The digital currency bitcoin began 2017 with a bang, soaring to its highest level in more than three years to reach $1,150 — a record high.
Since then, its price has fallen more than 30 percent as nervous Chinese authorities put local bitcoin exchanges on notice that more regulations may be coming.
To Dan Morehead — a former head of macro trading at Tiger Management who today runs his own San Francisco-based investment firm — such zigs and zags are hardly a surprise. His firm, Pantera Capital, has been exclusively focused on bitcoin and other digital currencies since 2011, and he argues that its price is “actually very predictable.” We talked with him late last week to learn more.
TC: Bitcoin has been going bananas lately. Why?
DM: With the exception of a bubble in 2013, the price is actually very predictable and has been rising along with the actual use of bitcoin. It was [trending up] slowly for a while because Ethereum [an open source public blockchain-based distributed computing platform] was supposed to be taking over — bitcoin was facing questions over its governance structure — but then Ethereum faded and bitcoin surged back.
That it reached another digit — into a thousand dollars — has gotten people excited, but its price has been grinding up for two years.
TC: How many bitcoins are currently in circulation?
DM: There are 16.09 million bitcoins now, with a roughly $14.4 billion market cap. In a hundred years, there will be 21 million bitcoins. So more than two-thirds of bitcoins have already been issued.
Early on, 50 bitcoins were issued every 10 minutes, then it was 25 bitcoins every 10 minutes, now it’s 12.5 and in another four years it’ll go to 6.25. So as their value is appreciating, the number of bitcoins that are being issued is being cut in half. The total value is going up fast as a result.
TC: Where do those 16 million bitcoins mostly reside?
DM: There’s no solid data on this, but anecdotally, it’s extremely popular in China because a lot of the transaction processors — or bitcoin miners — are there as chip manufacturing is there and electricity is inexpensive because of big hydro plants. Also, with Chinese currency devaluing and speculation that the country’s banking system is suspect or bankrupt, it’s a great way for citizens to store their wealth; some see it as a safer depository institution than their bank.
TC: Why would anyone ever use the currency, versus merely hold it?
DM: It’s definitely enticing for an investor to hold bitcoin, because they can buy more assets in the future. We have a fund where we’re investing in digital currency startups, but we have another where we invest in the currency and just hold it because we think it’ll be more valuable in the future.
TC: How much bitcoin has that second fund amassed?
DM: It’s $100 million in value at this point. We launched it when [the currency was valued at] $65.
But a lot of people are using it for real commerce, including to send money across borders. You and I have talked in the past about Bitpesa, a really cool company in Africa that helps people send money across borders using bitcoin [and is a Pantera portfolio company].
In almost every country, you can make a domestic payment pretty much for free and in real time, but any time you cross a border, even from the U.S. to the U.K., it takes several days and you have to pay some large yet non-transparent fee for converting that currency. So bitcoin has been very useful at helping people send money, whether it’s remittances or transfers by big multinationals.
If I download the software and my friend in Japan downloads it, I can send money instantaneously and free. Most immigrants aren’t going to that, but venture-backed companies are managing the process for them, then charging them a third or a quarter of what Western Union has been charging.
TC: What other companies have you funded recently that excite you?
DM: We raised a first fund, in 2013, that invested in the infrastructure company Xapo and [in the bitcoin marketplace] Bitstamp. We’re closing our second fund soon and one of our newest bets there is Brave, whose browser is faster than Chrome or Safari and much more private, but also uses bitcoin to do micropayments, so you can avoid ads — or you can be paid to view ads. Another newer bet is Abra, which is offering cross-border money movement as a service, rather than taking custody of any money, as does Bitpesa.
TC: How big is this new fund, and do you have the same limited partners as in your first fund of this kind, which attracted funding from Benchmark, Ribbit Capital and Fortress Investment Group?
DM: It’s $25 million, and no, it’s a different set of LPs — more standard institutional investors.
TC: Is that because some lost their appetite for bitcoin? You certainly hear Silicon Valley investors talk about it a lot less than was the case a few years ago, even with this run-up.
DM: You’re right that in late 2013, everybody was talking about bitcoin, then in 2014 and 2015, a lot of venture investment went in. Now, I think we’re in this period where most venture firms have made one if not several bets in the space, and most of the first wave of use cases already feature some pretty dominant leaders. It would be hard to launch a new exchange or a new custodian. Right now, it’s essentially just proving out those use cases, with more activity coming from corporates — big banks, mainly, but also Visa and MasterCard. They’re driving marginal investment in blockchain companies for financial but also strategic reasons. They’re trying to figure out how blockchain will change their businesses in the future.
TC: What’s the biggest hurdle in bitcoin’s more widespread adoption right now?
DM: The biggest hurdle used to be regulatory risk three or four years ago. There was a chance that the G7 would outlaw bitcoin. But mostly countries have been progressive or at worst, neutral.
The last big frictional point is banking relationships. It’s still hard to get big nationally chartered banks to [service bitcoin startups and other users]; they’re always struggling to cobble together more regional solutions.
But banks are slow. Three or four years ago, it was very difficult to work with banks. Now, it’s a hassle. A few years from now, it won’t be an issue at all.