Interview with deBitcoin

Earlier today I was interviewed by Paul Buitink and Jop Hartog, co-hosts of a weekly show at deBitcoin, based in the Netherlands.  The other two guests were Roeland Creve and Andreas Wauters, co-founders of Gent Bitcoincity, based in Belgium.

All views are my own and they do not necessarily represent the views of the companies and organizations I am affiliated with.

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Panel from Blockchain University Demo Day

A couple weeks ago I moderated a panel at Blockchain University, wrapping up the inaugural cohort.

Panelists included Atif Nazir (co-founder of, Matthieu Riou (co-founder of BlockCypher) and Greg Slepak (co-founder of okTurtles Foundation).  All three were instructors for the course this past winter.

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Distributed Oversight: Custodians and Intermediaries

[Note: This past weekend I took part of a working group at Stanford University as part of the “Blockchain Global Impact”  conference — and we discussed some of the legal issues surrounding digital bearer assets.  Below is my written submission provided beforehand; I am not a lawyer but I did consult with several attorneys familiar with the Bitcoin ecosystem who provided feedback, some of which was incorporated.]

The prevailing view in the bitcoin community is that control, by virtue of knowledge of a private key, is synonymous with ownership of the contents of the associated address. In other words, bitcoin is often touted as a form bearer instrument. With the advent of “exchanges” and “hosted wallets,” the ecosystem birthed facilitators (custodians) and intermediaries (depositories) where an individual no longer controls the applicable access credentials.

As Professor Shawn Bayern noted, the nature of the rights one has with respect to directly-held bitcoin differs significantly from the indirect interest in bitcoin in an account held by a third party: “[As] a matter of law, the [user of an exchange or wallet] probably does not ‘own’ any bitcoins, at least not in the sense of having title to personal property corresponding directly to bitcoins. What the [party] has is simply a contract right against the operator of the website—what was classically, at common law, called a chose (i.e., thing) in action.”

What is the nature of this right? Does the user still own the bitcoins held at an exchange or wallet? Or, instead, has title passed to the wallet/exchange? If title remains with the user, the user might be termed a bailor and the exchange/wallet a bailee. On the other hand, if title has passed to the exchange/wallet, the user would likely be a creditor and the exchange/wallet a debtor. Of course, the user agreements are far from clear on this point. As it turns out, the first question you ask to determine whether a transfer of title has occurred is: does the transferor receive the same exact thing or merely equivalent things that was put in? If the former is true, a bailment may be possible (this is often referred to as safekeeping or custody). If the latter is true, the transaction would not be a bailment except in three specific cases discussed later below.

In terms of both funding and development, the two largest VC-backed verticals in the Bitcoin ecosystem are “exchanges” and hosted wallets – both of which often offer “vaults” called “cold storage” and sometimes some type of insurance for customers. The precise legalities of providing other services such as “tipping” is beyond the scope of this brief article. Suffice to say that at this time, there is probably no US-based VC-backed startup that is fully compliant with all deposit taking laws, money transmission laws, insurance laws and so forth.

Yet irrespective of personal views as to whether or not additional regulatory compliance should be expected of these nuvo financial intermediaries and custodians, one aspect that all startups can and would agree on is the need for “best practices” in financial controls. But this then circles back to legal compliance.

For instance, every funded exchange as of this writing pools their clients deposits into a shared hot wallet which is then dispersed into a cold wallet (which sometimes is further broken into “ice cold” or “glacier” wallets). Yet despite this element of security – or at least security theater – deposits can and have been expropriated by knowledgeable insiders including exchange operators themselves.   Commingling customer bitcoin effectively forecloses the possibility of bailment/custody because, once commingled, the user is unlikely to get the “same thing” bank that they put in.

How can the technology being developed in the larger Bitcoin ecosystem be used to mitigate or prevent his from happening? And more importantly, how can entrepreneurs structure their startups to be in compliance with the law?

In its BitLicense proposal to the New York State Department of Financial Service, the Crypto-Economy Working Group outlined several technology solutions including multisig, escrow, proof of reserves, proof of solvency, keyless wallets and continuous real-time auditing. Empirically we have seen the rapid growth in the use of multisig via a technique called pay-to-script-hash (P2SH) – a method which at the start of 2014 represented roughly 0% of all bitcoins yet now at the time of this writing encompasses about 8% of all bitcoins. That is to say, possessors of those direct and indirect interests have moved 8% of the bitcoin money supply into a multisig schema.

BitReserve is a VC-funded startup that has spearheaded the proof-of-reserve initiative, providing near real-time data of the assets in their “reserve” (cold wallet) and the liabilities or obligations to its depositors. Several other companies have attempted to position themselves as “keyless wallet” providers, most notably They claim to be a software company that has no access to user funds, keys or information – solely providing a website that generates a “wallet” based on a multi-word mnemonic that users must memorize or store as it is the sole access credential to “direct interests.” This type of segregation not only prevents maleficence from internal administrators but may also prevent from being legally defined as a depository or custodian in some, if not all, jurisdictions.

But what happens if Bob loses this mnemonic? Then Bob loses control of the property, the bitcoin becomes inaccessible, ownerless (in our eyes) yet still exists as an entry on the blockchain.

Who does it belong to then? Did the network “steal” it? Its last legal owner was Bob, but to the Bitcoin network there is no distinction between ownership and possession. For instance, stealing is a legal term – not a physical phenomenon – thus whether it is rightfully transferred or not is the subject for legal scholars to debate.

Recall that the job of property systems is to associate the who(s) with the what(s). There is no infallible magic bullet. It is merely a question of best evidence. While possession and control is a pretty crude form of evidence but often nobody has better evidence of ownership. Registration is pretty good evidence but it can still be overcome. Think about a piece of artwork that Bob consigns to a gallery or that he registers. Or a title to his house. No matter what the title search says, Bob can never really know somebody won’t come out of the woodwork with better evidence of ownership. The question is really: how much protection does the law provide to an innocent purchaser for a particular type of property in a particular situation? This is still an open question with bitcoin.

What of bailments then? Does this distributed technology change the legal relationship between a bailor and bailee?

The term custody is reserved for bailments. After some consultation it appears you can only have a bailment when you get the same thing back that you put in and with “pooled” bitcoins, a depositor does not receive the same unspent transaction output (UTXO) as they originally deposited. Exceptions include: (1) fungible goods in warehouse; (2) currency in a particular type of bank account (special deposit); and (3) security entitlements (immobilized securities or pieces of a securitized pie). Bitcoin is not a good. Furthermore, hosted wallets are not warehouses. Bitcoin is not currently a legally defined currency and hosted wallets are not banks. A third idea is the trust company/broker dealer. While an entrepreneur may be able to secure a trust company charter, it has yet to be seen in the wild. And it is probably only scalable for a limited subset of uses and actors.

So, if we don’t have a bailment. We have something else. Again, after consulting with experts, we likely have a transfer of title and a corresponding debt owed to the depositor. If that is “checkable” or repayable upon request of depositor, then certain startups may have a problem under 12 USC 378(a)(2).

This seems to be the model that most startups has assumed is legally allowed. In fact, as of this writing, several VC-backed hosted wallets grant a “security interest” only on bitcoins they own. Alice’s hosted wallet startup may claim that “our bitcoins are insured.” Thus, if we were talking bailment, they would not be Alice’s startup’s bitcoin as the title would remain with the bailor (not Alice’s hosted wallet – who would be known as the bailee).

Now that organizations such as the Consumer Financial Protection Bureau (CFPB) have taken an interest in the Bitcoin ecosystem, how then, can Alice explain this to a consumer in a way that is not unfair, deceptive, or abusive? Is there anything in the technology that can help provide transparency and mitigate abuse?

In practice Alice will need to at least explain the effect on title in a manner that is consistent with reality. And she will likely have to be licensed, regulated and supervised to the same degree as others who operate in the same manner. While laws may change, it does not appear that a hosted wallet company falls within a loophole (currently).

In essence, there is a distinction between a facilitator and an intermediary.

And again, an intermediary is an institution that invests primarily in financial assets and that issues liabilities on itself (e.g., deposits). And a facilitator facilitate the financial transactions between intermediaries and their counterparties. They may hold some financial assets but their holdings are incidental to their facilitating roles. Custodians and money transmitters are the latter. Depositories are the former.

The questions for this working group should take these definitions into consideration and brainstorm how the technology being developed can not only help reduce the compliance requirements (if there is any leeway for that) but also fulfill financial controls “best practices” with respect to existing consumer protection laws.

A special focus should also highlight how exchanges operate in practice, that is to say, since they know the trading history, margin positions, when futures contracts will expire and other customer information – there is potential vectors of abuse such as front running and naked short selling by insiders. How can this be prevented, reduced and stopped?

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Understanding value transfers to and from China

A couple days ago, on Monday, I was on a panel hosted at Stanford University as part of the “Blockchain Global Impact” conference.  The panel covered remittances, unbanked residents and financial inclusion.

Below is a presentation I put together based on research for Melotic, for SKBI in Singapore and in preparation for the panel.

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Air pollution and the environment in China

About two weeks ago an in-depth investigative report covering the impact of pollution on the environment in China was uploaded and published on a number of Chinese video streaming sites.  It is called “Under the Dome” (based on the TV show).  It was an instant hit and reached over 200 million views within its first week — thereupon it was removed, scrubbed from the Chinese internet by censors.

I lived in three different cities during my five-year stay in China and the pollution varied from location to location.  Fortunately I spent the vast majority of the time in the south — which has its own issues — but the air was almost always better than the type found in the north and specifically in the Beijing metro.

This is not to say there were not very bad air pollution days too.  I recall my last week in Shanghai, in December 2013 (prior to moving to California), that in the twilight hours the smog was so thick that I couldn’t see the flashing red lights atop of the apartment I lived in.

It was bad enough that it earned its own Wikipedia entry and a number of news outlets wrote a few stories on it:

Below is the full version with English subtitles:

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Questions for knowledge markets

I am often asked to provide content to community-driven question-and-answer sites like Quora, Stack Exchange and now Zapchain.  Here are a few I recently proposed:

  • “Why does the community tolerate and patronize altcoin exchanges that are fully anonymous, and allow illicit funds to go through?”
  • “What do the large venture funded companies do to promote transparency, financial controls and account segregation?”
  • “Is it possible for insiders at VC funded exchanges to trade against customer flows and futures contracts?”
  • “What can be done to bring assurance to those who have lost coins due to thefts/scams/hacks?”‘
  • “When will the industry begin to self-regulate?”
  • “How to proactively remove or prevent bad apples from tarnishing the community?”
  • “Bitcoin companies talk a lot about transparency of the blockchain, but very few have actual public data, is there ways to incentivize more openness?”

It will be interesting to see what, if any are answered.

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What is the “real” price of bitcoin?

Even before Bitcoin was part of the zeitgeist for the digerati, people have been guessing what the price of a bitcoin should and should not be.

For instance, a couple days after version 0.1 was announced on the Metzdowd mailing list (back in January 2009), Hal Finney posted a possible scenario:

As an amusing thought experiment, imagine that Bitcoin is successful and becomes the dominant payment system in use throughout the world. Then the total value of the currency should be equal to the total value of all the wealth in the world. Current estimates of total worldwide household wealth that I have found range from $100 trillion to $300 trillion. With 20 million coins, that gives each coin a value of about $10 million.

So the possibility of generating coins today with a few cents of compute time may be quite a good bet, with a payoff of something like 100 million to 1! Even if the odds of Bitcoin succeeding to this degree are slim, are they really 100 million to one against? Something to think about…

Hal Finney, brilliant engineer and the world’s first Bitcoin price divinator.

Over the subsequent weeks, months and years there has been no shortage of guesstimates and “technical modeling” that gauge what the price will be.

For instance, a year ago (in February 2014), Founders Grid asked 50 Bitcoin “experts” what their bitcoin price predictions were over the next year.  The end result — all but a couple were completely, very wrong (see this spreadsheet for a line-by-line itemization).

Later, in May 2014, CoinTelegraph asked (video above) more than 30 Bitcoin “experts” as to what their bitcoin predictions were for the end of 2014.  Once again, all but a couple were completely, very wrong.

How could passionate enthusiasts who pay attention to Bitcoin-related news be so wildly off on what some consider a “sure-bet” moon shot?

The short answer: just because you are domain expert in one area does not mean you are a price modeling expert.  (Disclosure: I try not to give price predictions because I know I am not a price modeling expert)

Let’s look at a few examples.

Is there a “fair” price?

A couple days ago CoinDesk interviewed Denis Hertz, a project manager at ALFAquotes who has created the “Fair Bitcoin Price indicator.”  And that according to its calculations, the current fair price is $518.

How has he calculated it?

First, it calculates the changes in the cost of mining equipment and its performance. Next, it attempts to assess the change in difficulty of production, factoring in the electricity costs faced by miners on the network.

In particular, Hertz indicated that the fair value tool should be embraced by miners, as the price today is lower than the fair price – a factor he attributes to the recent string of bankruptcies and closures in the sector.

There are a few mid-to-late 19th century German economists that would be happy to see — what is effectively — the Labor Theory of Value as back en vogue.  But it is disingenuous to attribute value based on inputs because it wholly ignores the subjective valuation of the demand side of the equation.

It is not a valid way to measure value of a widget (or virtual commodity in this instance) for the same reason that the value of a Renoir or Matisse painting is not based on the value of the inputs (oil paint, canvas, brush, frame, etc.).

Speaking of art: David Andolfatto, a marbleized personification of Marcus Aurelius, also disagreed:david andolfatto bitcoin price

Reservation Demand

It is unclear where this theory first started in relation to bitcoin, perhaps it was from Curtis Yarvin, who writes at Unqualified Offerings as Mencius Moldbug (he briefly discussed this idea four years ago).

The main thrust of this idea is that because some market participants buy and perma-hold an asset, it removes supply from the market, thereby ceteris paribus — assuming the same quantity demanded — it should eventually push market prices higher because less supply is available.  Or in short, if people hoard bitcoins, their price will somehow rise.

Their are multiple problems with this theory:

1) Financial history is littered with corpses of people, organizations and countries that try to corner supply to artificially boost an asset price.  And in bitcoin, the hoarders are collectively trying to do what the Hunt brothers tried to do with silver, what Malaysia tried to do with tin and what China tries to do with rare earth elements.  It doesn’t work because cornering supply has never guaranteed long-term price rises and if everyone hoarded, it would make bitcoin have zero economic value because there would be no circular flow of income (see also the coordination problem below in #4).

I spoke with George Samman, co-founder of and frequent writer on Bitcoin-related topics.  In his view:

Hoarding does not help the bitcoin economy at all, in fact it stifles its growth as its clamoring for traction and mass acceptance. It locks up bitcoin in a place where its not being cycled back and forth making it scarce and therefore making it economically unviable as a currency and as a means of transaction. Hoarding in no way makes bitcoin a viable solution in the medium to long term. Not to mention if hoarding is done to manipulate price, it may work short-term, but cornering supply has never been a great wealth strategy especially as people and/or governments sniff out manipulation and “change the rules of the game.” Its more of a going bust strategy.

2) It does not account for and seems to ignore both transactional demand and speculative demand.  Because price discovery currently takes place in relation to national currencies on exchanges, it is the liquidity at exchanges and the changing demand of this liquidity which directly impacts prices.  Perma-holding (“hodling”) likely makes it more difficult to get into and out of positions (due to slippage).1

And what impacts the demand on exchanges?

The volatility in demand (changes in demand) likely comes from the fact that the “fair value” of bitcoin is constantly fluctuating.  For instance, every time a new “big adopter” rumor is posted on reddit, a professional exchange opens, an exchange gets robbed, a new central bank paper is released, or a regulator gives a speech — the expected future value of bitcoin changes.

For instance, last February, when the market learned up to 850,000 bitcoins may have been permanently removed from circulation (simply did not exist), knowledge that became public due to the bankruptcy of Mt. Gox, prices rose but then fell a couple weeks later when it was announced that perhaps 200,000 coins may have been located in a disused wallet.  The market was incorporating changes in supply relative to existing speculative demand.

Robert Sams, co-founder of Clearmatics and a former interest rate trader, has a good explanation (pdf) of this phenomenon:

If a cryptocurrency system aims to be a general medium-of-exchange, deterministic coin supply is a bug rather than a feature. This is because changes in coin demand get translated into changes in coin price, making price volatility proportional to demand volatility. But that is only a first order e ffect, for expectations of future levels of coin demand give rise to speculation. If the expectations of the long-term rate of coin adoption are signi cantly greater than the rate of coin supply growth, people will buy and hold coin in anticipation of future adoption, driving up the current price of coin.

It is the nature of markets to push expectations about the future into current prices. Deterministic money supply combined with uncertain future money demand conspire to make the market price of a coin a sort of prediction market on its own future adoption. Since rates of future adoption are highly uncertain, high volatility is inevitable, as expectations wax and wane with coin-related news, and the coin market rationalises high expected returns with high volatility (no free lunch).

Or in another example: if Satoshi’s alleged 1 million coins started moving around, it would also likely drive down the price as this supply has largely been considered removed from circulation, specifically at exchanges.2

3) While bitcoin’s creation rate is fixed, perma-holding is equivalent to buying a fleet of airplanes and then locking them in warehouses with the belief that merely removing them from the supply chain, that it will increase the overall value of the airplane and/or airline industry. Sure those planes may one day appreciate in value to become highly assessed museum pieces, but this ignores the utility of flying entirely.

nyc tokenThis is a similar problem with most tokens in the “Bitcoin 2.0” world which purportedly give you access to networks (e.g., pre-paid gift cards).  In this case it would be akin to going to the New York subway in the 1980s, removing a handful of subway tokens and storing them in a lock box with the belief that their value will rapidly appreciate.

They may eventually become a valuable collectible or antique, but all that happens in the latter situation is that the subway token minter will just create more to replace those removed from circulation; the intended utility is riding the subway, not perma-storing value in the token itself (in December 2014, residents of St. Petersburg “hoarded” subway tokens for a different reason).

4) It likely runs into a coordination problem.  Each individual has different time preferences and horizons for how and when they will sell their assets at (in this case, bitcoins).  Empirically we have seen this story before with OPEC, in which participants “cheat” and do not follow their internal “Honors Program” — producing more oil than their quotas.  And as a consequence, it increases downside pressure on the price.

Organizing individuals and jawboning them into selling or holding as frequently occurs on social media with relation to bitcoin and other altcoins.  This is what Josh Garza has tried to do with Paycoin, who has promised a variety of price floors (notably $20).  Yet because the market is decentralized, he has ended up resorting to tactics such as an ad hoc “Honors Program” in which he (and his employees) try to convince other holders/traders not to all sell at once because this drives down the price below the promised price floor (due to a lack of additional demand).  In fact, despite these hopes and dreams, as of this writing Paycoin is roughly at an all-time low hovering around $0.60 per coin.  Maybe that will change, but then again, that could be wishful thinking (note: Garza’s GAW mining is likely some type of fraud).

In order for bitcoin to reach and maintain a stratospheric price level (greater than $2,000 a coin) in the face of similar coordinated and uncoordinated sell-side pressure, at least an equal amount of speculative (and/or transactional) demand would need to be brought on board to absorb a similar sell off of bitcoins.3

What happens if such demand does not materialize to absorb it?  Prices drop.

For example, last September I provided some comments to CoinDesk about why prices fluctuate which touch on the demand side on exchanges and OTC facilitators:

And in other cases, an OTC buyer can affect exchange via “buy pressure.”  If he begins buying directly from an OTC provider, avoiding an exchange, the exchange loses its buy wall thus affecting price.  The sell pressure forces the price down and once a large buyer goes “off-market,” he is weakening the buy pressure.  If all the buyers and sellers are “off-market,” we can say that exchange price and price discovery is distorted.  As my friend Raffael Danielli recently said, “Information is never off-chain and ultimately information makes the price.”  Consequently today information spreads very quickly and if a broker can make money because he facilitates “off-chain” transaction and knows “better” what the real price is then game theory dictates he should take advantage off this (investment banks do the same with OTC).

So in addition to partnership agreements, they probably also sell somewhere else to mitigate exposure to this volatility.  In addition, many miners have to finance their operations and at current prices of $410, roughly $1.6 million is created every day via block rewards and it has to go somewhere.  Fewer people buying?  Down we go.

Merchant acceptance

On almost a daily basis there is a discussion on reddit or Twitter about merchant acceptance and how the increase in adoption of bitcoins for payments by merchants should eventually be reflected in higher market prices of bitcoin itself.  This reasoning is problematic for a variety of reasons but most importantly: empirically it has not happened because it doesn’t account for any changes in consumer demand for the token.

Why haven’t consumers increased their demand of cryptocurrencies for retail transactions?

In August last year, Wedbush, an equity research firm, made the claim that:

Volatility in the price of bitcoin should not impede retailer acceptance of bitcoin, in our opinion, as merchants and payment processors are entirely shielded, and we expect consumers will be shielded in the future.

This is a bit of wishful thinking.  While there are an increasing amount of products and services that can hedge against volatility (such as Hedgy or Tera Exchange), in each instance, this costs a customer both time and money — which the average consumer probably is not interested in becoming experts at (e.g., airline fuel hedging strategies).  Consumers want stable currencies, not friction-full hobbies they have to fiddle around and hedge against every day.4

Why does this matter?

In its February 2015 analysis (pdf), the European Banking Commission looked at a variety of opportunities and challenges of “virtual currency schemes.”  One area that it looked at was:

Is Bitcoin establishing itself as a successful payment method?

In general, a buyer and a seller can agree on anything to be used as money (both regulated and unregulated payment methods) in a specific transaction. Consequently, virtual currencies may also be used as a payment method if both sides agree. The basic problem for every two-sided market is, however, that it needs “critical mass” on both sides for it to function. For payment cards and other payment instruments, reaching critical mass requires having enough merchants who accept the payment instrument and enough users who want to use the payment instrument so that it becomes attractive for other merchants and other users to join, thereby accelerating the network effects.

There are now over 100,000 merchants that now accept bitcoin for payments, up from ~20k last January.  At this rate, by the end of next year, there will probably be more merchants that accept bitcoins than actual on-chain users of bitcoin.

While any number of reasons are stated for why merchants could and should continue supporting bitcoin, unless consumers use it on a regular basis, continuing to train employees on how to accept it at point-of-sale consumes is an opportunity cost for merchants as those resources could be used for other purposes (there have been several recent threads on reddit from Wholly Hemp on this issue).

Why is that?  Recall that there has likely been no change in aggregate retail usage by consumers this past year.  That is to say, while nominal on-chain transaction volume may have increased, the aggregate, the total amount of bitcoins used altogether for retail commerce has stayed roughly the same (the rest is apparently superfluous activity).  If you are a merchant, why should you continue to support a foreign currency that costs more to support than you save by accepting it?  Again, maybe this will change in the future and more merchant adoption does, for some reason, spur consumer usage.

Percent of precious metals and transaction volumes

The basic idea of this argument, from among many organizations such as Pantera Capital (a fund dedicated to Bitcoin-related investments), is that if bitcoin is the digital equivalent to gold or silver — or is even in fact superior to gold and silver — then should it not follow that its market cap should absorb some percentage of these metals?

For instance, last October, Pantera provided an assessment (pdf) related to the price per bitcoin relative to the market capitalization of a variety of assets (including gold, remittances, payments and global money supply (as measured by M2) itself:

pantera bitcoin prices

From Pantera Capital

While some of their 2014 predictions haven’t panned out (recall “interest” versus “adoption”), perhaps future events will swing their way and change with the advent of new investment vehicles like GBTC or ETFs.

Again, that chart above states that if bitcoin absorbed the market cap of gold, each bitcoin would be worth as much as $550,954.  And what would happen if bitcoin somehow absorbed the market cap of the world money supply (and payments, remittances, gold, etc.)?  It would purportedly reach as high as $4,291,060 a piece.

However, under such a scenario, not only does this run into the logistical exergetic issues of the “Million Dollar Bitcoin” (pdf) but variations of this argument also involve supplanting some percentage of a payment rail.  For instance, if the Bitcoin network captured X% of the daily transaction volume of Visa or ACH then it should create additional demand for bitcoin, bidding up the market value to new highs.  But this could be a non sequitur.  Just because supporters find value in this “virtual currency scheme” does not mean the rest of the market will.  Perhaps they will, but in this circumstance, this tech is not being built in a vacuum so maybe not.

For example, currently listed on AngelList:

While many of these startups will burn out of capital and fail to gain traction, there may be a handful that do find significant consumer adoption — and it may or may not involve a cryptocurrency.5

One additional challenge with the X%-of-incumbents market share argument (and this occurs in every industry) is that it assumes that market participants (Alice and Cathy) are willing to go through the frictions to use Bitcoin, the network instead of existing rails or products like Apple Pay.  Or that Alice and Cathy perceive bitcoin, the asset, the same way as some backers do.  It could happen but is conceivable that it may not as well (to be even handed, there are any number of investors and entrepreneurs that have bullish views, Pantera was just used as an example).

For balance I spoke with Raffael Danielli, a quantitative analyst at ING Investment Management and proprietor of Matlab Trading, and in his view:

In terms of pricing bitcoin, equity models do not work (no dividends, no predictable cash flows) and forex models also don’t work.  At this moment I would value Bitcoin somehow like gold, meaning lots of speculative value and little intrinsic value. When people make those comparisons with precious metals they usually assume that “what if Bitcoin became as big as the market cap of xyz”. More realistically would be to assume “what if Bitcoin became x% as big as the market cap of xyz” with x being (a lot) smaller than 100 because both are competing for the same market share (not entirely true but to some degree).

This also touches on the binary outcome argument: that bitcoin will either go to the moon or fall to zero.  This is a false dichotomy.  Just as it would be fallacious to assume that a new car marquis will absorb all of the market share from the rest of the industry (or none at all), or that a new computer company will similarly displace all incumbents (or none at all), so to is it incorrect to assume that a cryptocurrency only has two directions to go: vaulting into geosynchronous orbit or crashing on the launch pad.

What happened to something in the middle; remain-a-viable niche?

Technical analysis

dilbert technical analysis

To cut to the chase, all bitcoin technical analysis has about as much scientific predictive power as phrenology does.  Not only is the market illiquid and manipulable (see Willy Bot) but there is (probably) still no real fundamental value beyond the transactional demand floor set most likely by the demand generated through the trade of illicit goods and services.  Perhaps that will change in the future, but maybe not.

For instance, Ryan Selkis (“Two Bit Idiot”) recently performed a back-of-the-envelope calculation to create an estimate for “transactional demand” — dialing down to a figure of $0.25 per bitcoin.

A year and a half ago, when the market price of a bitcoin was $143, Rick Falkvinge put together perhaps the only analysis of transactional demand generated by illicit trade (e.g., online gambling, dark markets, Silk Road, etc.).  Based on his own break down of the velocity of coins it amounted to roughly $1.12.  Everything on top of that is based on speculative demand.

In his words, “[…] the current value of one bitcoin, as backed by exchange of products and services in its role as a transactional currency, is roughly one US dollar and twelve US cents. And that’s still a generous estimate.”

Interestingly enough, Falkvinge reached out to Automattic, parent company of WordPress (a CMS developer and web host) to find out what kind of payment volume they had observed (they originally announced support for bitcoin payments in November 2012).  According to Falkvinge:

What about normal products and services? To get a ballpark understanding, I contacted Automattic (the parent company of WordPress) and asked politely if they could share how much revenue they have received in bitcoin, being one of the highest-visibility brands ever to accept bitcoin. The answer came quickly – “a couple of hundred dollars worth, so far”. If the highest-visibility brand accepting bitcoin has had less than two bitcoin in revenue in total, then for all intents and purposes, there is currently no measurable bitcoin economy outside of drugs and gambling.

Last July I also reached out to Automattic to find out if the volume had changed.  In an exchange with Chris L., from customer service (ticket #1886104), he stated:

We will not disclose that type of information since we keep our financial information private, as well as any information as it relates to our users.  If you have any follow up questions, or concerns, please do not hesitate to reply back.

Fast forward to last week, Matt Mullenweg, co-founder of WordPress explained that bitcoin was recently dropped as a payments option (it may be added again later).  Why?

The volume has been dropping since launch, in 2014 it was only used about twice a week, which is vanishingly small compared to other methods of payment we offer.


The takeaway should not be seen as “bitcoin does not have value” or that “bitcoin will not increase in value” or that even “bitcoin will not displace gold as a store of value.”  It clearly does have some kind of value to thousands, perhaps enormous value and utility to hundreds of thousands of traders, merchants and consumers of all stripes.

But in almost every case above, as well as many more often stated on forums, the argument is typically from a supply-sided viewpoint and not the demand (see Steve Waldman’s comments from the Cryptoecon event).  Historically most of the speculative demand seems to originate from a variety of investors with high risk tolerance and low time preference, with the expectation that prices will eventually go up (for a variety of reasons).

While it could change, empirically, we see that in general most participants are still holding coins and not using it for trade or commerce.6  And without any additional actual use-cases that generate transactional demand or additional aggregate demand from outside investors, it is likely that the bitcoin price will largely stay within the range it has seen this past year.  After all, why would it increase just because a large whale has moved a significant quantity to a cold wallet?

How then, can the market value of bitcoin — with a marketcap (or money supply) similar to that of the M1 of the Bolivian boliviano (according to the same ECB report above) — change in the future?7

Every bitcoin holder benefits from any kind of “good” news.  So there is an incentive to pump and manufacture as much good news as possible (e.g., astroturfing).  This seems to have culminated in an effort announced last week by the Bitcoin Foundation:

The Bitcoin Foundation announced today a partnership with Bitcoin companies BitFury, BitGo, Tally Capital, ChangeTip, and Bitcoin Foundation lifetime member Bruce Fenton to engage theAudience – one of the world’s largest multi-channel publishers of social and digital content. theAudience’s team of digital storytellers will work closely with these groups to launch a multi-faceted social and traditional media campaign to educate businesses, consumers, and society at large about Bitcoin.

Is this the same type of payola that “Tom Butterfield” investigated last summer?  The downside of this “educational” push is now any time there is “good” news, we may have to consider the source to find out if it is organic or just a sponsored puff piece.

Though in the end, it probably doesn’t really matter what we think or publish, what matters is — like all markets — is what the actual traders on markets think.  And as an aggregate of their demand relative to the available supply on exchanges, the value is around $270 today.  Perhaps future expectations of utility and value will dramatically change once the BitLicense is fully resolved and professional exchanges such as Gemini and LedgerX come online.

future-crystal-ball1Future research

Is there a way to model prices?

Future research could look at breaking down a cryptocurrency into consumption segments/tranches just as gold is typically done: (e.g., jewelry, investments, industry, etc.).

One reviewer suggested another way to model the future price of bitcoin:

Let v(t) denote the purchasing power of bitcoin (or USD) at date t.

Let R(t+1) = v(t+1)/v(t) denote the (gross) rate of return on (zero interest) money.

Since money (BTC included) is an asset, it must earn an expected rate of return E[R(t+1)] that competes with other forms of wealth. We might make adjustments based on liquidity premia etc, but to a first approximation, let’s just say that the expected rate of return from holding BTC must be about the same as holding any other asset. This is basically the EMH. And it is a compelling argument (just do the counterfactual).

So, for those people expecting huge capital gains from holding BTC… they may turn out to be correct ex post but, if they are, they would just be lucky. The same holds true for any other asset.

Moreover, the EMH tells us that the value of BTC v(t) must follow a random walk with drift — the best forecast for tomorrow’s BTC price is today’s BTC price (plus a modest drift term).

The EMH above only pins down the expected rate of return on an asset — it does not have anything to say about the *level* v(t), only its rate of change.

It is unclear what, if anything, pins down v(t) for BTC, or any fiat object. There are some theories, but in general, I think that v(t) may be indeterminate (i.e., the equilibrium v(t) could be a self-fulfilling prophecy).

If this conjecture is correct, then one could imagine discrete jumps in v(t) that happen for no good reason at all (pure psychology), without altering the expected return properties of the asset.

So, for example, the BTC price could suddenly drop from $300 to $100 and at the same time be a very good investment because if you buy it at $100, it is still expected to generate a competitive return. But this does not mean that the price might not jump down again to $50, or, indeed, up to $150.

One limitation to this approach is that EMH probably more appropriately applies in a normal, more highly liquid market with professional traders that are better informed and have equal access to information (there are currently a number of information asymmetries) and in which financial controls are the norm and not the exception — recall that there is no “neutral” exchange in the cryptocurrency world, all “exchanges” are effectively broker-dealers.

So the approach above assumes that insiders and operators of large exchanges are segregated from financial information of their customers, which they are not (e.g., because of a lack of financial controls, some exchange operators can currently front-run and ‘naked short sell’ their own customers which then distorts price discovery and the overall market).

Researchers may also be able to build a short-term sentiment index of large traders and market makers.  For instance, “accelerating merchant adoption” is typically mentioned as a bullish catalyst.  Maybe that’s true in the long-run but in the short-run it probably isn’t (as described above).  In a first step someone could create a simple regression model to measure the coefficient of “one unit of market adoption” on the market price. Then in a second step make some assumptions about market adoption for all of 2015 and use the estimated coefficient to derive (one small part) of the future price.

If someone does it like this for the most important market actors and factors, you could be able to derive a future price that is more than just a gut feeling.

See also: Eric Tymoigne: “The fair price of bitcoins as measured by the discounted value of future cash flows is zero.”

  1. As we have also seen with altcoins it could also reduce liquidity on exchanges amplifying volatility.  One reviewer suggested that with traditional equities, in such a scenario the impact is likely on liquidity and not on value since traditional calculations always take all outstanding shares into account when calculating value, not just the ones traded on an exchange. []
  2. See also: Too Many Bitcoins: Making Sense of Exaggerated Inventory Claims []
  3. See How do Bitcoin payment processors work? []
  4. In one respect, a similar problem faced Linux F/OSS adoption 20 years ago: end-users wanted a desktop OS, not a full-time hobby. []
  5. See Is the adoption of blockchains and consensus ledgers a foregone conclusion? []
  6. It is arguably rational to hold with the expectation of price appreciation; spending may actually be irrational []
  7. See also Why Bitcoin does not have a market cap []
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Eric Tymoigne: “The fair price of bitcoins as measured by the discounted value of future cash flows is zero.”

Earlier today The Wall Street Journal posted two responses to the question: “Do Cryptocurrencies Such as Bitcoin Have a Future?”

The ‘Yes’ answer was penned by Campbell R. Harvey, a professor at Duke University.

The ‘No’ answer was penned by Eric Tymoigne an assistant professor at Lewis & Clark College.

I don’t fully agree with all of Tymoigne’s points, but I think the areas regarding speculative demand are empirically valid — he also has a couple other good, concise points that tie in with what Robert Sams has previously discussed (see Seigniorage Shares).

Below is Tymoigne’s full response:

“NO: As a Currency, Bitcoin Violates All the Rules of Finance”

By Eric Tymoigne

Bitcoins are an odd sort of commodity. They are not financial instruments. The value fluctuates widely, in line with changing views regarding the overall usefulness of the bitcoin payment system and the speculative manias surrounding such views. There is no financial logic behind bitcoins’ face value.

In other words, if you like to gamble, this is a perfect asset. If you are looking for an alternative monetary instrument, look elsewhere.

The bitcoin system has two components: the means of payment themselves, and an online ledger, called the block chain, which is a record of all bitcoins that have been created and who holds them. The ledger is the main innovation. It provides an open, decentralized, fast, cheap and supposedly secure means of completing transactions.

Volatile and Illiquid

But as an alleged alternative currency, bitcoin is unacceptable. Its volatility and lack of liquidity pose risks far beyond most traditional currencies.

To understand why, take a quick look at how real money works. Monetary instruments are securities. As such, they have a term to maturity (instantaneous) and an issuer—often a central bank or private banks—that promises to pay the bearer the full face value. Gold coins are a collateralized form of such security. Paper, cheap metal, and electronic entries are the forms such securities take today. The characteristics of these securities allow them to circulate at a stable nominal value (par) in the right financial infrastructure and as long as the creditworthiness of the issuer is strong. This provides a reliable means to complete transactions and, more important, service debts.

Bitcoins, meanwhile, violate all of the rules of finance. There is no central issuer guaranteeing payment at face value to the bearer; in fact, there is no underlying face value, and subsequently no imputed value at maturity, which means they are completely impractical for use in servicing of debt. The fair price of bitcoins as measured by the discounted value of future cash flows is zero.

Bitcoins pose a huge liquidity risk. Ultimately, anyone with bitcoins has to convert them into a national unit of account—dollars, say, or euros—to pay taxes or personal debts and to make other transactions. Their extreme volatility makes them a bad bet if one plans to buy a house in a few years, is saving for college, or has regular payments on, say, a mortgage or car. If bitcoins were a large asset in a portfolio, the investor’s solvency would be at risk. This certainly would be the case if bitcoins were promoted for poorer individuals who don’t have access to banking today.

Logic and Illogic

For an economy to work well, money needs to be created (for example, through bank credits or government spending) and withdrawn (through debt servicing and tax payments) following economic logic. We have all seen recently, in the global financial collapse of 2008-09, how irresponsible behavior on the part of big banks with regard to their lending and debt-servicing practices can set off widespread financial panic followed by years of economic stagnation.

The mechanics of creating and withdrawing money need to operate not only with sound economic logic. They also should be simple, to accommodate quickly the needs of a flexible economy. Today, money is created and destroyed in seconds through digital entries.

Bitcoins, by contrast, are created using a purely mathematical logic that lacks financial or economic underpinnings (currently 25 new bitcoins every 10 minutes); and they can’t be retired as needed to maintain their scarcity. Given the lack of economic logic behind the net injection of bitcoins, there is increased risk of financial and price instability.

The block chain is useful as an authentication tool and is the main innovation. But it’s too soon to tell whether it can have other applications. For now, unfortunately, it’s a potential step forward accompanied by an actual step backward.

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A brief history of Bitcoin “wallet” growth

There has been a lot of investment and press coverage of the overall Bitcoin ecosystem.  So what kind of growth have some of the larger companies historically had?

Even though it is not an accurate measure of growth or adoption (see Measuring Interest and Not User Adoption), a lot of discussion on social media typically uses self-reported “wallet” numbers as a valid metric for traction.  Ignoring the fact that there is nothing in the network that can be described as a “wallet” (there are no real “payment buckets,” since addresses are essentially just UTXO labels), for simplification purposes, we will talk about what are typically referred to as wallets.1

A brief history

As mentioned in a working paper last spring, Coinbase began 2013 with ~13,000 wallets and on February 27, 2014 announced it had reached 1 million.

Similarly, had roughly ~13,000 wallets in August 2012 and reached 1 million in January 2014.  On April 14, 2014, reached 1.5 million wallets.

Yet it is unclear how many are active or actually have any bitcoins in them (similar uncertainties surround Coinbase wallets).  More on that later.

Fast forward to the present day, recently announced that it had 3 million wallets and Coinbase now has 2.5 million (note: the about section on Coinbase also states there are 2 million “users” though that is unclear if they are active, KYC’ed users with an actual balance or just a registered empty account).

Altogether, Coinbase purportedly added 1.5 million new wallets over the past year and supposedly doubled its own wallets.

Sounds like real consumer traction?

Or, maybe not.

Why?  Because there is no cost to open or create a wallet.  In fact, for “best practices” users are supposed to use only one address per transaction due to privacy and security concerns.  Thus, consequently the growth in wallet creation could be a skewed metric.

Internal usage

According to media reports, merchants accepting bitcoin for payments globally increased from ~21,000 in January 2014 to now over 100,000 as of February 2015.  Of that total, Coinbase states it has 38,000 merchants and BitPay claims 53,738 merchants accept bitcoin payments through them.

What does this “growth” actually look like?

coinbase offchain transactions

Above is a chart covering the past year from Coinbase which illustrates the daily off-chain transaction volume, the transactions that take place within the Coinbase database.

While it is unclear if all of this activity represents merchant processing, vault movements, etc., the trend over the year is actually relatively flat.  Perhaps that will change in the future.

Can we be sure that this flatness is missing actual merchant activity?

Four-and-a-half months ago, in October 2014, Brian Armstrong and Fred Ehrsam, co-founders of Coinbase, did a reddit AMA.  At the 31:56 minute mark (video), Fred discussed merchant flows:

One other thing I’ve had some people ask me IRL and I’ve seen on reddit occasionally too, is this concept of more merchants coming on board in bitcoin and that causing selling pressure, or the price to go down. [Coinbase is] one of the largest merchant processors, I really don’t think that is true.  Well one, the volumes that merchants are processing aren’t negligible but they’re not super high especially when compared to people who are kind of buying and selling bitcoin.  Like the trend is going in the right direction there but in absolute terms that’s still true.  So I think that is largely a myth.

What about

blockchain my wallet transaction volume

Above is a chart measuring the internal transaction volume over the past year of the “My Wallet” feature (the product name of the user wallet) from

Earlier this week, claimed that “over $270 million in bitcoin transactions occurred via its wallets over the past seven days.”

But this is probably not accurate.  Organ of Corti pointed out that the 7 day average was indeed ~720,000 bitcoins in total output volume (thus making) the weekly volume would be about “5e06 btc for the network.”

Is it valid to multiply the total output volume by USD (or euros or yen)?  No.

Why not?  Because most of this activity is probably a combination of wallet shuffling, laundering and mixing of coins (e.g., use of SharedSend and burner wallets) or any number of superfluous activity.  It was not $270 million of economic trade.’s press release seems to be implying that economic trade is taking place, in which all transactions are (probably) transactions to new individuals when in reality it could simply be a lot of “change” address movement.  And more to the point, the actual internal volume looks roughly the same as has been the past few months (why issue a press release now?).

Is there another way to look at this?

blockchain my wallet number of transaction per day

Above is a chart from that visualizes “My Wallet” transaction volume over the past year.

While has seen transactions per day roughly double over the past year (from 25,000 to 50,000), without doxxing where those bitcoins go, it cannot be said that a doubling of economic activity, or that bonafide consumer traction has taken place.

Has there been any “exponential” growth, adoption or traction?  Probably not.  Again, perhaps that will change, but consumer usage could simply continue to grow at a linear fashion or maybe even less as well.

There may be a number of reasons, perhaps the average consumer is still someone who buys and holds bitcoin as a speculative investment and has no need to actually spend it with the available merchants.  But this is a topic for another post (see also Zombie activity).


ChangeTip was founded on December 17, 2013.  It is not generally seen as a wallet, like the services above, in fact it currently bills itself as a micropayment service (e.g., “tipping”).  However, users need a ChangeTip wallet — which is provided for free through its platform — in order to perform their tipping services.

While their “Offsite storage wallet” (cold storage) is publicly accessible, below are three charts culled from Changetip real-time usage stats which has been broken the last couple of weeks (or the API they were collecting data from is broken; or both).  The time period is from between December 6, 2014 and February 17, 2015, covering ~73 days including Christmas and BitPay’s “Bitcoin St. Petersburg Bowl.”

changetip total number of tips sent

The chart above visualizes the total number of tips sent on the ChangeTip platform .  In just over 2 months it increased from: 119,740 tips to 187,071 tips.  During this 73 day period, approximately 67,331 tips were sent which is roughly 922 per day.

changetip total usd tipped to date

The chart above visualizes the total USD tipped to date (at current exchange rate).  During this time frame it increased from: $54,767 to $111,963.  Thus $57,196 was sent in tips during 73 days, roughly $783 per day.

changetip total numbers of users

The chart above visualizes the total number of ChangeTip users during the same time frame.  It increased from 45,851 users to 67,469 users.  According to this data, 21,618 users joined ChangeTip during 73 days, which is approximately 296 new users per day.

Altogether this comes to a grand total as of February 17, 2015 — 67,469 users have sent 187,071 tips totaling $111,963.  The average user has sent 2.7 tips altogether, with each tip worth about $0.60 (just under 60 cents to be precise).

Perhaps this trend will change — in addition to its usage on Twitter and Reddit they have added support to Slack and Youtube.

But then again, maybe tipping is not a really accurate, useful or desirable signaling mechanism (recall that micropayments is not a new idea).  And while speculative, a lack of traction could be one of the reasons why — after 3 months since Coinbase first launched their own — it recently dropped their own tipping feature (e.g., the engineering resources consumed more than the service generated).

Future research and conclusions

What about Android Bitcoin wallets?  Last October a github user put together a short comparison of the top 10 Bitcoin wallets by number of downloads.  What we saw then was a power law distribution: growth in downloads among the top 3 but a relative plateau for others.  More striking was that there was linear growth, not exponential.  Future research should also take into account the corresponding amount of deleted wallets and inactive wallets.  Note: last May at the Dutch Nationaal Bitcoin Congres, Mike Hearn described this comparison of downloaded vs deleted wallets at length, see his presentation (video) starting at 11:30m.

Bitreserve, which incidentally also launched in October 2014, provides a public transparency stats page which could serve as the beginning of a “best practices” for the industry.

Why is this important?

We have previously looked at BitPay data (which was flat).  Circle and Xapo have not publicly released much data at this time (incidentally, breadwallet is actually ranked higher at #4 in the Apple Store than both Coinbase and Xapo).  Yet from the data above it is increasingly clear that actual user numbers should not be conflated with wallet creation numbers.

Aside from movement into P2SH addresses, it is hard to really say where large, sustained organic growth is occurring.  Perhaps it is only a matter of time, maybe it is “early days” as some say.  Or maybe it is a reflection of other economic development constraints.


I received an email from Andreas Schildbach, creator of the Android Bitcoin wallet, and a portion of it is posted below (with his permission):

Install count is at 700k. Perhaps an interesting metric is that on GitHub, it’s forked 384 times (and starred 371 times). A lot of these forks made it to the Play Store.

Update 2:

I received an email from Wendell Davis, creator of the Hive Wallet.  According to him, all the Hive Wallet stats are open and accessible.  He also pointed to a similar, smaller discussion on reddit last fall.

Update 3:

BitcoinPulse has been tracking the total amount of downloads for the Satoshi bitcoind client (the reference client); over the past year there has been a linear increase in downloads.  Arianna Simpson pointed out that MultiBit, as of March 2014, had at least 1.5 million downloads.

  1. I would like to, again, thank Andrew Poelstra for crystalizing this point for me. []
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