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While much of the world remains unaware or skeptical, Bitcoin and its crypto-cousins are quietly building a parallel financial system. It’s a friction-less system of economic networks with global 24/7 availability and advanced functionality that, in many respects, already exceeds the capabilities of big banks and legacy financial infrastructure.

This rapidly emerging crypto-economic network will become the world’s largest and you, dear reader, will one day be an eager and delighted user. Importantly, this parallel financial system—which is built on the back of public blockchains like Bitcoin and Ethereum—is its own distinct ecosystem, not an “add-on” to legacy banking products. (Disclosure: My firm, Blockchain Capital, invests in blockchain startups and crypto assets.)

There’s a lot of questions: Why should anyone care about this parallel world of crypto-finance? Why are tens of thousands of developers dedicating themselves to building out these economic networks which, in aggregate, are already valued north of $120 billion? Who will be the winners in this sea change of money and finance?

Digital infrastructure for a digital age

First, let’s address the most important question: Why is this happening? Why is this parallel world of crypto-finance emerging so rapidly and why are so many of the brightest minds dedicating themselves to this space?

At the core, it comes down to a simple reality: That which is natively digital is more functional. The parallel world of crypto-finance is enabling the world’s first natively digital assets. Natively digital goods are programmable and free from the constraints that limit us in the offline world.

Many years ago, PayPal helped bring money into a digital age by creating a layer on top of legacy systems. But while PayPal made it easier to use legacy financial infrastructure in a digital context, it didn’t create new financial infrastructure. PayPal is a digital front-end with an offline legacy back-end. In contrast, public blockchains like Bitcoin and Ethereum are new financial infrastructure: Digital infrastructure for a digital age.

Programmable assets

Two examples that highlight the advanced functionality of natively digital assets are “time-locked transactions” and “multi-signature transactions.” The former allows users to “lock” bitcoin such that it can only be spent or withdrawn at a particular point in the future while the latter allows users to specify that particular bitcoins are restricted from being spent or withdrawn unless, say, 2 of 3 people agree (or 7 of 10, or whatever parameter the user establishes).

These are things that I can replicate in the traditional financial system with crude hacks that require hours of legal time and effort to create something like a Trust. However, that cost and burden has been reduced to a couple lines of code in Bitcoin and Ethereum. “Time-locked” and “multi-signature” transactions are just two early examples of what will become dozens and eventually hundreds of advanced functions that will be combined in novel new ways. Programmable money is finally here.

Software is finally eating the world of financial assets and value transfer and the outlook is incredible. We’re talking about an empowering world of advanced functionality, seamless exchange, and 24/7 global availability.

Surviving without Big Banks

But how do we get there? After all, the big banks and legacy financial system as a whole have been hesitant to even acknowledge Bitcoin, let alone support, integrate or build off public blockchains.

I used to struggle with this conundrum: On the one hand, public blockchains like Bitcoin and Ethereum are the valuable innovation that can change finance and money forever but, on the other hand, banks are subject to regulations that make it difficult or impossible to fully integrate these chains. It’s a “square-peg, round-hole” problem.

For years, the question was whether these public blockchains could survive out in the cold on their own without support from the legacy system. However, as these blockchains have grown in value from $1 billion to north of $120 billion, that question has been definitively answered: They aren’t waiting for permission or support—they are creating a parallel world of crypto-finance.

But who will be the winners and losers in this parallel world of crypto-finance?

Winners and losers: banks, tech companies and startups

So how will banks and technology companies be affected by this transition? Who will be the winners?

Given their constraints, I expect that legacy financial institutions will be confined to the fringes of this rapidly emerging parallel world. It’s entirely possible that legacy financial institutions will only be as relevant to this new crypto economic network as telephone companies were to the internet: Valued on- and off-ramps but not much more.

I expect that big banks will begin to offer rudimentary services for crypto-assets such as trading and custodianship over the next 12-24 months. The good news for legacy financial institutions is that this is a new product to sell and may help engage an otherwise difficult-to-capture millennial audience.

The bad news is that crypto-assets like Bitcoin inside the legacy financial system will really only be a launch pad to something else: The parallel world of crypto-finance.

In this sense, Bitcoin is a passport to a new, voluntary economic network—one that is natively digital and more functional than its legacy predecessor. It’s an opt-in system that users will adopt not because JPMorgan said to, but because it’s capabilities and fundamental features drive user adoption.

After all, users didn’t wait for City Hall to figure out Uber, they just started using it. They didn’t wait for the post office to get faster, they just chose email. Similarly, you don’t have to wait for JPMorgan to evolve, you can start using Bitcoin at any time.

In the forthcoming battle to capture market share in crypto-finance, tech companies will likely fare better than legacy financial institutions— this will be the tech industry’s first real push to create and support new financial infrastructure.

Why will tech companies be able to capture more of the opportunity than legacy financial institutions? Simply put, tech companies are better positioned to assume the substantial risk involved in pursuing new ventures with large upside opportunity. In contrast, banks and their investors are more conservative with lower growth expectations (that’s why you’ve never heard of a “Moonshot Factory” at Citibank).

The difference in expectations is evident in comparing the P/E ratios of large tech companies vs. Big banks. While JPMorgan and Bank of America have P/E ratios of 13-15x, Google and Facebook have P/E ratios of 34-37x. Investors pay ~2.5x more for each dollar earned by Google and Facebook than they do for each dollar earned by JPMorgan and Bank of America because they expect the former group to grow into huge new markets (like crypto-finance).

Data from Google Finance

Even then, while large established tech companies will likely capture more of the crypto market than banks, I expect that the majority of the opportunity will be captured by new startups.

The desire from established tech companies to capture new markets will certainly push them toward the crypto industry but, like banks, they also have a lot to lose and will be similarly constrained by regulatory concerns. As a result, large established tech companies won’t be the most aggressive in building out crypto infrastructure and applications.

The crypto industry is still very risky and, simply put, startups are best positioned to assume risk. For this simple reason, I expect startups will capture the majority of the value created in the crypto industry over the next three to five years.

The fear of new technology

As with any new technology, there’s also an element of fear associated with cryptocurrencies. The first thing to recognize is that this parallel world of crypto-finance is not a threat. It’s an opt-in, voluntary world of cryptocurrencies, cryptographic protocols, and digital assets that together are creating the world’s largest economic network.

You don’t have to use it and it’s not going to make the legacy financial system function any worse than it already is. You didn’t have to give up Walmart to try Amazon. Similarly, you don’t have to give up Wells Fargo to try Bitcoin, Ethereum, or smart contracts—and I expect that most people will want to try these things over the next few years.

As with any new technology, there will be significant ups and downs for the crypto industry, and they’ll be far more evident than they have with past disruptive technology trends because assets like Bitcoin and Ether trade 24/7 from day 1 whereas fluctuations in the value of Facebook and Snapchat were opaque until their equity was traded publicly many years later.

Ultimately, this technology isn’t going to be un-invented, it’s not going away—on the contrary, it’s getting stronger, more resilient, and more functional. It’s being built outside of the legacy financial system and, over the next few years, users will increasingly find themselves popping over from the old system to the new system to pursue new opportunities and leverage its advanced functionality.

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