, bitcoin had a run-up to nearly $1,200 per coin. Hundreds of other cryptocurrencies have come (and many gone). The combined market cap of all digital currencies now far exceeds its brief bitcoin high in December 2013.

Only a few other currencies have sustained lasting traction. The graphs above and below show bitcoin and the currencies which have attained #2 status over the years.

Bitcoin was dealing with scalability/governance issues while Ethereum showed promise of smart contracts and an easier way for developers to create more complex products. We can foresee a future where the total cryptocurrency market cap significantly increases with a greater distribution of protocol market share. Below is the market share of the top five cryptocurrencies. In aggregate, they represent 95.8% of the total market cap of the top 50 cryptocurrencies.

Three cryptocurrencies have reached second in total market cap behind bitcoin, they are Litecoin, Ripple and Ethereum. As can be seen in the below graph, Ethereum appears to be taking a similar path to previous #2’s. Ethereum maintained its highs longer than Ripple and Litecoin, but has recently began to lose value.

Bitcoin still maintains a dominant position in market share. As the below graph shows, bitcoin’s overall percentage of the market is trending down, but it still represents over 88% to the total market cap of the top fifty cryptocurrencies.

The performance of the 2nd highest market cap cryptocurrency shows it is difficult to compete with Bitcoin and maintain value after an initial price surge. These cryptocurrencies are finding it difficult translating promise into real world applications. We feel recently launched digital currency Zcash exhibits similar potential as the Bitcoin Protocol, with a number of added improvements that may set it up for exceptional performance in the medium-term.

ZCASH LAUNCH

Zcash is a new digital currency that recently went live in one of the most anticipated digital currency launches. The team behind Zcash include some of the top scientists in cryptography from UC Berkeley, John Hopkins, and MIT.

The open source platform is based on Bitcoin’s Core codebase. Zcash’s improvement over Bitcoin is the addition of privacy. Zcash uses advanced cryptographic techniques, namely zero-knowledge proofs, to guarantee the validity of transactions without revealing additional information about them. In the bitcoin blockchain, the sender, receiver and amount are always public. The company aims to set a new standard for privacy through the use of groundbreaking cryptography.

It’s Bitcoin plus several meaningful advantages, such as:

Selective transparency — no information on the parties transacting and the amounts being transacted

GPU mining — no huge economies of scale which have led to mining centralization in bitcoin — and theoretically could end up with a duopoly controlling mining (ironic since we’re trying to replace Visa/Master Card)

Potentially more effective governace — while Bitcoin has an anonymous Satoshi, the Zcash project has a leader in Zooko Wilcox and a founding team of scientists to help steer the ship and governance

Fungibility — each coin will be worth the same since there is no “history” tied to any coin

In days leading up to the launch, the market surged — trading at up to 1.8 BTC per ZEC in the thinly-traded futures market. This was due to the large demand and low supply, since the mining rewards and founders distribution are being rolled out slowly. The price has since settled in a trading range near $45 per ZEC — about 5% of the value of a bitcoin.

The Zcash team has done a great job of maintaining a smooth launch without any major bugs. It will be up to the team to help drive use-cases for the price and utility to match expectations. You can visit their website to learn more here.

BITSTAMP FUNDRAISING

Pantera portfolio company Bitstamp, the first nationally-licensed digital currency exchange, recently launched a successful fundraising campaign on BnkToTheFuture, a global online investment platform that allows qualifying investors the opportunity to invest in growing finance and technology companies.

With investments exceeding $2.3 million, Bitstamp raised nearly twice their funding target of $1.2 million. The campaign allowed over 441 investors participate in the deal and benefit from Bitstamp’s future growth initiatives. Several institutional investors are investing alongside the round.

This fundraising round will allow Bitstamp to embark on a two-year period of expansion. Bitstamp is well position for international expansion, and has a number of new services in the pipeline, including margin trading, adding fiat trading in GBP, JPY, AUD and CAD, as well as introducing additional digital currencies to their platform starting with Ripple’s XRP and Ethereum.

Bitstamp has recently teamed up with Ripple by adding XRP to their trading platform. Trading will be fee free through February 10th. For additional details, you can visit Bitstamp here.

CHRONICLED FUNDRAISING

Another Portfolio Company, Chronicled, has also launched a fundraising campaign on the BnkToTheFuture platform. Chronicled plans to raise $1.0 million through the issuance of a convertible note. Interested qualified investors have the opportunity to invest until February 18, 2017.

Chronicled, a blockchain and IoT technology company based in San Francisco is developing solutions enabling physical property to be securely linked to a blockchain for authentication, e-commerce, provenance, supply chain, and finance related cases.

Chronicled, other startups and enterprises recently met in Berkeley, California to discuss blockchain and IoT innovation and the potential to work collectively to address the challenges facing the space (Article).

For more information, you can visit the BnkToTheFutrue platform here and watch the founders introduce Chronicled’s technology and applications here.

NEW OFFICES

We have recently moved from the City to Sand Hill Road. Pantera’s new address is:

Pantera Capital Management

3000 Sand Hill Road, Suite 1–235

Menlo Park CA 94025

If you are interested in a meeting, please contact Pantera’s investor relations team at 650–854–7000 or via ir@panteracapital.com.

Interesting times,

PANTERA PUBLICATIONS

We tweet Bitcoin news and insights on Twitter and Medium at @PanteraCapital and @Dan_Pantera.

You can subscribe to our publications by visiting www.panteracapital.com/subscribe or by e-mailing ir@panteracapital.com:

Blockchain Letter: a monthly letter with our thoughts on significant market and ecosystem-related developments. Also includes our thoughts on blockchain venture capital and news on our portfolio companies for accredited investors.

Blockchain Investor Letter: Public Letter plus exclusive information for accredited investors.

White Papers: periodic, original blockchain research and academic papers.

Portfolio Company Profiles: inside looks into some of our portfolio companies, featuring our general perspectives in addition to overviews of each company’s industry positioning.

Our content is publicly available at www.panteracapital.com/research. However, the SEC mandates that only accredited investors can access certain information. If you are an accredited investor, register here to access restricted content.