[Bitcoin, bitcoin, Blockchain, blockchain]

Nomenclature.

“Bitcoin” – a computer network

“bitcoin” – a currency on a computer network

“Blockchain” – an open, synchronized, peer to peer, immutable, global ledger

“blockchain” – a ledger, similar to Blockchain but closed, private or permissioned.

If I’ve learned anything from closely following commodity markets for thirty years it is that an asset that has been in a bear market for a year has no friends. Let’s think about why. Where do we get our information, our perceptions and the “feel” for an asset? The answer is, news media, internet, TV, financial papers and magazine, chit chat amongst brokers, research reports and so on. I often get interviewed and my words appear before hundreds of thousand of eyeballs. And guess what? Like everyone else, I talk my own book. For those unfamiliar with that phrase: if I am long an asset I talk glowingly about it, if I am short I will imply it causes cancer – it’s just habit and human nature. I’ve only ever truly met one trader who was so brilliant, and so honest with himself, that he could give an unbiased appraisal of the market conditions for an asset regardless of his personal position. He went on to make a hundred million dollars trading his own account.

So now after a year-long bear market in bitcoin, bitcoin has no friends. But unlike some other assets bitcoin has a very close relative, Blockchain. Blockchain is a “technology”, I’d prefer to call it a protocol, and on it sits bitcoin, a currency – or an “app”. The currency is only made possible by the open, decentralized, indelible ledger that is Blockchain. As we all know Blockchain has many other potential apps that may be supported in areas where there is centralised trust or a middleman.

So here’s what’s going on. The overall Bitcoin ecosystem is very hot, but bitcoin has a price - which has been going down. Blockchain has no price. So apparently Blockchain is “great” and bitcoin is “bad”.

No – bitcoin is Blockchain and Blockchain is bitcoin – and they are both great.

It’s very hard to separate the Blockchain from bitcoin – and this has led to an interesting bifurcation. Commercial banks have decided to pursue private blockchains (small b for generic). Now, I would be the first to support this and indeed some 13 banks are now working together with R3, a start-up, to create a bank-specific blockchain. Others are grouping to similar end. These groups are making all efforts to detach themselves from the Bitcoin world and all it sounds like to me is, “It’s round, it’s got spokes and it rotates on an axle – but it’s really not the same as that wheel thing you invented”.

Before going further with this story I need to introduce a new character.

One of the aspects I find most stimulating about the bitcoin ecosystem is the ingenuity, passion and vision of many of the participants. Some of these luminaries have achieved considerable successes in other areas of technology, like Marc Andreessen (Andreessen Horowitz, Netscape), Peter Armstrong (Coinbase, AirBnB), Halsey Minor (Bitreserve, Salesforce, CNET).

James D’Angelo fills YouTube, and more recently the lecture halls of MIT, with lecture after lecture on bitcoin-related subjects. Others have ridden their vision over the edge of legality, Charlie Shrem (BitInstant) now stands convicted.

Some of them are the coding Godfathers of Bitcoin (Wladimir J. van der Laan, Gavin Andresen, Pieter Wuille – who have over 5000 commits to the open source Bitcoin stack on Github).

Right or wrong, revolutionary or conventional – the passion is always obvious.

Perhaps top of my list is Andreas Antonopoulos.

Andreas is a prolific writer, blogger, author, speaker and coder. Much of his work is freely available online. Andreas’ parents are Greek. To get a sense of the man imagine the boy, growing up in Greece, seeing his hard-labouring parents’ cash savings raided, pensions decimated and his country brought to near ruin. He sometimes comes to tears describing it. Then imagine the coder, the network expert, the iconoclast, and the disruptor. As someone who was captivated by LINUX in its early days and who claims he went weeks barely sleeping when he first set eyes on it.

You can imagine what he felt when he encountered Bitcoin. His “Eureka” moment – he claims – was when he realized Bitcoin was a network, and he understands networks. Since then he has coined some of the most succinct descriptors of bitcoin: “Programmable money” and “Currency as a content type.”

So with full credit to Andreas I will summarize his view, which -- though similar -- I am sure is more enlightened than mine – on non-bitcoin blockchains.

Private blockchains are to Blockchain what a corporate intranet is to the internet. An intranet is a location where all the outdated information about a host company is posted - you can’t use most of the interesting applications of the internet. The mantra amongst the banks involved is that of a “disruption from within”. They are taking Blockchain -- an open, decentralised, borderless, transparent, peer-to-peer technology -- and adjusting it so that it’s not open, decentralised, borderless or peer-to-peer. They are, however, adding plenty of control: reconstructing a cheaper, faster version of the Master–Slave model that banks currently use. That’s not disruptive.

It’s like the difference between Che Guevara and a Che Guevara tee-shirt.

Market Update

Two factors have recently depressed the price of bitcoin. One was the withdrawal of a number of bitcoin companies from the New York marketplace as a function of the BitLicence regulations introduced by the New York Department of Financial Services (“NYDFS”). In our view NYDFS has done a good job in putting this initial framework in place.

Another factor depressing the price was the very public squabble among some core bitcoin developers on the subject of block size – the so-called blocksize debate. Many agree that blocks larger than the current 1MB in the blockchain will soon be needed to boost capacity above 7 transactions a second. This seems self-evident. However the execution of an upgrade to core has not gone as smoothly as earlier upgrades.

At the time of writing the market has digested both of these issues and the bitcoin price is recovering.

New Apps in the bitcoin space continue to emerge and legacy apps are reaching higher functionality. We continue to be impressed with the progress at Change Tip – which now connects to over a dozen social media platforms offering seamless integration for payments. We like the developments at Circle who, like many, now offer a USD wallet as a safe haven for bitcoin assets in times of volatility or bearishness. We see wider uptake on the Xapo credit card system, which is a prepaid card in bitcoin, currently only operative outside the USA; and lastly we like the developments of ABRA – who aim to create the “Uber of cross-border banking” by enfranchising large numbers of local payment agents (similar to M-Pesa) who will covert bitcoin to and from local currency.

Finally we point out that the venture capital investment in the bitcoin ecosystem remains strong and is on track for a visible number approaching $1bn this year. It is intriguing to think that – assuming companies are selling at most 25% of their stock -- the market cap of these bitcoin companies may be estimated at $4bn. Add to that valuations of companies not raising finance. All told that implies a market cap well above that of the value of all bitcoin at today’s prices. Note also that many of these companies’ revenue models are a function of the bitcoin price (as well as volume). In our view this makes bitcoin itself better value on a “one or the other” basis.

Future catalysts

Two items appear on our radar, both of which we believe are positive catalysts for price. Firstly, in the short term, the US Marshall service has announced its third and final auction of seized bitcoin. There are 44,000 bitcoin at a value of approximately $10m. This is the smallest in the series by far. The market has been awaiting clearance of these bitcoin and while in previous cases the market has reacted negatively to the auction announcement there has been no downdraft associated with this one. Our impression is these coins will be well bid for and disappear quickly. Secondly, slightly longer-term, we look toward the reduction in bitcoin supply that will occur in the middle of 2016. New bitcoin is available to miners, or network participants, on a prescribed schedule. There will be a step-change lower representing a 50% cut in supply. While this will make mining economics less favourable, in an already-weak return environment, our view is that the demand side remains unchanged or stronger in the face of the cut. We believe this will be an enduring positive for months to come and in the short term make the auction that much more attractive.