bitcoin

Pantera Capital’s Dan Morehead on the Future of Bitcoin

At a StrictlyVC event in San Francisco last week, Dan Morehead, founder of the San Francisco-based hedge fund Pantera Capital, sat down with seed investor and venture advisor Semil Shah to talk Bitcoin.

Morehead knows Bitcoin as well as anyone. After logging time at Deutsche Bank and Goldman Sachs, then joining Tiger Management, where he rose to the head of global macro trading, Morehead founded Pantera, a 12-year-old outfit that has more recently committed to investing exclusively in Bitcoin and other digital currencies. We wanted to know why — as did Shah — so Shah asked him. Parts of their discussion follow, edited for length.

SS: There was exuberance over Bitcoin, then not, and now it’s coming back. What’s going on?

DM: Every technology goes through a hype cycle, where there’s a kernel of truth or a kernel of genius, and once the media catches it, it [captures everyone’s imagination] for a while. Then there’s an awkward period. And Bitcoin went through that. [But] it was more extreme because it has one unique feature. It’s a technology protocol that has a real time price feed. And that’s really, really weird.

In 2011, no one really cared. By 2013, everyone had [that price feed] on their screens and the press was talking about it, and it led to extreme bubbles [including in Bitcoin mining]. At the end of 2013, the price of Bitcoin was 93 times higher than it was the year before. Bitcoin improves all the time, but it wasn’t 93 times better, so a bubble . . . had to deflate.

SS: Was it rational for Bitcoin’s price volatilty to affect venture investment in the technology?

DM: I think people did get over their skis in 2013, thinking it was going to change the world overnight. It’s going to change the world, but it’s going to take a couple decades to do it, as other Internet protocols [have taken].

One data point about Bitcoin: All the companies in the Bitcoin ecosystem are worth just over $3 billion today. All the Bitcoin that exist are about worth that right now. So you have a ratio of about 1:1. Meanwhile, in talking about the U.S. equity market or the developed company space, the market cap of all the companies in the U.S. is worth five times the value of money supply. So I think you’re going to see a persistent trend of value venture in Bitcoin increasing at a faster pace than the underlying currency or protocol.

SS: Numerous traditional VCs have made bets on seed- and early-stage Bitcoin companies, but it seems like these bets will take longer [than expected] to play out. Will they have to continue supporting these companies, or will other investors come down the stack?

DM: It’s certainly taking longer than some people expected a few years ago. But you’re seeing [an influx] of investors. Last month, Circle [Internet Financial] did a round with Goldman Sachs, which was the first major international bank to invest. So not only are you getting the traditional venture investors, but you’re getting strategic investors like big banks and big exchanges trying to get invested in the Bitcoin space.

SS: You understand Wall Street. How does it perceive Bitcoin, both as a currency and as a technology platform?

DM: I think most of Wall Street realizes that the systems that move money are incredibly antiquated and incredibly inefficient. Most of them were designed in the 1950s. The main thing for wiring money – SWIFT – is basically sending messages and it’s very primitive and can be disrupted by Bitcoin very easily, and most banks would like to see that happen.

SS: How would that affect big banks’ fees and the way they make money?

DM: I think too much was made in the early days of [Bitcoin’s ability] to disrupt banks. A lot of banks now have retail stores – selling services to people. So they can still retain their relationship with the customer and then swap out the back end.

Also, there are a small number of banks that do cross-border money movement; they’re called correspondent banks, and there’s really only a dozen or so that control an entire market. An extreme example is Africa, where, if you want to move money into or out of the entire continent, there are only two banks that will do it and other banks need to use those two banks and it’s very expensive. So banks want a cheaper way to get money in and out of places like that.

SS: What is happening in Bitcoin in the rest of the world outside the West, especially where rule of law is weak?

DM: In mobile money, Kenya is actually the world leader. Southern Africa has weak institutions and currencies that deflate at a rapid rate; Zimbabwe is the world record holder with a 100 trillion dollar note now. So their citizens need a better solution to transact.

They also are unbanked [along with billions] of other people on earth that don’t have access to a bank but do have a cellphone, and going straight to some mobile money solution — bitcoin is a great solution for that. Already, 75 percent of adults in Kenya use a mobile system called M-Pesa. In fact, 45 percent of the entire GDP of the country is processed in M-Pesa. To me, that’s the future of bitcoin.

(If you’d like to hear more from this discussion, you can listen to it in its entirety here.)

StrictlyVC: April 20, 2015

Hi, and happy Monday, everyone! Hope you had a wonderful weekend.

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Top News in the A.M.

Nokia is reportedly plotting a return to the consumer phone market in 2016.San Francisco denizens face an ugly reality. Phone numbers with 415 are running so low that phone companies have begun assigning numbers starting with area code 628.

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Wences Casares on the Future of Xapo (and Bitcoin)

Wences Casares is among the most-trusted proponents of the digital currency bitcoin. Indeed, last year, Casares – a serial entrepreneur who previously ran the digital wallet service Lemon (acquired by LifeLock in late 2013) – raised $41 million for his now 40-person, Palo Alto, Ca.-based company, Xapo, including from Benchmark and Fortress Investment Group.

That amount has since been dwarfed by other bitcoin startups – the payments processor and wallet startup Coinbase announced a $75 million round in January, for example – but Casares says he doesn’t need more capital any time soon. Despite a price crash last year and some high-profile security breaches, bitcoin’s growth, and Xapo’s, continues apace, he says. We talked the other day in a conversation that has been edited here for length.

When you were raising money for Xapo last year, a single bitcoin equaled $650. Now, bitcoin are worth $225 a piece. How has that price fall impacted your business?

For people who’ve been looking at bitcoin for three or four years, that’s not really the story. Bitcoin has done the same thing several times: [jump from], nine cents to $10; $1 to $17; $17 to $30 — all the way to $100. So those who’ve been around along time have seen it go from nine cents to $200.

Also, when we raised that money, there were 3 million people using bitcoin. Today, there are 12 million. There were 20,000 transactions; today there are 100,000. Back then, bitcoin represented 50 percent of all cryptocurrency volume; today, it represents 96 percent.

But are your customers transacting more now that it’s worth less, or are they continuing to sit on it?

There are two very different markets. You have the California and New York market, [where people] own it as a speculative payment and who never do a payment, and [those 10 million people] account for most of the bitcoin. Then you have emerging markets where you see [2 million other] users with a lot less coins, and they’re using it because they don’t have credit cards and that hasn’t changed with the price.

Where are people most actively using bitcoin in emerging markets, and is it becoming any easier to use in those places?

People are using it in India, Turkey, Indonesia, Brazil. The barriers remain enormous. It’s very hard to use it. But if you have no other way of paying online, you’re willing to go through enormous hurdles.

You’ve said that establishing trust is the biggest hurdle that bitcoin faces. Isn’t simply understanding it an even bigger obstacle?

Bitcoin looks like the internet before there was a browser. A lot of us tried explaining PCP stack and how the protocol works [etc.] and nobody really started using it because of those explanations. It happened because someone wanted to keep in touch over email or Skype or Facebook.

[Similarly], the main use case for bitcoin is micro-transactions, and the internet will look different five years from now when you can move cents and hundreds of users who don’t have credit cards but $5 of bits can unlock certain things that you can’t unlock any other way.

Xapo’s business is centered on a bitcoin wallet whose users store the bitcoin in vaults – or physical servers — around the world. What are they like, how many does Xapo manage, and why are they located where they are?

These are large facilities where there are sections owned by other companies, with sections that are exclusive to us that we don’t share with anyone else. We have five – one in Switzerland and the others on other continents. They’re not very close because you have to be able to lose one due to a disaster like an earthquake, flooding or nuclear war.

Would you ever need more?

No. Even if we were 10,000 times our current size, it isn’t like bitcoin take up more space. We have five [servers] because each bitcoin has five keys. Imagine a door that has five keys and you need three to open it. Basically, if you lose one or two facilities owing to natural disaster or theft, you can use the other three to move the bitcoin to a safe location.

Many bitcoin companies are tackling numerous things, like Coinbase. It’s a wallet provider. It’s also an exchange. Why are you focused on the wallet alone?

Because it’s hard enough to win at one business and do it really well. At the beginning, AOL gave you connectivity and weather and email addresses and financial news, and it didn’t win at any of those things. Bitcoin is the same. A lot of companies do many things; we’d rather build the best wallet in the market.

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New Fundings

58.com, a 10-year-old, Chaoyang, China-based classifieds site (China’s biggest in terms of monthly unique visitors), has acquired a 43.2 percent stake in its Beijing-based rival Ganji for $412.2 million in cash and stock, reports TechCrunch. 58.com, which went public on the New York Stock Exchange in 2013, also disclosed that Tencent Holdings has provided it with $400 million in new funding to increase its ownership position in the company. Tencent now owns 25.1 percent of the business. More here.AllCampus, a 2.5-year-old, Chicago, Il.-based startup that collaborates with universities and helps them expand online enrollment programs, has raised $844,000 as part of a round that’s targeting $3 million, shows an SEC filing. The company has previously raised $1.5 million in debt and a separate, $6 million round from Noson Lawen Partners.Boombotix, a three-year-old, San Francisco-based maker of portable and Bluetooth-enabled loudspeakers, audio accessories and mobile apps, has raised $4 million as part of a $10.8 million round, shows an SEC filing. According to Crunchbase, the company had previously raised $4 million from a long list of investors, including Red Hills Ventures, Great Oaks Venture Capital, Grishin Robotics, Walden Venture Capital, Baseline Ventures, and The Social+Capital Partnership.

Cnano, an eight-year-old, Santa Clara, Ca.-based maker of multi-wall carbon nanotubes products for the energy storage, structural and electronics industries, has raised $15 million in Series C funding led by GRC SinoGreen Fund, with participation from Hotung Investment Holdings; several new, unnamed investors; and earlier investors Pangaea Ventures, Presidio Partners, WI Harper Group, IDG Capital Partners and Megatop Capital. The company has raised at least $27 million to date, shows Crunchbase.

Contego Medical, a 10-year-old, Raleigh, N.C.-based maker of angioplasty balloon and stent delivery catheters, has raised $5.6 million in Series B funding led by Hatteras Venture Partners, with participation from Mountain Group Partners, Lookout Capital and Medical Mutual.

Citified, a year-old, Portland, Or.-based peer-to-peer parking app startup, has raised $600,000 in seed funding, shows an SEC filing that lists a $900,000 target. The service appears to be available in Portland only right now. More here.

Fanli, a nine-year-old, Shanghai, China-based online rebate and flash sale site, has raised an undisclosed amount of Series C funding at a $1 billion valuation led by Rakuten, says the company. According to Crunchbase, Fanli has raised at least $30 million from investors previously, including QiMing Venture Partners, SIG China, and Steamboat Ventures. China Money Network has more here.

Flashpoint Global Partners, a 3.5-year-old, New York-based security service that provides its customers with data about areas on the internet where mainstream search engines are unable to penetrate (also known as “the Dark Web”), has raised $5 million led byTechOperators, with participation from Bloomberg Beta, Cisco Investments, Greycroft Partners, and K2 Intelligence.

Freshdesk, a five-year-old, San Francisco-based maker of cloud-based customer support software, has raised $50 million in new funding led by Tiger Global Management, with Accel Partners and Google Capital participating. The company has now raised roughly $95 million altogether. TechCrunch has more here.

GamEffective, a 2.5-year-old, Tel Aviv, Israel-based enterprise gamification company (its graphics aim to improve sales, customer service, on-boarding and more), has raised $3 million in Series A funding led by Verint Systems, with participation from the company’s earlier backers, including 2B Angels and Shaked Ventures. The company had previously raised at least $1 million in seed funding, shows Crunchbase.KiteDesk, a 3.5-year-old, Tampa, Fl.-based sales intelligence platform, has raised $4 million in seed funding from unnamed angel investors. VentureBeat has more here.

MX, a five-year-old, Provo, Ut.-based company that partners with financial institutions and online banking and payment network companies to help them create segments, deploy offers, and start tracking campaigns, among other things, has raised $20 million in new funding as part of a $30 million round, shows an SEC filing. The round doubles the amount that the company had previously raised across numerous rounds, shows Crunchbase. Earlier backers include Peak Ventures, Commerce Ventures, North Hill Ventures, TTV Capital.OneSignal, a year-old, San Francisco-based company that makes retention marketing tools and push notifications for mobile developers, has raised more than $2 million in seed funding, including from Rakuten Ventures, Y Combinator, Tamares Capital and numerous individual investors, including Justin Kan.Oscar, a nearly two-year-old health insurance company that focuses heavily on technology, design, and data, has raised a whopping $145 million in new funding led by Founders Fund at a valuation that TechCrunch sources peg at $1.5 billion. The company has now raised $295 million altogether, including from Li Ka-shing, Wellington Management, Goldman Sachs, Thrive Capital, Khosla Ventures, General Catalyst Partners, Red Swan Ventures, BoxGroup and others. More here.

Samba TV, a 6.5-year-old, San Francisco-based startup that provides television analytics, is now partly owned by the ad giant Interpublic Group, which has acquired a minority stake as part an effort to understand how consumers are watching television. The companies aren’t disclosing the size of the investment. Samba had previously raised at least $8.2 million, including from August Capital, Gary Lauder, and Mark Cuban, shows Crunchbase. The New York Times has more here.

Sulekha, a 15-year-old, Chennai, India-based local services classifieds company, has raised $28 million in Series C funding led by Singapore’s sovereign wealth fund GIC, with participation from earlier backer Norwest Venture Partners. The company had previously raised at least $16.5 million, including from Mitsui Global. The outlet Inc42 has more here.

Widetronix, a 12-year-old, Ithaca, New York-based company that makes ultra-low power sensor platforms, has raised $1.2 million in equity and debt, shows an SEC filing. According to Crunchbase, the company has raised less than $1 million in the past, including from Gotham Ventures.

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New Funds

Sep Kamvar, director of the Social Computing group at the MIT Media Lab, has raised a $2.5 million venture fund called Fireweed Fund, shows an SEC filing. Kamvar spent four years as the head of personalization at Google. He was also the founder and CEO of Kaltix, a personalized search company that was acquired by Google in 2003.

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IPOs

Baozun, an eight-year-old, Shanghai, China-based e-commerce service company that helps smaller businesses with site design, development and hosting, IT infrastructure, customer service, warehousing and logistics, is planning to raise up to $200 million in a U.S. IPO, shows a new SEC filing. The company’s biggest shareholders include Alibaba, which holds a 23.5 percent stake in the company; Softbank, which owns 17.8 percent; funds owned by Goldman Sachs, which owns 9.8 percent; and the private equity firm Infinity Group, which owns 6.6 percent.Legend Holdings, the parent company of Chinese PC vendor Lenovo Group, is reportedly planning to launch an IPO in Hong Kong later this year that could be the biggest in Asia so far this year. More here.China’s government has just drafted rules for companies’ IPO applications to be reviewed by the nation’s two stock exchanges, rather than regulators. More here.

Three IPOs planned this week.

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Exits

SunGard Data Systems, the Wayne, Pa.-based financial tech company, is exploring a sale that could value it at as much as $10 billion, says Reuters. SunGard was acquired for $11.4 billion a decade ago by Silver Lake Partners, TPG Capital, Bain Capital, Blackstone Group, Goldman Sachs Capital Partners, KKR and Providence Equity Partners.

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People

Klout co-founder and CEO Joe Fernandez has stepped down from his role leading the company, which sold to Lithium Technologies for a reported $164 million in cash and stock a little more than a year ago. According to Recode, Fernandez is off to pursue other startup ideas; as part of the transition, he’s also joining Lithium’s board of directors.According to a new book coming out next month, Elon Musk very nearly sold his car company, Tesla Motors, to Google in 2013. More here.Ellen Pao’s attorneys, Therese Lawless and Alan Exelrod, talk with the San Francisco Chronicle about losing, sexism and what’s wrong with the tech industry.

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Essential Reads

Twitter has filed a “tweetstorm” of trademark applications.Late Friday, WhatsApp disclosed that it now has 800 million users. More here.

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Detours

The quick trick one self-made billionaire uses when trying to make a tough decision.A winning Craigslist ad. (You try selling a 2002 Ford Taurus.)What 10 famous movie mansions would cost in real life.

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Retail Therapy

Save your whiteboard ideas.You’ll be the coolest parent at the soccer match with this chair. (Also, good luck getting out of it!)

Wences Casares on the Future of Xapo (and Bitcoin)

When you were raising money for Xapo last year, a single bitcoin equaled $650. Now, bitcoin are worth $225 a piece. How has that price fall impacted your business?

But are your customers transacting more now that it’s worth less, or are they continuing to sit on it?

Where are people most actively using bitcoin in emerging markets, and is it becoming any easier to use in those places?

You’ve said that establishing trust is the biggest hurdle that bitcoin faces. Isn’t simply understanding it an even bigger obstacle?

Would you ever need more?

Many bitcoin companies are tackling numerous things, like Coinbase. It’s a wallet provider. It’s also an exchange. Why are you focused on the wallet alone?

Tyler Winklevoss on the Positive Impact of “The Social Network”

By Semil Shah

Cameron and Tyler Winklevoss, the twins who remain best known for their legal fight with Facebook CEO Mark Zuckerberg — and the ensuing depiction of that battle in “The Social Network” — have moved on from those days. Still, speaking for both men, Tyler Winklevoss recently agreed to share some thoughts about life in the public spotlight and how it has impacted the brothers.

Many people in tech and startups know your name but may have an impression of you based on movies and press stories. What’s one thing you wish people knew about you that you feel is misunderstood?

I think most people in tech and startups today actually know us through the investments we’ve made, the projects we’re working on, or their own first-hand experience in meeting or working with us. Over the past two years we’ve met with hundreds of entrepreneurs, attended many demo days, and keynoted at TechCrunch Disrupt, the Bitcoin 2013 Conference, and Money20/20, to name a few. We’ve co-invested with many top valley investors, built what we believe to be a strong portfolio, and have worked very hard to bring value beyond capital to entrepreneurs we’ve partnered with. Chances are, if you are a part of the tech ecosystem in either Silicon Valley, Los Angeles or New York, you know us or know someone who really does knows us, and this informs your impression of us, not a Hollywood movie.

That being said, “The Social Network” was a fantastic film and it was a lot of fun to watch its success. It was certainly an interesting time back then, but we never got too caught up in it. We couldn’t. Our focus was on training for the Olympics. Today, we’ve traded athletics for Bitcoin and angel investing. The fact that we were portrayed in a film that won some Oscars and almost won for Best Picture is a cool piece of history, but it’s not really relevant to our daily lives. I feel the same way about graduating from Harvard and Oxford and competing in the Olympic Games. I’m proud of these accomplishments, but I don’t spend a lot of time thinking about them. They’re in the past and just not directly related to what I’m trying to accomplish these days.

As for what the crowd understands or misunderstands, your guess is as good as mine. At the end of the day, impressions drawn from a movie or a movie portrayal, either right or wrong, live in a parallel universe of pop-culture. This is not a universe that I live in so I don’t spend much time analyzing it.

What was your largest takeaway from the whole experience?

My largest takeaway is just how powerful films can be. When we graduated from Harvard in 2004, computer science was the least popular major. When we went back to Harvard to speak to students in 2012, computer science was the tied for the most popular major on campus and it seemed like every student was involved in some sort of startup or had plans to be down the road. “The Social Network” has driven a lot of this cultural interest and shift towards technology and entrepreneurship and has had a profoundly positive impact on young people around the world. I’m very happy for this.

As you grow as investors, do you see yourselves moving into traditional VC, or being more entrepreneurial and taking investing in a new direction?

Right now, we’re really enjoying the freedom and agility that comes with running our own book, and this freedom has turned out to be a great asset so far. If we were operating a traditional VC fund, there’s a good chance we never would have been able to buy Bitcoin back in 2012, because Bitcoin is not a C-corp, and VC funds are, by and large, restricted to investing in corporations. I can only imagine what the conversations might have been like trying to explain what Bitcoin was to our LPs, let alone defend a direct investment in the asset itself. Being a fiduciary to outside parties also makes it a lot more complicated to put on the entrepreneur hat, which we have done with the Bitcoin ETF and the WinkDex bitcoin price index.

Bitcoin aside, we’ve been able to place bets in a wide-range of sectors that I think has been crucial to our overall learning. While focus is important, there’s a lot of promising deals in our portfolio that wouldn’t be living side-by-side if we had a stricter mandate.

Have you totally ruled out a traditional venture fund?

We haven’t, but we’ve never really been traditional guys in that sense, and traditions don’t necessarily last forever. I do believe that venture crowdfunding will replace a significant portion of the venture capital stack in the future. This just has to be the case. Right now we see the majority of syndicate activity at the seed level, but it’s conceivable that later rounds could be filled out by syndicates down the road. By increasing liquidity, access and flexibility on both sides of the ledger, the crowdfunding model has the potential to greatly improve the power of the venture capital marketplace.

We’re more interested in exploring this new path before walking down the existing one.

Semil Shah is a guest contributor to StrictlyVC. Shah is currently working as a venture advisor to two funds, Bullpen Capital (which focuses on post-seed rounds) and GGV Capital (a cross-border U.S.-Asia fund).

Investing the Winklevoss Way

By Semil Shah

Cameron and Tyler Winklevoss, the 6-foot-five-inch, Olympic-rowing twins who remain best known for their legal battles with Facebook CEO Mark Zuckerberg, could have taken the money they were eventually awarded in the case (a reported $65 million shared with partner Divya Narendra) and hit the beach. They decided to become full-time investors instead. In fact, since 2013, they’ve been assembling startup stakes across numerous industries. The brothers, who live both in L.A. and New York, have grown especially bullish on Bitcoin, creating among the single largest portfolios of the digital currency. To better understand why they’re so convinced that Bitcoin is here to stay — despite a rough 2014 — we asked Tyler to explain their thinking.

You are both well-known for a variety of things now. Briefly catch us up on all of your activities. What are you both focused on for 2015?

Sure. Over the last two years, Cameron and I have been focused on building Winklevoss Capital. Prior to this, we were elite athletes for close to 15 years. After retiring in 2012, we decided we wanted to get back into the startup game and investing seemed like a natural entry point. For the past two-plus years we been spending a lot of time building a strong network of fellow investors and promising entrepreneurs. We’ve been fine-tuning our filters to what we like and don’t like, and developing our overall investment thesis. Most importantly, we’ve been investing a lot. Ourportfolio now comprises more than 40 companies and is growing by the day.

Our main focus for the coming year will be in Bitcoin and growing our overall angel portfolio. In the Bitcoin world, we will continue or joint role as both investors and entrepreneurs. We believe there will be some great opportunities in the infrastructure company layer, as well as some promising application layer startups. We will be working on the Bitcoin ETF and improving the WinkDex, the Bitcoin price index we launched in February, which will be used to price the Bitcoin ETF.

In the non-Bitcoin world, we will continue to place bets on strong entrepreneurs. We’ve found a lot of great teams attacking compelling problems in the logistics, human operations, smart home, consumer packaged goods and security spaces. We’ll keep our ears to the ground in those spheres but also be on the lookout for other secular trends that start to emerge.

You’re both active on AngelList. How do you plan to use your own fund and AngelList to your advantage? Are you thinking of angles beyond just crowd-based syndication?

AngelList has been instrumental to our overall investing. We’ve found great investments on the platform and the platform has made it really easy to diligence companies. Being able to message a founder directly or see a company’s existing investors and reach out to them makes the research process much more efficient. When the opportunity to invest directly in AngelList presented itself, the decision was a quick and easy “yes.”

We recently launched the Winklevoss Capital Syndicate on AngelList and have already begun syndicating our first deal. We think the crowdfunding venture model has a lot of merit and we have been devoting significant time and effort towards getting behind it. When possible, our plan is to syndicate the deals that are appropriate and give accredited investors access to these deals. Our current portfolio demonstrates the types of deals we do, and investors who back our syndicate ahead of time will get priority. It’s important to note that backing does not obligate an investors to invest in any of our deals.

I still think there is ample room to improve crowd-based syndication before focusing on other alternatives. Currently, closing takes days waiting on every wire and ACH transfer to hit. Incorporating Bitcoin into the AngelList platform for instance, would allow settlement to happen immediately. In addition, there is a lot of territory to be explored with regard to smart contracts in this context. Investors could invest contingent on certain fundraising targets being met, and the real-time balance of a syndicate would be completely transparent if it lived on the blockchain. Investors worried about momentum could instead invest immediately, knowing that if certain goals weren’t met, their money would be sent back. This particular example could help mitigate a chicken-and-egg funding dilemma and tip some startups into getting funded that otherwise wouldn’t.

But the possibilities don’t end there. Any conceivable investment term could be baked into a syndicate smart contract and be triggered when certain milestones were met. Pro-rata pre-emptive rights, super pro-rata pre-emptive rights, sliding scale discount rates, information rights, etc., could be hard-wired, all the way to the election of a board member by vote of the syndicate investors. It is going to be fascinating to see this play out.

You’re both big Bitcoin believers, but 2014 was a tougher year. As early-stage investors and with only a few larger firms investing (or conflicted out), how do you help your seeded companies thrive during a time where the area isn’t as hot as it was in 2013?

2014 had its own set of challenges for Bitcoin, but as the saying goes, what doesn’t kill you makes you stronger. I think Bitcoin will finish the year more robust than ever. I say this taking into account a lot of metrics beyond just a surface measure of price. Price is just one indicator of strength, and there is evidence to show that the price highs at of the end of last year were more noise than signal (as a result of Mt. Gox trading bot manipulation), and should not be used as a benchmark. A more complete measure of strength should include the number of 10xers and tier-one venture capitalists who have moved into the space. It should also include growth in the number of Bitcoin startups, the amount of accelerators, incubators and hackathons that are Bitcoin-focused, and the sheer lines of Bitcoin-related code that have been written. All of these numbers have grown dramatically this year.

Bitcoin may have lost some of its novelty buzz, but today it lives in meaningful business and technology headlines more than ever. Let’s not forget that less than a year ago the majority of media stories were busy lampooning Bitcoin as a ponzi scheme and/or a safe haven for money laundering that was on the brink of being outlawed. Now, serious Bitcoin news and developments are reported by the minute in the most respected and well-read publications and blogs around the world. If some of the frenzy has ceded to a calmer, more earnest narrative, then I think that is a positive development.

The growth curve of venture capital Bitcoin investments over the last few years has been steep and up and to the right. Provided that there isn’t a major economic downturn, I believe the venture capital money flowing into the space will be plenty to fuel continued growth. Some have brought up a potential funding gap with respect to core development. I think that is a more relevant concern, but again, there are a lot of projects and non-profits tackling this.

This year, both federal and state lawmakers have time and again decided not to outlaw Bitcoin but rather embrace it as an extremely transformative and monumental technology. This sets the stage for some great possibilities for this year and beyond.

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A Bitcoin Bear in Silicon Valley, It’s True

Well, yesterday was crazy.

Newsweek published a story saying it had finally found the elusive original creator behind the digital currency bitcoin. People on Reddit then went nuts, arguing that the world should leave the guy alone. On Twitter, journalists then weighed in on whether Newsweek had put his life at risk, before a gaggle of them in L.A. (where the man lives) converged on his home, then chased him around town by car until he denied to reporters that he has anything to do with bitcoin.

Plenty of investors appeared to be following the action, too. At Andreessen Horowitz, for example, at least three partners who are well-versed in bitcoin tweeted of their skepticism that Newsweek had the story right, with Balaji Srinivasan observing that bitcoin connoisseurs know that “there are vastly more credible candidates” than the 64-year-old California man that Newsweek turned up.

So much of the day revolved around the story that you might think that everyone in the tech world is convinced that bitcoin will be as big as the Internet itself.

You would be wrong, though.

While venture capitalists often seem in league on Next Big Things, Josh Stein, a managing director at the storied venture firm DFJ, says that when it comes to bitcoin, he isn’t convinced of anything — even calling himself a “bitcoin bear” in an interview early yesterday (that I’ll run more of next week).

Stein is a savvy investor who is known, among other things, for writing the first check to the online data storage company Box. It isn’t surprising that he doesn’t like advertising his position on bitcoin, which he says is personal and not a reflection of the firm’s interest. (He says others at DFJ are “looking at it.”)

As he explains it, “I’m at a huge disadvantage to the bulls. Bulls have huge incentives to make elaborate arguments for why bitcoin is going to work. But I’m not going to short it, so I have zero upside [in discussing at length why it may fail].”

Still, given that the “bulls” have had the floor for much of 2014 (Marc Andreessen in particular has been actively promoting the currency since his firm placed its first big bet on a bitcoin company, investing $25 million in Coinbase in mid-December), I pushed Stein for more.

Noting that if Andreessen is right, he’ll “make a billion dollars,” and that if Stein is right, “I don’t make any money — so who do you think will spend more time refining their argument?” – he continued.

“Look, why does everyone think bitcoin is going to work? Well, you say, it [offers] a lower transaction cost between existing systems. But anyone can [enjoy low to no costs] with ACH,” for Automated Clearing House, a widely used electronic network that allows financial institutions to process transactions in batches, transactions that are often free for customers.

“People also say bitcoin is a hedge against inflation. And why? Because they say it’s like gold. But gold actually has value. People want gold, aside from its value, and that’s been true for thousands of years. Bitcoin has no intrinsic value. It’s electrons; it doesn’t exist.”

Here, Stein abruptly stopped talking, noting that publicly stating his position on bitcoin would only serve to “cue the trolls.”

I hope he’s mistaken. Forgive the pun, but there are two sides to every coin, and skepticism is a good thing; it strengthens the development of new technologies. Silicon Valley is often an echosphere. In just a few months, the tech cognoscenti have seemingly anointed bitcoin as the currency of the future. It’s refreshing to hear a VC challenge this new conventional wisdom and express a little doubt once in a while.

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I Listened to the Winklevii So You Don’t Have To

Yesterday, at the New York Times’ annual Dealbook conference, financial columnist Andrew Ross Sorkin sat down with Cameron and Tyler Winklevoss, who long ago moved on from their battle with Facebook to become enthusiastic backers of the digital currency bitcoin.

Little wonder: The twins began buying bitcoins at $9 apiece in the summer of 2012. As of April, the value of bitcoins had shot to $120, making their investment worth $11 million. Fast forward to today, when bitcoins are trading at around $385 each, and you begin to appreciate the brothers’ fondness for this latest, financial phenomenon. Indeed, the twins – who hope securities regulators will let them move forward with an exchange-traded fund that would hold only bitcoins – say that they now believe bitcoins could enjoy up to a $500 billion market cap.

At the outset of yesterday’s interview, Sorkin offered that he’s still “perplexed” by bitcoin. Because a few of you might be, too, it seemed worth sharing some of the brothers’ insights.

* Speaking about the history of bitcoin, Cameron Winklevoss recalled the story of pseudonymous programmer Satoshi Nakamoto, who in 2009 released the source code of bitcoin to the world. “Effectively, it [created] a digital currency with a fixed set of bitcoins at 21 million that’s divisible out to eight decimal points,” he said. In an effort to simplify his point, Winklevoss added that there’s no reason to be concerned by the apparently limited supply of bitcoin, as it’s “divisible out to a large, large amount.”

* On how bitcoins are digitally “mined,” Cameron Winklevoss noted that while an individual could, theoretically, mine a bitcoin, there are “a lot of mining outfits that are building huge data centers and computers with applications that are specifically built toward trying to mint bitcoins.” (Put another way, he suggests leaving the mining to the professionals.)

* On how they got into bitcoin investing, Tyler Winkelvoss said the brothers were on vacation in Ibiza (of course), when a friend of a friend suggested they look into the digital currency. They followed up and soon realized it was a “pretty incredible invention.” (I was hoping for more from this anecdote, but there you have it.)

* On why bitcoin might be used to transfer money, rather than good old-fashioned dollars, Tyler Winklevoss compared the technology to email. “Bitcoin is a protocol, and just like [email protocols]…allow you to send an email free and instantly, you can now send money from [the U.S.] to anywhere for free, as opposed to wiring money through Western Union [and] paying a 10 percent clip, or going through banking systems that take maybe three to five days. The old legacy rails of the banking system…are slow, inefficient, and costly. So the promise of bitcoin is to bring technology to financial services like it did for email…”

* On regulation around bitcoin — or the lack thereof — Cameron Winklevoss said, “That’s the point. It’s based on your trust in math and cryptography. It’s not based on trust in an individual, or the back-room dealings of, let’s say, the Federal Reserve… This is an open-source code; everyone knows what’s going on. The rules are set in stone.”

* On whether bitcoin features an anti-government strain, Tyler Winklevoss acknowledged that there is “definitely a libertarian strain [of individuals] that gravitates toward this, [along with] certain economic schools of thought…But it’s more a response to a financial system that’s frankly very buggy. I don’t think it’s a bet against the dollar,” he said. “I think it’s a healthy check and balance that makes it better.”

* Asked about concerns that bitcoin isn’t traceable and therefore likely to be used for illicit purposes, both twins smiled. (They’d been waiting for this softball.) Tyler Winklevoss quickly noted that “you can’t track cash,” either.

* On what happens if U.S. regulators determine that bitcoin is too risky, Cameron Winklevoss suggested that the U.S. will be left behind if they do. China, he noted, “has implicitly given its blessing to bitcoin,” including by allowing Chinese search engine Baidu to accept it as a form of payment. He also noted that bitcoin has been declared “legal, private money” in Germany and that other countries, including Belgium, see “no problem with it. Said Winklevoss, “If there’s a scenario where bitcoin is regulated out of existence in the U.S., I think bitcoin continues to thrive in other places in the world.”

Photo courtesy of CNN.

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