December 12, 2017 | Webinar

Bubble or No Bubble? Deciphering Blockchain, Bitcoin & ICOs

Rohit Kulkarni 00:34

Okay. Hello. Welcome, everyone. Happy Tuesday morning for anybody that’s joining us from the West Coast, and happy Tuesday afternoon far anybody who is on the East Coast. We are live from SharesPost’s headquarters here in the Financial District in San Francisco. My name is Rohit Kulkarni. I’m the managing director of the private research group at SharesPost. Among other things, I manage website content, data, research analytics on our platform. I’m super excited to have today with us Bart Stephens. Bart is a hot guy in a very hot sector right now. Bart is a founder and managing partner of Blockchain Capital, the general partner of CyrptoCurrency Fund. Blockchain Capital is a pioneer and premier venture capital fund investing in blockchain technology. There have invested in 72 companies so far and I think Bart is one of the most thoughtful and one of the most intelligent people in this space right now. So I’m sure excited to pick his brains on a very relevant topic; what’s happening with Bitcoin, blockchain technology past, present, and future, and what’s this thing we hear in the news called ICOs. I’m very confident that the collective knowledge of the entire group is going to rise like the price of Bitcoin over the next 25 minutes [laughter]. And Bart has graciously put together a presentation that we’ll walk through. And send me an email. I have Mark Brogger, our head of marketing standing by, send him an email in case you need presentation and you’re unable to see the slides right now.

Rohit 02:12

Before we jump into the main part of the webinar, I would like to give a quick overview of what is SharesPost for anyone who’s joining us for the first time. We are a fintech company. We are headquartered here in San Francisco and we believe in bringing together shareholders and individual and institutional investors to create liquidity in what we call as the private tech growth asset class. This is a new asset class we believe has taken birth and it’s growing leaps and bounds. Here are just a few companies that we have transacted in, the list keeps growing almost daily basis. I work with a group called SharesPost Research and we launched the group in Q3 last year. Q3 of 2016. And essentially what our strategy is, we want to bring to light, reduce the opacity in this asset class and bring more data, more information, more analysis to investors, and be able to bring together buyers and sellers in more and more thoughtful manner. There are a bunch of reports that we have published. Anyone who is an investor who has logged into SharesPost, please log on and you’ll get these reports and a whole bunch of other collateral online. We conduct webinars on a regular basis. We are always looking for more ideas. We’re always looking for smart, good looking people like Bart to host webinars with. And shoot me an email or shoot Mark Brogger an email in case you have any ideas. We like to stay on top of market commentary. There are a lot of things happening in Silicon Valley right now. We call it movie and popcorn time. What’s happening with the private companies is something that, having lived in the Bay area for more than 15 years, we haven’t seen the electricity like this, what we have seen in the last few months. And we believe that’s going to keep our job very interesting over the next several years to come.

Rohit 04:16

I will let Bart talk more about all the things about blockchain Bitcoin, but anybody who’s been kind of breathing and sleeping over the last five years has definitely heard what is blockchain. It is a smart contract, it is a distributor ledger. I won’t go into a lot of details, it means many things to many people, but oversimplifying here, it’s a very, very disruptive technology. One application of that technology is what we call is cryptocurrencies. This we think is the first and the most widely available application of the blockchain technology. Again, we’ll let Bart talk about why the charts look like they are, and what, if any, we need to keep in mind about how the chart will look two years from now. And ICOs, we’ll get in more detail about the ICOs, initial coin offerings. The basic point here is a lot of early-stage companies, a lot of companies that would have otherwise opted to go to traditional Silicon Valley VCs, Silicon Valley early-stage investors, seed and angel investors, are opting to get crowdsourced funding by doing what we call as initial coin offerings. Industry experts put kind of the estimates of the amount of money that these companies are raising to be significantly higher than what VCs are investing in similar-stage companies. So, again, is this a new paradigm of raising capital? That’s what we are trying to keep our eyes on.

Rohit 05:56

And along those lines, what I would like to say is, last week we, as in SharesPost, we announced that Finom, a blockchain firm based in Switzerland, is conducting an ICO of security and utility tokens. This offering is being conducted on SharesPost’s ATS, as in alternative trading system. SharesPost already is one of the pioneers, and a leading provider, of ATS to traditional private, securities of, private companies. We thought there is a clear, natural, logical next step for SharesPost to provide their ATS services to this particular type of asset class. And we think that this is the largest tokenized equity offering ever executed in accordance to SEC’s Regulation D, Act of 1933. Again, it would also be the first common stock offering, and it would be the first ICO exclusively for accredited investors that conforms with all the rules like anti-money laundering, Know Your Customer - AML KYC. Also, there are a lot of these firsts that are noteworthy, but also at SharesPost, when we view the shape of our business over the next 24 to 36 months, we think this is kind of a tipping point for the shape of the future of venture capital. And I think history will tell us, but we think that it is a democratizing event for how early-stage companies are accessing capital, and how innovation is being funded, and how it will be funded over the next many, many years to come. But again, that’s one more thing I would like to pick Bart’s brains on, and that’s all I had. I’m giving the ticket to Bart. Bart, the mic’s yours, and thank you for joining us.

Bart Stephens 07:53

Well, first I’d like to thank Rohit and SharesPost for the opportunity to speak today. I think there’s going to be an opportunity to take some questions from some of the members of the audience, and hopefully we can get to as many questions as possible. Kind of the agenda for today is I want to talk briefly about Bitcoin. It’s obviously a topical subject matter. We’ll talk about blockchain technology and why we think it’s important at Blockchain Capital, and then we’ll talk about ICOs and really the concept of tokenized networks. Just by way of reintroduction, again, I’m Bart Stephens. I’m one of the co-founders and managing partners of Blockchain Capital. Blockchain Capital is one of the pioneering and leading venture investors in the sector. We invest in both the equity of Blockchain technology startups, and we also invest in tokens, which is essentially a new asset class.

Bart 08:37

But before we get to all that, I feel the need to discuss a question that I get multiple times a day, which is Bitcoin and are we in a bubble? First, I’d note that there is overwhelming consensus opinion that this is obviously a bubble. If you talk to bankers, and regulators, and market commentators, they say, "Of course, this is a bubble. Look at the chart. If something goes up 15X or 20X in a year, of course it’s a bubble." And so if you’re in my seat, I’ve had to go do some research in bubbles. I went back to the South Sea India Company. I went back to the tulip bubble. I went back to the dotcom era in 2000. I went to the 2008 financial crisis, and I tried to find some commonalities on what makes a bubble. And in fact, you do find some commonalities. First and foremost, what you always find is the presence of levered financial incumbents. And so those are the people that are sitting atop the financial pyramid that have information and access before regular investors, and they tend to be levered speculators that inflate the bubble. And in the South Sea Company, those were wealthy merchant families. So the South Sea India bubble, that was wealthy merchant families. In the tulip industry, it was large families and growers. In the 2000 dotcom bubble, we saw a lot of home gamers at home with etrade accounts and Schwab accounts. In the 2008 financial crisis, we saw the presence of banks and investment banks pushing credit default swaps, and CDOs, and synthetic CDOs, a lot of those synthetic products that ended up almost collapsing the financial system. And what you don’t see in blockchain-based assets and cryptocurrencies is the presence of levered financial incumbents. In fact, I’ve talked to 20 of the world’s largest hedge funds in the last six months, and nobody, nobody has a position. No banks, no investment banks, no traditional venture funds, no pension funds, no mutual funds, no hedge funds. So if this is a bubble, it is a bubble unlike all else. Usually bubbles come from the inside. It’s the players that have access that inflate the bubble. That is not what we’re seeing here in Bitcoin, Ether, and other tokens. In fact, it’s something closer to a movement. It’s a movement that is defined by individual investors, people that are technologically savvy, that want access to a new financial system that is being built around them.

Bart 11:01

The other thing that’s important in kind of bubble commentary, besides noting what’s different here - again, what’s different is there’s no presence of levered financial incumbents. It’s a whole new class of investors - the other thing that matters is scale. Scale really matters. So in the 2000 dotcom collapse, there was four and a half trillion dollars of market cap, dotcom market cap, that was publicly traded on the New York Stock Exchange and NASDAQ that went away. Poof. Went to money heaven. Four and a half trillion dollars is a lot of money, but that pales in comparison to the 2008 financial crisis. If you take a look at the 2008 financial crisis and you take a look at the total outstanding notional value of credit default swaps, CDOs, synthetic CDOs, and other credit products, you’re looking at $250 trillion. That is a massive number. I can’t even wrap my head around it. And let’s compare that to the market cap or the network value of Bitcoin, Ether, and other tokens, which is roughly 400 billion. 400 billion is orders of magnitude different than 250 trillion. And so just for another frame of reference, the large technology companies, the so-called FANG stocks, they have $1.4 trillion of cash sitting offshore in tax havens. So we’re just really far away in terms of the absolute scale of bubbles in the past. We’re really far away from the traditional players that you would see in incumbence. And so even though there’s overwhelming consensus opinion that we’re obviously in a bubble because of the rapid price movements in Bitcoin, Ether, and other assets, we think something else is going on. So I’ll offer a contrarian opinion. We think we’re seeing the emergence of a new asset class.

Bart 12:40

So this is a slide I borrowed from my partner, Spencer. The story is that the platypus was a like a mythical figure if you were a biologist or a naturalist in the 19th century. The platypus confounded the authorities at the time. It was a mammal but it kind of acted like an otter. It was a terrible badger. It had some appearances of a reptile and it had a duck’s bill. And so there was a raging debate in the 19th-century biology community on if the platypus even existed. And after many years, they decided that it wasn’t a duck, and it wasn’t an otter, and it wasn’t a badger. It was indeed a mammal. It was essentially something new. It was a platypus. It was an odd duck, if you will, and in some ways so is Bitcoin. Bitcoin is not quite a currency. That’s what causes Jamie Dimon so much heartburn. He says, "Only sovereign governments can have a currency." And that’s not quite a commodity. We think it’s probably closest to a digital gold or a gold 2.0, but it also has peer-to-peer payment features and it also kind of feels like an equity in some ways. So it’s not quite an equity, it’s not quite a commodity, it’s not quite a currency, it’s not quite a peer-to-peer payment technology. It is all of those things and none of those things at the same time. It’s a platypus of sorts. We think it’s the emergence of a new asset class. And by the way, it’s the emergence of a new asset class that is particularly attractive to younger demographics.

Bart 14:16

At Blockchain Capital, we went out to the gold standard of polling companies to do a survey of 2,500 Americans. You can find this survey on our website, by the way, at www.blockchain.capital or blockchaincapital.com. And what we did is we asked a series questions to various Americans about their views on Bitcoin. And what you find is that young people in particular are attracted to Bitcoin. If you ask Millennials, so defined as age 35 to 18, would you rather own $1000 of Bitcoin or $1000 of gold or stocks or bonds or commodities or real estate? One in three Millennials would rather own Bitcoin. If you ask the same group of people, do you trust Bitcoin-- which is roughly an eight-year-old software system. Do you trust Bitcoin more than say JP Morgan, or Bank of America, or Wells Fargo? One in three of these individuals trusts Bitcoin. Because they are natively digital, because they are natively mobile this concept of a cryptocurrency is not alien to them, and plus, Bitcoin in some ways is a protest vote. Younger people know that by the time they get 67-years-old, that Social Security is bankrupt. There’s no Medicare or Medicaid available to them at our rate of spending. So if you want to store a value that is outside of the system, if you want to store a value that Jamie Dimon at JP Morgan can’t touch, Bitcoin is an attractive option, and not just here in the United States. This is really a global phenomenon, is what we’re saying. So Bitcoin is obviously topical, it’s exciting to talk about, but for us, that is like looking at one tree in the forest. The forest here is blockchain technology.

Rohit 15:59

Quick question before you jump into blockchain. That’s very interesting. I didn’t know there was a lot of debate on platypuses back in [laughter]-- 50 years back. But as in you’ve compared a lot of things between Bitcoin and many other bubbles and why there are basic fundamental factors. As in, if you were to look ahead-- as in, we’ll talk about this in the in the latter of the presentation. But what we hear from investors who have not been part of a cryptocurrency boom, if you will, there is FOMO. There is fear of missing out. There is asymmetric supply demand that’s been driving the price of Bitcoin and other currencies. Do you agree with that, or is there any other underlying fundamental technology adoption to pinpoint that we have essentially missed?

Bart 16:50

No, that’s a great question. The truth is that Bitcoin and other cryptocurrencies or blockchain-based assets are the first time in human history where the whole globe can participate in an asset class. Traditionally, we’ve been siloed by geography. So a Japanese investor, for example, had a hard time participating in the Google IPO for-- as an example. Or European investors difficult to access the market in China. What we’re seeing with blockchain technology and cryptocurrencies in general it is an open system. So arguably there’s seven billion people on the planet that have a smartphone that could buy or sell these types of assets. There is some psychology going on here of fear of missing out. I think that’s part of what we’re seeing in the price movement. But it’s worth noting that a lot of the holders of Bitcoin have been through the ringer. They have been through ups and downs. There was a Bitcoin bear market for three years that people don’t really talk about. And so if you’re a Bitcoin holder, at this point you’ve got an iron stomach. You’ve seen ups and downs, incredible volatility, and just because Bitcoin hits 10000 you’re probably not a seller. You’re probably not a seller if Bitcoin hits 20000, and a lot of people I know aren’t a seller when Bitcoin hits 200000. So the people that hold this asset class have incredibly high conviction. And so the sellers on the margin aren’t there. What you don’t see compared to a traditional capital markets environment is some of the fundamental ratios that you would see like a price to earnings ratio, a price to sales ratio. So some of the valuation techniques from the traditional stock markets don’t really apply here. And so I would say that there’s this global nature, there’s this kind of culture of [holdering?], which is holding on for dear life, and if there’s an institutional interest coming into the market like we’ve seen over the last 72 hours with the launch of CBOE Futures, we’ll see CNE Futures launch next week and NASDAQ in the coming year. There is, we believe, a wave of institutional interest that has interest in this asset class and a lot of the sellers have very strong hands.

Rohit 18:54

Love it. 200000 Bitcoin and [holdering?]. Two things we learned right now.

Rohit 18:59

Great. So just moving on a little bit, as exciting as Bitcoin is, as exciting is Ether is, we really think that underneath the hood of this technology blockchain technology is a game changer. The Internet that we all use every day is really just the Internet of information. It allows for the secure and instantaneous exchange of data. Blockchain technology allows for the secure and instantaneous exchange of value. So for us, Bitcoin is the beginning of the story. It’s not the end of the story. In the near future, we’re going to see stocks, bonds, currencies, commodities all traded and settled using blockchain technology because it is better, it is faster, it is cheaper and it is more secure. It’s an incredible value proposition and this technology is open for everyone to use. And those are some of the themes that’s going on here. Blockchain technology’s arrival on the global stage sits at the confluence of a bunch of important technology factors. The first, I would say, is crowdsourcing. So the Bitcoin blockchain and the Ethereum blockchain are some of the largest supercomputers the world has ever seen, if you will. You could think of them as the world’s largest decentralized database. In the case of Bitcoin’s blockchain, if you take a look at these hundreds of thousands of computers worldwide that are all running the same software and processing transactions, the computational power of this resource, the Bitcoin blockchain, is larger than all of Google’s data centers combined times 1,000. It is hard to wrap your brain around 1,000 Googles. And so, if you’re an entrepreneur, like the type of entrepreneurs that we back at Blockchain Capital, you have an incredible computational resource to build on top of. You’ve got this free hardware that is the world’s largest, most secure decentralized database. You also have free software. Bitcoin and Ethereum, these ecosystems, this is open-source software. And so that means it can be free. That means you do not have to pay licensing fees, like you would’ve in a traditional software regime. So when you have free hardware and you have free software, it’s a very robust environment for entrepreneurs to build exciting companies kind of up the stack, so to speak.

Bart 21:10

And a lot of people like to put blockchain technology into the bucket of fintech. We don’t think that’s appropriate. We think this stuff is everything tech. And by that I mean blockchain technology has been proven by Bitcoin. Blockchain is the world’s most robust supercomputer, it’s got 100% uptime, no one has ever hacked it and everyone has tried, but we also see opportunities in the trading and settlement of traditional financial products. We’ve backed companies that are in the energy markets, that are in the gaming markets. We see applications in government services, legal services, supply chain and logistics. And so even though Bitcoin tends to grab the headlines, underneath the hood, blockchain technology, we think is a game changer and is a multi-decade mega boom.

Rohit 21:54

Okay. I guess one pushback we hear from investors with kind of the basic, fundamental underlying technology of blockchain, as in if you think of two words, one is open source and decentralized. If you map that out to what’s happened to open source companies out in the public equity markets - be it Red Hat or da da da, a whole bunch of open source companies that have had, essentially, challenges scaling as well as challenges kind of monetizing their technology. The technology is great, but when it comes to making money and when it comes to giving shareholder returns over the longer term, there are challenges with open source, is what kind of late-stage investors seem to believe right now. So given this pushback, where do you see-- if there are any changes to blockchain’s underlying technology that need to be done, is anybody taking that into account, or are we still early in terms of monetization of the technologies concerned?

Bart 22:52

Yeah. So those are astute observations, but there is an important difference in that. So first and foremost, I’d like to thank all the open source software developers out there. I’d like to thank all the developers that are in the Bitcoin and the Ethereum ecosystem. They have built an incredible system for entrepreneurs and operating companies and investors like myself to help finance a new kind of parallel universe of financial services and other industries. What we’ve seen-- first of all, Linux has been incredibly successful. Every single major Fortune 500 company runs Linux somewhere in its data center. At the core of the Apple operating system, iOS, is a Linux kernel. What has been missing, historically, in the Linux development community is proper compensation for these hardworking developers. What’s different about tokenized networks and protocols like Bitcoin and Ethereum and others is, for the first time, open source software developers can reap the rewards of their intellectual property. Usually, if you’re a core developer in Bitcoin or an equivalent in the Ethereum ecosystem, you’re a large holder. And so as you contribute your intellectual capital to the system, the prices of the tokens are reflected in that product improvement, if you will. And so this is, first and foremost, decentralized system, very robust, and it allows open source software developers to get paid for the first time. And this is something that is long overdue.

Rohit 24:16

Okay. That’s a very thoughtful nuance, and I would love for listeners to take a note of that as in that’s something that we haven’t heard even very thoughtful investors talk about in terms of what is the nuance in terms of monetizing open-source, decentralized technology that is disruptive, but also has the ability to make money for both the developers as well as the customers. Thanks.

Bart 24:37

So we’ve talked a little bit about Bitcoin and my contrarian opinion that I don’t believe we’re in a bubble. I think we’re seeing the emergence of a new asset class, and we’re seeing that the holders of this asset class are different than the usual suspects. You don’t have to be a Wall Street CEO. You don’t have to be a Sand Hill Road insider. Anyone can own Bitcoin, anyone can own Ether and, for the most part, most people can participate in initial coin offerings. So, obviously, the price of Bitcoin grabs a lot of headlines. We’ve also seen a lot in the business press about ICOs, or initial coin offerings. In fact, there’s been about $3.5 billion of capital raised this year via this new crowdsourcing technology. And the chart on your screen now issues a little bit of that-- or illustrates some of that capital-raising activity. And people like to focus on ICO because it kind of sounds like IPO, which is an initial public offering, but an ICO is just a transaction. What is more important than the ICO transaction is the idea of a tokenized network. A tokenized network basically allows entrepreneurs to crowdsource capital from new directions. It allows them not to go to Sand Hill Road, not to go to Wall Street for capital, but to raise capital from their future users. So if you were building a tokenized network, these networks solve a handful of problems that have bedeviled Silicon Valley for decades.

Bart 26:06

The first one is known as the cold start problem. This is a technology problem, which is, if you were building a network-based business, how do you get your customers to care about your network? Think about the person that unboxed the first fax machine. Fax machine is based on network effect, but the first fax machine was worthless. There’s no one that you could fax to. As the whole world got fax machines, that became a valuable network. So network-based businesses work off something that’s known in Silicon Valley and other places as the network effect. That’s where liquidity begets more liquidity, or the big get bigger. It’s why you would only go to eBay to sell something out of your garage. It’s why you would only go to Facebook to find a long-lost friend. So in network-based businesses, what you’re trying to do is jump start a network. You’re trying to bring liquidity and people to your network. And with tokenized networks, for the first time, you can solve this cold start problem. You can offer a financial incentive, a token. And so by offering a token, you’re incentivizing future users of your network to care about your network. It’s a way to compensate open-source software developers that might be building on top of your network, entrepreneurs, evangelists, thought leaders. So you don’t have to go up and down Sand Hill Road begging for capital if you’re an entrepreneur now. There are new avenues of capital available to you, and they’re new avenues that will help you jumpstart your business. It’s an important concept.

Bart 27:22

The other problem that these tokenized networks solve, I would argue, is a Silicon Valley venture capital problem. And SharesPost knows this as well as anyone. The average venture-backed company in Silicon Valley now takes 9.4 years to do an initial public offering. So think about Airbnb and Uber and Spotify and SpaceX. These are all great companies, but they’re staying private for a long time. I would contrast that to these tokenized networks that are doing ICO transactions. Many of the entrepreneurs that we’re backing in these ICOs, they are building a product and they are going public, not on the NASDAQ, but on the Ethereum blockchain. They’re not going public in 9.4 years, but 9.4 weeks or months. It’s a dramatic improvement in the liquidity profile of venture investing. That’s not to say that seed stage venture investing isn’t risky. It’s incredibly high-risk, high-return, but for the first time you’re bringing liquidity to the seed-stage of the market. So tokenized network solved this cold-start problem. That’s a technology problem. They also solve a Silicon Valley liquidity problem. That’s kind of a venture capitalist problem. And I would argue, and this is maybe a little more controversial, that it solves a third problem and that is income inequality and wealth distribution.

Bart 28:37

Traditionally, if you want to get to access to Silicon Valley’s best venture capital deal flow, you have to be a fancy-pants investor. You have to be Stanford’s endowment or Yale’s endowment, or politically connected pension fund. Those are the limited partners, the clients, of the major legacy Sand Hill Road firms. And they’re the ones have, historically, have gotten access to the best Silicon Valley deal flow. It was a closed system dominated by insiders and Wall Street CEOs. This is a different paradigm. It’s a different model. Everyone is invited to this party. If you have a Bitcoin wallet, if you are active in the Ethereum ecosystem and you own Ether, you can very likely participate in these ICOs. So this is enlarging the concept of venture capital. It is no longer for insiders only. The doors have been thrown open and that is why you’re seeing some of the heartburn that’s been caused by traditional financial incumbents and gatekeepers. So we believe ICO technology is here to stay. We think it’s incredibly powerful. We think these tokenized networks solve those three problems that I just went through.

Bart 29:43

Here’s a chart that talks just a little bit about some of the types of ICOs that we’re seeing. And it’s worth noting that this technology is only a year old, so we are in the early days here. There’s a lot of experimentation. We’re seeing companies that are all over the map in terms of their business models: companies that are looking at storage, companies that are in the energy markets, companies that are looking at identity management, companies that are using the blockchain as a digital notary service. And so as you look at the bars on the right there, you’ll see a tremendous amount of capital. You’ll also see a wide variety of types of tokenized networks that are being built. So the market is very exciting. We are seeing some guidance from the SEC in terms of rules of the road. I have a contrarian opinion on that. I think regulation is welcome. For me, the enemy of capital formation is uncertainty. And so when the regulators come out and they say, "This is what a security token is, and this is what a utility token is, and these are the rules in order to do a proper ICO," for many of us that is welcome guidance.

Rohit 30:48

For laymen and people who have been sleeping under a rock, can you just explain what is a security token and what is a utility token?

Bart 30:57

Sure. Many of these tokens that are issued in an ICO are part of the tokenized network. And these tokens have a dual function; there’s a speculative function, so they’re used to raise capital by investors, both institutional investors and regular retail investors, but they also have a role in the network, a functional utility. So in many of these networks, if you want to access the product or service - like a storage-based service in the case of FileCoin, one of our portfolio companies - this network does not take American Express, or MasterCard, or Visa. You have to have Filecoins to access the decentralized and distributed storage network. And so it’s a new business model and it’s one that tries to create a virtuous circle between providers, and early adopters, and speculators in a given network, and also eventually the customers that want to access the product or the service based on this network. So these tokens have a dual function: one is a speculative function and one has a utility function in a given tokenized network.

Rohit 31:56

Okay. And what about a security token?

Bart 31:58

So a security token is different. SharesPost is pioneering a securities token coming up in the coming months. Our firm, Blockchain Capital, did its own security token in the spring, and those are basically asset-backed tokens. If you take a look at the traditional capital markets world, one of the areas-- Marc Andreessen of Andreessen Horowitz likes to say that software’s eating the world. One of the last holdouts of this phenomenon has been financial services. If you want to trade and settle a stock in the US stock exchanges, it takes three days to settle. In a day of-- in our day of instant messages and lightning-fast communications, it’s hard to believe that T+3 is the norm, and that’s the best you get in the traditional capital markets. If you want to look at credit default swaps or leveraged loans or syndicated loans, you’re talking about a 30-day settlement period. And so a lot of the companies that we’re backing and many of the operators and entrepreneurs in this industry are taking a look at the traditional financial services products - think of stocks and bonds and currencies and commodities - and saying, "How can we digitize those? How can we put those on a blockchain so we can do a better, faster, cheaper trading and settlement process?" So we’re going to see-- even though a lot of the entrepreneurial activity within the crypto ecosystem is focused on protocol tokens and decentralized applications, we’re also going to see kind of a third bucket, if you will, which will be traditional securities put onto a blockchain for the better, faster, cheaper trading and settlement.

Rohit 33:23

Okay. Great. Please go on.

Bart 33:26

So that’s the end of my slide presentation. If any of the viewers on today’s webinar have any questions, my contact information is there on the screen. I’d be happy to get back to you. And I think, Rohit, if I’m not mistaken, you have a few more questions?

Rohit 33:43

Yes. We are receiving a bunch of questions on the GoToWebinar panel. So if you have any questions, feel free to type up to the box on the top right, and I’ll try to read them out as they come. I guess one question that comes to mind is regulatory oversight. You talked about one very interesting phrase, regulatory oversight. Again, I missed that. But, again, if you could repeat that. But also if you fast-forward over the next 12 to 24 months, what are a few things that you are closely monitoring as an investor about regulation or the potential regulation that can happen that can help, hurt, or, in fact, accelerate the usage of this technology?

Bart 34:32

Yeah. So regulation is kind of a tricky topic. The job of the regulator is two-fold: it’s to protect the system and to protect the consumer, but the regulator also has to make sure that innovation is fostered within their given jurisdiction. I think the appropriate model for regulators is the Internet itself, the Internet of information, if you will. If you look at Apple and Google and Amazon and Facebook and Netflix, these are the dominant Internet companies of our era and they’re all based in the United States. And that is no accident. Silicon Valley and the United States in general is the center of innovation in our country, and it does a great job. But part of the reason why these Internet titans are all based in the United States is the US government took a light touch to the regulatory approach in the mid- to late-90s. So the FCC, the FTC all basically allowed this Internet technology to flourish, and as a result the titans of the Internet are all US-based companies. And so in my discussions with regulators, I try to encourage them to-- this industry is in its infancy. It’s literally the first inning, and so it’s important to let entrepreneurship flourish. It’s important to let this technology grow in an organic and safe way because otherwise the entrepreneurs can vote with their feet. They can move money around the world using Bitcoin and other technologies almost instantaneously, and so we would see the center of gravity move outside of the United States. It might move to Hong Kong. It might move to London. It might move to Singapore or Switzerland. These are all areas that are vying for both human capital and financial capital. So I think it’s important for regulators to tread lightly here, and to let this technology flourish and make sure that the United States is the leader in blockchain technology just like we’re the leader in Internet technology.

Rohit 36:30

Interesting. I guess one more question we got here is about futures trading, as in what are your views on that? As is I believe over the last few days we have had Bitcoin Futures trading commence on a few exchanges. Is that another inflection point moment from here on out over the next 12 months or so? How are you as a firm viewing this as an opportunity or a risk?

Bart 36:54

Yeah. So that’s a very interesting question. It’s a topical one. We’re a venture capital firm so we invest in startups. We invest in the equity of blockchain technology, startups and companies in the cryptocurrency ecosystem. We also invest in tokens. We talked about tokenized networks earlier, and so we will invest in ICO’s and help entrepreneurs grow their tokenized networks. So we don’t speculate on the price of Bitcoin, but I have lots of conversations with institutional investors and for the most part they’ve been absent on this playing field, and so there’s some reasons for that. Number one, Bitcoin has historically had a PR problem. It was associated with some scandals in it’s early days, money laundering, this type of thing. It turns out that all that stuff is not germane anymore. If you’re a criminal, you don’t want to use a blockchain or a Bitcoin because it leaves a permanent record on the Bitcoin blockchain of any activity you might be doing. And so with the CBOE launching Bitcoin Futures in the last 48 hours, with the Chicago Mercantile Exchange launching Bitcoin Futures next week, with NASDAQ announcing they’re going to be entering the market in Q1, what we’re seeing is for the first time there will be products that institutions can use to get exposure to blockchain based assets and cryptocurrencies like Bitcoin and others. And so the reason why institutions have been absent so far is because they need custodial services and prime brokerage services that haven’t been available to them. So Morgan Stanley and JPMorgan, if you’re a hedge fund, they will not custody your Bitcoin. So there’s kind of administrative or custodial reasons why large institutions - I’m talking about hedge funds and mutual funds and investment banks - really don’t have much of a position in this market. So with the advent of the futures market, we think it’s very bullish for the price of Bitcoin over the intermediate term. And over time, you’re going to see more of these institutional on-ramps, whether it’s an exchange-traded fund, futures market options, that will allow institutional investors to speculate on the price of Bitcoin, both on the long side and on the short side. And that adds for a more robust market and that increases price discovery.

Rohit 39:09

Okay. Interesting. As in we are in the last few minutes of this webinar, I have a whole bunch of questions to ask. I’ll probably ask them in a rapid-fire--

Bart 39:16

Okay, lightning round.

Rohit 39:19

Litecoin and Ethereum, what’s your view on that?

Bart 39:22

Yeah. So I often get asked what is Bitcoin closest to? And I say Bitcoin is closest to gold 2.0. It’s kind of a protest vote, it’s outside of the system, it’s a store of value. So you can think of Bitcoin as gold 2.0. Some people ask me, "Well, tell me about the Ethereum ecosystem, tell me about Ether." And I say, "Well, you can think of Ether as NASDAQ 2.0." That’s where entrepreneurs can go to crowdsource capital and build a tokenized network, not taking capital from Wall Street but rather from their future users, as we talked about earlier. Litecoin is a little different. Litecoin is essentially a fork of Bitcoin and has some features that Bitcoin has yet to adopt. Interestingly, Litecoin is one of the three cryptocurrencies that is available to Coinbase users. Coinbase is a portfolio company of blockchain capital. We believe it’s the fastest growing financial services company on the planet. Period. It is a remarkable company and Coinbase is opening up hundreds of thousands of accounts a day. So if you’re a retail investor or now an institutional investor and you want exposure to these exciting blockchain-based assets and cryptocurrencies, Coinbase is kind of your one-stop shop. It’s as if NASDAQ and Charles Schwab maybe were the same company. They have both a custodial services, a Bitcoin wallet service, but also exchange called GDAX. And what we’re seeing on GDAX is insane amounts of volume. So Coinbase has opened up so many accounts in the last two months that we’re seeing a lot of these account holders basically buy both Bitcoin and Ethereum, and I think Litecoin has been the beneficiary of a lot of these new Coinbase accounts being opened.

Rohit 40:59

Okay. You touched upon a couple of your portfolio companies. Can you call them out again? Which ones would you want investors to keep a close eye on? Maybe two names.

Bart 41:08

Yeah. So we just talked about Coinbase. Another I would point out would be Ripple. Ripple is kind of a allowing for large financial institutions to send value and money across borders. If you’re a traditional financial institution and you want to send money from, say, Europe to South America, you’re going to go through multiple corresponding [inaudible] banks, you’re going to have FX charges that are kind of hidden along the way. Ripple uses a distributed ledger technology that allows for the better, faster, cheaper, and more secure way, if you’re a financial institution, to send money across borders. They have over a hundred partners right now. Many of the traditional financial institutions are uncomfortable with the Bitcoin blockchain because it is an open system and the Ethereum blockchain is really optimized for something called smart contracts rather than payments, and so if you’re maybe risk-averse institution like a bank, Ripple is an exciting option for you if you’re looking to accelerate and secure cross-border money movements. And Ripple also has its own native token which is called XRP, which has been a pretty strong performer this year. So we’ve talked about Coinbase, we’ve talked about Ripple, maybe a third company that I would point to would be Kraken. Kraken is based here in San Francisco. It is a cryptocurrency exchange. It allows access to a lot of the other types of tokens. Where Coinbase offers their customers Bitcoin, Ether and Litecoin, Kraken has a much longer menu of cryptocurrencies that are available to their partners and their customers. And so are three of the leading companies in the sector in terms of private market cap, and they are all doing incredibly well. And interestingly, they are all based here in San Francisco.

Rohit 42:43

Okay. I guess a couple of other questions. Have you come across any companies that facilitate consumer purchases using cryptocurrencies?

Bart 42:52

Yeah. So one of our companies, Abra, allows for users to send currencies from phone to phone, or you can send value across borders from phone to phone. It’s kind of like Venmo, but it works across borders where Venmo doesn’t. It uses kind of Bitcoin in the background. Many users don’t even know they are using Bitcoin. So I’d encourage any of the viewers out there to check out the Abra app. It’s available on Apple iStore. But a lot of the early people in Bitcoin had this notion that Bitcoin was going to displace fiat currencies. That we would all be going down to the corner store and buying our donuts and coffee with Bitcoin. We really haven’t seen that happen. So, many a times in the technology industry, the early pioneers have this vision or a philosophical view on how a technology should be used, but sometimes the facts on the ground just don’t bear that out. And so a lot of the early Bitcoiners wanted to kind of overthrow governments and banks and they thought that the US dollar would be displaced by Bitcoin. That’s not really happening. What we’re seeing is Bitcoin is being treated more as an speculative asset class or a store of value, gold 2.0 as I mentioned earlier. And so the psychology is wrong. If you’re a Bitcoin holder, you’re probably convinced that the price of Bitcoin is going up. It’s kind of like when you talk to people that own shares in Apple. They’re convinced it’s going to be the next trillion-dollar market cap. And if you ask them to go to the corner store and pay for their coffee with their Apple stock, they say, "No way, man." And so we see some of that same behavior going on with Bitcoin.

Bart 44:22

If you own Bitcoin, you are very likely a believer in this new, open-architecture financial system. You might believe it’s a store of value, you might believe that it’s going to go up manyfold from here. And so the psychology’s wrong. If you believe something’s going to go up in price, you don’t spend it. There was a story five years ago where a young man in Florida paid for his pizza in Bitcoin. In today’s dollars, that would be a $53 million pizza. No one wants to be the guy that paid $53 million for a pizza. And so a lot of those payment applications or payment use cases for Bitcoin really aren’t panning out here in the United States, and that’s because we’ve got great payment technology. Rohit, you and I have Apple Pay, we’ve got the World’s Reserve Currency, we have credit cards that give us miles, we have Venmo, and so it’s just a very high bar to get over to get people to switch to Bitcoin when we’ve got such robust payment technologies here in the United States. But it is worth noting that, internationally, where there’s almost no payment technology, if you look at developing economies, there’s 3.5 billion people in the world that have no access to financial services as we know it. JPMorgan will never care about them. They will never step foot inside of a bank. They will never have a piece of plastic in their wallet. And so, for those people, they do have a smartphone in their pocket. It’s usually an Android smartphone. And so that means they have blockchain based financial services. So we are constructive on the kind of payment applications of Bitcoin and other cryptocurrencies in the developing economies where you’re competing against nothing.

Rohit 45:49

Okay, okay. Super. Really quick question, any couple of companies that you’re keeping a close eye on which are not your portfolio companies?

Bart 46:00

Yes. So we have 76 portfolio companies, so that’s a lot of mouths to feed and we kind of cover the waterfront, but there was a pretty interesting announcement a couple days ago out of Australia. So there’s a very well-known entrepreneur by the name of Blythe Masters. She is the CEO of a company called Digital Asset Holdings. For disclosure purposes, that is not a Blockchain Capital portfolio company. But the Australian Stock Exchange announced that Digital Asset Holdings will be implementing a blockchain based solution for the trading and settlement of Australian equities. So we’ve seen the adoption of blockchain technology in capital markets applications take a little bit longer than some of the pundits might have predicted, but this is really a landmark transaction. o we’re going to see the first commercial-scale rollout of blockchain technology in a major trading venue in Australia in the coming months. And that’s a company by the names of Digital Asset Holdings, and we’ll see how that goes. It’s very exciting.

Rohit 46:57

Okay, interesting. I guess we will wrap it up right there. We want to be careful of everybody’s time, and above all, we want to be careful of Bart’s time as well, who graciously came into our headquarters here to do this video recording with us. And thank you for everyone joining in, and as you will see on the screen, that’s my contact information. Feel free to drop me a line with any follow ups that you may have. Many of you have requested access to the webinar. We will be sending a follow-up email with the webinar replays, slide, transcripts, Bart’s home address [laughter], and what have you. And, again, thank you very much, Bart. Any last words?

Bart 47:39

No. I just want to thank the viewers for tuning in today on the webinar. And if anyone has any questions, you can reach us at www.blockchain.capital, and I want to thank Rohit and SharessPost for the opportunity to be here today.

Rohit 47:51

Again, thank you very much for joining us. This is the last webinar that we’re hosting this year at SharesPost. As I said, we are always looking for interesting topics, interesting speakers with a lot of opinions, and obviously, good looks like Bart. So if you have anybody who wants to volunteer, feel free to drop me a line. And from everyone here at SharesPost, I hope you and your family have happy holidays and hope everyone has a safe, healthy, happy, and a prosperous New Year. Thank you.

Bart 48:20

Thank you.

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Analyst compensation is based upon various factors, including the overall performance of SharesPost, Inc. and its subsidiaries, and the performance and productivity of such analyst, including feedback from clients of SharesPost Financial Corporation and other stakeholders in our ecosystem, the quality of such analyst’s research and the analyst’s contribution to the growth and development of our overall research effort. Analyst compensation is derived from all revenue sources of SharesPost, Inc., including brokerage sales.

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This report does not contain a complete analysis of every material fact regarding any issuer, industry, or security. The opinions expressed in this report reflect our judgment at this date and are subject to change. The information contained in this report has been obtained from sources we consider to be reliable; however, we cannot guarantee the accuracy of all such information.

Any securities offered are offered by SharesPost Financial Corporation, member FINRA/SIPC. SharesPost Financial Corporation and SP Investments Management are wholly owned subsidiaries of SharesPost, Inc. Certain affiliates of these entities may act as principals in such transactions.

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SharesPost, the SharesPost logo, My SharesPost, the SharesPost Index, and SharesPost Investment Management are all registered trademarks of SharesPost, Inc. All other trademarks are the property of their respective owners.

Copyright SharesPost, Inc. 2019. All rights reserved.

PLEASE READ THESE IMPORTANT LEGAL NOTICES & DISCLOSURES

CONFLICTS

This report is being published by SharesPost Research LLC, and distributed by SharesPost Financial Corporation, a member of FINRA/SIPC. SharesPost Research LLC, SharesPost Financial Corporation and SP Investments Management, LLC, an investment adviser registered with the Securities and Exchange Commission, are wholly owned subsidiaries of SharesPost, Inc.

Recipients who are not market professionals or clients of SharesPost Financial Corporation should seek the advice of their own personal financial advisors before making any investment decisions based on this report. None of the information contained in this report represents an offer to buy or sell, or a solicitation of an offer to buy or sell, any security, and no buy or sell recommendation should be implied, nor shall there be any sale of these securities in any state or governmental jurisdiction in which said offer, solicitation, or sale would be unlawful under the securities laws of any such jurisdiction.

This report does not constitute an offer to provide investment advice or service. Registered representatives of SharesPost Financial Corporation do not (1) advise any member on the merits or advisability of a particular investment or transaction, or (2) assist in the determination of fair value of any security or investment, or (3) provide legal, tax, or transactional advisory services.

ANALYST CERTIFICATION

The analyst(s) certifies that the views expressed in this report accurately reflect the personal views of such analyst(s) about any and all of the subject securities or issuers, and that no part of such analyst compensation was, is, or will be, directly or indirectly related to the specific views contained in this report.

Analyst compensation is based upon various factors, including the overall performance of SharesPost, Inc. and its subsidiaries, and the performance and productivity of such analyst, including feedback from clients of SharesPost Financial Corporation and other stakeholders in our ecosystem, the quality of such analyst’s research and the analyst’s contribution to the growth and development of our overall research effort. Analyst compensation is derived from all revenue sources of SharesPost, Inc., including brokerage sales.

DISCLAIMER

This report does not contain a complete analysis of every material fact regarding any issuer, industry, or security. The opinions expressed in this report reflect our judgment at this date and are subject to change. The information contained in this report has been obtained from sources we consider to be reliable; however, we cannot guarantee the accuracy of all such information.

Any securities offered are offered by SharesPost Financial Corporation, member FINRA/SIPC. SharesPost Financial Corporation and SP Investments Management are wholly owned subsidiaries of SharesPost, Inc. Certain affiliates of these entities may act as principals in such transactions.

Investing in private company securities is not suitable for all investors. An investment in private company securities is highly speculative and involves a high degree of risk. It should only be considered as a long-term investment. You must be prepared to withstand a total loss of your investment. Private company securities are also highly illiquid and there is no guarantee that a market will develop for such securities. Each investment also carries its own specific risks and you should complete your own independent due diligence regarding the investment, including obtaining additional information about the company, opinions, financial projections and legal or other investment advice.

Accordingly, investing in private company securities is appropriate only for those investors who can tolerate a high degree of risk and do not require a liquid investment.

SharesPost, the SharesPost logo, My SharesPost, the SharesPost Index, and SharesPost Investment Management are all registered trademarks of SharesPost, Inc. All other trademarks are the property of their respective owners.

Copyright SharesPost, Inc. 2019. All rights reserved.