George Washington back in 1776 used encryption, and it was revolutionary. Now, it is a standard issue tool to combat cyber attacks and for compliance. It has been claimed by many voices within the crypto and digital asset community that, “It is still early days!” While these could not be truer words, the window of opportunity for that phrase’s use is closing. The rate at which it closes is uncertain. For now though, there are plenty of reasons that Bitcoin despite being a decade old resembles the Internet much in its nascence. The World Wide Web was birthed out the protocol wars over the Internet that played out in the mid-1980’s followed by the browser wars in the 1990’s. The feverish progress of that time also shifted the PC Era into Web 1.0 where the focus was primarily on gaining users “on the net” and connecting them to information and documents via hypertext links. Bitcoin is experiencing a similar progression as many altcoins have surfaced over the years to challenge it as the leading crypto asset. As long as bitcoin remains “The King” atop of the crypto market capitalization ranks, it will likely be triumphant and be chosen as the standard or money protocol of the emerging Internet of Value. It needs to be leader in order for crypto’s success because people need to trust that it will be there tomorrow as well as into the foreseeable future. Essentially, the past few years in the crypto asset market has been the face off between various blockchain standards and protocols. If things continue in this direction, let’s just say that Bitcoin will have its own Web 1.0 moment in Web 3.0 with a consolidation of standard networks and protocols that power the applications of Web 4.0. All it takes for widespread mainstream use is further development of the ecosystem for users to simply interact with the decentralized payment network. Allowing them to connect value over the Internet via wallets and private keys, enabling users to transact securely and trace value over a public ledger powered by the blockchain technology as easily as it is to use email today. It took 18 years to shake out the ideas and protocols that are underlying and solidify the Internet we all use now. I believe what we are currently witnessing with Bitcoin closely mirrors the rise of the Internet, specifically the World Wide Web.
In the 1990’s, nobody knew what Web 1.0 was and the term was not applied only until it bit the dust. Web 1.0 is practically synonymous with the World Wide Web as it meant connecting to the network via modems that forbid landline usage elsewhere in a household because it used dial-up to link users to static websites and loads of information. The problem at this stage was the lack of interactive content due to the infrastructure not quite being ready for it. As connectivity and speeds over the Internet rose with emergence and rising popularity of wireless fidelity (WiFi), it created the foundation that was the basis of the massive rise of Web 2.0. As users gained access to the network, it paved the way for interactive content and applications to be built on top of the network. Global sharing of information surged with the explosion of social media through Google, Myspace, Flikr, Facebook, YouTube, LinkedIn and more like-minded communities where anyone could realistically Read-Write-Publish. It thrived as users were generating content and utilizing new platforms to voice their views, opinions, research, and more. The latest iteration of the Internet, Web 3.0, is the antithesis of Web 2.0 and seeks to balance out the power structures of the Internet. The main reason it differs from 2.0 is because it’s decentralized. It comes as a solution to the network becoming monopolized and privatized by companies like Amazon, Facebook, Google, Netflix, Uber, and AirBnB. Instead, its focus is primarily on democratizing the network to share value across multiple profit centers over open source and cryptographically secured networks accessible to anyone. Besides concentrating power and data in the hands of huge Internet behemoths with questionable motives, privacy will be returned to the rightful owners through a more fair and transparent architecture. Decentralization was the idea behind much of Web 2.0, but the tools and technologies were not available for it to materialize yet. Web 3.0 offers dramatically improved uninterrupted service, permission-less networks, interoperability, reduction in hacks and data breaches, and greater ownership of data due to the lack of a central point of control.
This next generation of the Internet encompasses the otherwise missing piece of the above jigsaw puzzle (originally authored by Pantera Capital), which shows Bitcoin filling the void as it has spawned an Internet of Value around itself of other protocols that can potentially become parts of the standard on their own. Some suggestions have already been made for smart contracts, storage and access, asset exchange, settlements, and document notarization. It should be kept in mind that this has not gone unnoticed by major technology companies like Microsoft and Oracle who originally wanted a private internet and their own version with protocol standards, respectively. Sergey Brin, co-founder of Google, even noted this summer that zk-SNARKs (zero-knowledge proofs for private transactions) are so new that it is almost incomprehensible that Zcash had successfully deployed them in a real-life application so fast. The project’s founder even expressed how most people do not understand that they compressed the normal timeline by several years. It was driven by strong crypto economics. The market literally helped fund the creation of another revolutionary technology. For purchasing, using, and holding their assets, users as early owners of their portion of the network gained value as they saw the addition of new users make it more valuable. Bitcoin and its original blockchain are secured by the largest computer network in the world today, with more processing power than all supercomputers combined. By now it is clear with hindsight, standards and protocols are inevitable. Day-by-day we are inching closer for Bitcoin (or possibly another blockchain network) becoming embraced by governments, or be implemented commercially on a global scale using some form of blockchain to replace the SWIFT network, or serve as the back-end infrastructure for banking network settlements. A big headline a couple of days ago was the announcement of a Singapore government owned venture firm called Vertex Ventures investing in Binance, the crypto asset exchange platform, to launch a crypto-to-fiat exchange by the end of 2018. The goal of their investment is to build-out gateways, tools that make it easier for people to participate in the crypto economy and ecosystem. It bodes well for the emerging asset class and hopefully sets a positive precedent that is assumed by many others to follow. Traditional finance is catching up with trends albeit at a pace that is cautious as to not seem to act irresponsibly, especially given light to the past behaviors that have gotten them in hot water in the public’s perception.
Since the Web 1.0 era of the Internet, the open outcry on trading floors around the world slowly became quieter and quieter until they fundamentally became extinct with some rare exceptions due to the business becoming digital with electronic trading. It has taken its time for our traditional markets to shift from analog to digital too. Even today, bonds are still traded over the phone or for the more sophisticated trader by Bloomberg chat or a similar medium. As a millennial that loves a good mobile application with solid services and exceptional user experience, it seems like only a matter of time before all of these markets are easily maneuvered through a neat app or platform that connects and synthesizes them in one place where users can navigate them all easily by the push of the button. Now it appears that many individuals are getting out of public markets either out of fear or as a protest to the outdated and fragmented legacy financial system. Many people between the ages of 18 and 35 years old use applications for simple payments and hold not an insignificant amount of crypto and digital assets. Money itself has largely become digital around the world (92% of the supply is not in paper notes) and will only continue to do so if the course we are on persists. The idea of digital bonds, equities, funds, trusts, and shares in other private companies and startups is already being spurred by technology companies like Carta and AngelList. The movers and shakers in the Web 3.0 movement will be the ones more interested in leading the charge to “digitize the world” rather than the silliness of creating a token and blockchain for everything simply to “tokenize the world.” This is playing itself out now in the crypto market as the cream will eventually rise to the top in the next 3 to 5 years at least. If the world is digitized, there will be an immensely rich amount of data to drive risk management, decision-making, machine learning, and artificial intelligence. Currently, the crypto market is saturated with many projects and use cases for tokens and blockchains that are not viable or suitable for institutional investment. Sparking the interest of regulators like the SEC and CFTC, who are looking to crackdown on the bad actors, shady practices, and ponzi-scheme projects in the market to uphold proper protections for retail and institutional investors alike. This is good for the growth and maturation of the emerging asset class according to many insiders within the space.
“Smart money,” as it is called among in some circles of investors, is known usually to get in on investments before the institutional and mainstream herds enter the trade. As a result, they benefit greatly usually from having the intelligence to see the opportunity and to notice the inefficiencies of the other two groups aside from taking the initial risk. In recent news the University of North Carolina, Dartmouth College, Harvard, MIT, Stanford, and Yale endowments have all announced they have placed significant amounts of money on the asset class by making investments directly or into at least one cryptocurrency fund. This exceptional report indicates the growing acceptance among serious institutional investors with a reputation for outsized returns, especially in alternative investments. It is a sign that the asset class is not going anywhere and that it might be a good idea to go long. From an investing standpoint, the levels at which many of these assets are trading at are almost too complex to rationalize from a retail perspective making price calls basically all personal opinions in the current market structure. The best explanation of the price of bitcoin is that it’s a proxy for one portion of the network’s value and/or how desirable it might be relative to some future value or date. An investment in bitcoin if you are long-only, keeps it simple enough that it boils down into a binary bet of whether or not it will succeed in growing to become massively adopted and put into mainstream use. As an alternative to fiat currency, bitcoin has a known supply without borders or a central group controlling it. Whereas the US Dollar is also clearly a digital currency with an unlimited and unknown supply, border restrictions, and controlled by a central banking cabal. Bitcoin’s inflation schedule is set for the next 100 years and known to all parties. The US Dollar’s inflation schedule is antiquated, political, and uncertain even 1 year out making it opaque. Let alone, the reality that the FOMC (Federal Open Market Committee) is allowed to manipulate the schedule monthly. Donning both the best technology and best security, it seems only logical that it is the best investment due to the fact governments cannot regulate or kill it. The US Dollar is the first digital currency the world interacted with, and Bitcoin is just an improved version built for a digital world. The value of Bitcoin like land fluctuates in the short term, and over long periods of time due to scarcity rises in value. Just like the old investing chestnut says, “Buy land — they’re not making any more!” The same principles apply to Bitcoin virtually as they’re not minting more than 21 million bitcoins.
If Bitcoin is growing in the same fashion as the penetration of the Internet as compared from 1994 to 2016, it still has a long way to go. Referring to the chart above, given that Coinbase had 13.3 million accounts in November 2017 and as an exchange roughly made up only 5% of the bitcoin trade as a percentage, implying that there are a total of 266 million crypto exchange accounts and after assuming that there are 6 accounts per household; it can be estimated that the total penetration of bitcoin and/or other crypto assets as a percentage of internet households is 1.29% and 0.60% as a percentage of the total world population using the latest figures from 2016. Now in 2018, Bitcoin and/or other crypto asset adoption in the United States could possibly stand as high as 8-9%! By examining the growth trends in the Internet Penetration Comparison chart above, the trend of the network sizes with respect to time takes after the netoid function as defined by Robert Metcalfe (co-inventor of Ethernet, founder of 3Com, and formulator of Metcalfe’s Law) in 2013. Principally, its slope (the adoption rate) is proportional to the product of the fraction of the population already adopted multiplied by the fraction awaiting adoption. It peaks when adoption is 50 percent (global population). Both lines of the chart resemble the same S-curve shape as the sigmoid. Metcalfe used Facebook’s data from 2003 to 2013 to show a good fit for the netoid function, and then Xing-Zhou Zhang, Jing-Jie Lui, and Zhi-Wei Xu used the actual data of Tencent (China’s largest social network company) and Facebook to fit the netoid function. Their work displayed the growth trends of Monthly Active Users (MAUs) of Facebook and Tencent over the past decade can be modeled by the netoid functions seen below.
Metcalfe’s law states that the value of a telecommunications network is proportional to the square of the connected users of the system. It postulates that the utility of a network is derived from the number of connections between nodes. Therefore, a large network with many connections and users is more useful than a small network. This law carried over to applications with the of globalization of the Internet, and its original intent was to describe the Ethernet purchases and connections. This law provides a basis for the theory of network effects. Take for example, telephones, they are highly useful and valuable to people as long as there is more than one. A single telephone would be worthless technology if there were only one in existence since it has no utility. Thus, if there is more than one telephone it can connect to then the value of that network of telephones rises as it becomes more useful by allowing more people to connect to one another. Bitcoin is like the telephone providing a utility and as technology lends itself to a winner-take-all competition against other crypto assets seeking network dominance. The blockchain and crypto asset wars have begun and are engaging in intense competition for market share. The winner will be whoever gains a compelling lead and sees their supremacy snowball as network effects allow it to consolidate their hold over the market. Bitcoin is in the obvious lead as the front-runner for a crypto asset monopoly with an impressive ten year history as well as being the largest, most valuable and secure crypto asset network.
Facebook in its early days experienced network effects as they gained new colleges and universities. As a result, its valuation grew almost exponentially. Similarly to Bitcoin and new crypto assets being listed on new exchanges, they also typically see rises in their values from the addition of new potential users. It begs the question, will Bitcoin and other crypto assets over the long-term have network effects that follow suit? If it does, the highs that were posted back in December 2017 are likely not even half as much as of the value we could potentially see it hit in the years to come. The peak of the crypto market cap was $800 billion last year, a far cry from the dot-com bubble peak of $3 trillion. Putting us not too far out from the hockey stick shaped part of curve. The true madness of crowds has yet to take place, in my opinion, and it will not happen until Bitcoin and crypto assets are even more globally ubiquitous. For now, I think we need to believe it will only succeed because the performance as an investment over the past ten years has been so strong. If Bitcoin and crypto assets are not considered by investment professionals, it should be a violation of their fiduciary duty. They need to understand the concept that as investors in these crypto networks they are able to invest directly into the protocol or infrastructure layer underlying new and future applications of Web 3.0. These crypto assets are the base for these decentralized applications (“dApps“), which are being built on top of their blockchains. The crypto market’s constant run-time and other investment-worthy qualities, not to mention, the growing user bases have proven they are not only possible but inevitable as the future of digital money on the Internet. The rise of Bitcoin and the digital revolution it is inspiring makes it a noteworthy candidate for alternative asset investing after exhibiting cues and characteristics of the early Internet, social media networks, and its maturation as an asset class with increasing liquidity, accessibility, and qualified custodian options. The best use cases for payments are the ones best for sending both $5 or $5 million simply and securely without breakage. Remarkably, last week someone processed $194 million on the Bitcoin network moving funds for less than a $0.10 fee! By design Bitcoin is deflationary, contrary to the non-commodity money experiment that has been running for about 50 years now and having no real value behind the greenback except belief has not gone great. Take back control and trade your belief for code, it’s more transparent. If notable investors and wealthy individuals keep pouring in and back the right horse, they will own a piece of the next Internet or Facebook, except it will be even more valuable!
Mark Twain famously said, “History doesn’t repeat itself, but it does rhyme.”
IMAGE: CNBC (George Washington)