Dan Morehead, Pantera, Bitcoin Conference in Miami January 2015
Dan Morehead, Pantera, Bitcoin Conference in Miami January 2015

Bitcoin: The Final Puzzle Piece of the Protocol Puzzle

Thank you for the kind introduction.

I've managed Pantera Capital for the past twelve years - managing hedge funds which invest in currencies, bonds, and equities. However, my true passion has been investing in large disruptive ideas - from glasnost to Tesla Motors.

When I found bitcoin in 2011, I was blown away. It combined all the facets of my professional experience and economic/political beliefs with the power to potentially have a large, positive impact in billions of lives. Two years ago our firm transitioned to be exclusively focused on digital currencies.

Bitcoin is going to change the world - I just want to tell my grandkids that I was a small part of it.

I'd like to start with an overall statement - why I think is Bitcoin is so compelling: the Bitcoin protocol is not a category killer, it's a serial killer. So many different applications can be built on the bitcoin protocol. It is likely to bring enhancements to activities we already do - like payment systems, remittances and wealth storage. However, the really exciting use cases are ones which are impossible in the current financial system such as micropayments. As with early days of the internet, there are many use cases we cannot even imagine today. Bitcoin might bring new possibilities to legal contracting, political elections, and so many critical areas.

I'd like to share a few thoughts on the price of bitcoin before devoting the remainder of the presentation to the future of bitcoin and where Pantera sees compelling investment opportunities.


Much is made of the analog "Bitcoin is the Internet of money." I believe that the Bitcoin-Internet analog is very useful. The Internet is an interlocking web of protocols. Those protocols have radically changed commerce and communication. The last piece has been missing from the protocol puzzle - money. We have protocols for every kind of data movement, but we were missing one of the most important - a protocol for the movement of money.

Even back in 1999, Milton Friedman realized, "The one thing that's still missing but that will soon be developed is a reliable e-Cash - a method whereby on the Internet you can transfer funds from A to B, without A knowing B or B knowing A". 

Bitcoin elegantly solved the issues. The protocol is a novel application of several technologies that have been around for decades.

Bitcoin is the final piece of the protocol puzzle.


There is one profound difference to this analog that is never discussed: Bitcoin is a protocol with a price feed. How weird is that? None of the other protocols in this puzzle have real-time quoted prices. None of the other protocols that make the Internet work have shares or coins that can be bought and sold. You can't ask your buddy where SMTP is trading today. If your email jams, you can't short SMTP.

Binary Financial's Harry Yeh just gave a great presentation on trading bitcoin. That, again, is a pretty wild concept. They don't have conferences talking about fundamental value analysis or technical chart patterns on protocols like SMTP. That just doesn't exist.

Although there have been moments lately we may have wished bitcoin didn't have a price feed, it does. The bitcoin price feed screams up, crashes down, and, hey, once in a while, it even goes dark for a few days.

Can you imagine if we had had a price feed on TCP/IP? The price would have soared and crashed a hundred times in the period before the protocol achieved widespread adoption. Soaring from a tiny base in the 70's and then crashing for entire decade of the 80's. If everybody in what we now call the "wired world" was staring at a real time price ticker for the underlying protocols all day, those wild price gyrations would have caused pandemonium, heart attack, and depression. We'd have all given up. It never would have happened.

Bottom line: If TCP/IP had had a real-time price feed, we'd still be doing data transfer on floppy disks.


This is to be expected of a new technology, Gartner Research calls this the "hype cycle". Disruptive technologies can be fickle. Creative destruction of existing ways is never linear. Widespread adoption and maturity of a game-changing invention is often violent, chaotic, and even explosive.

I believe this is a useful visualization of the hype cycle:

In the first few years, Bitcoin picked up steam as curious intellectuals passed around the whitepaper and technology enthusiasts embraced it. 2013 was the year Silicon Valley fell in love with bitcoin. And, unsurprisingly, the hype caused three bubbles:

  1. The first bubble was in the price. By November 2013, the price of bitcoin had appreciated 93 times the value a year prior. Bitcoin is getting better all the time, but it certainly wasn't 93 times better at the end of 2013 than it was at the beginning of the year.
  2. The price bubble begat a bubble in bitcoin mining which is being worked out right now. Recent price weakness has caused high-cost commercial mining operations to take capacity offline or, in some cases, close doors. For these miners, the selling price of bitcoins mined was less than the marginal cost of production (e.g., electricity, rent, debt, labor, maintenance, etc.) and certainly less than the all-in cost including capital.
  3. Lastly, there was a bubble in hype. Towards the end of 2013, tons of articles predicted that Bitcoin could change the world over night. I fundamentally believe that it will change the world - but over the next years and decades.


I've traded currencies for 25 years. The price often diverges from the fundamentals. In bitcoin we've seen the pendulum swing way ahead of fundamental reality to way behind. We should separate the bitcoin price swings from the underlying reality. Well-before the boom and the bust in price, Pantera put together a way to measure Bitcoin's potential for success. We call it the BitIndex. It has always been totally independent of price.

The price is kind of like a score board for the fans, but the actual use and growth of Bitcoin is based on the number and quality of developers entering the space, number of active wallets, Google searches, retail transactions, and other fundamental measures. The good news is that while price may boom and bust, the underlying power and adoption of Bitcoin is steadily growing.

BitIndex Components

Here are the eight components of our index. We designed the BitIndex long ago and have been tracking these metrics since, so what you see here is not reverse-engineered to fit the ecosystem's current state. It's how Bitcoin adoption has actually unfolded.

The table shows where each metric is relative to the last time Bitcoin was at this price. They are sorted by the biggest change. I think it fits the narrative I just described. The last time Bitcoin was at 200 bucks was in November 2013.

By far the biggest change is an 82-fold increase in mining capacity. The bitcoin hashrate doubled every six weeks for much of that period. That's Moore's Law on crack. It has now been essentially flat for three months. It is the first time in years that capacity-added is matching capacity gone offline.

Everything else, merchant adoption, transaction volume, and the other metrics, we've seen strong growth, up 2 or 3 times. The only component that is down is the hype indicator - Google word searches of "bitcoin". As I stated earlier, we're past the hype bubble and it's probably a healthy thing - people are building things, people are using bitcoin for transactions while the hype is being dialed back to a realistic level.


Bitcoin's in an awkward moment right now. It has all it needs to be the last protocol of the Internet - the money protocol - but the apps aren't there yet. It is probably the most important technological advancement since the browser. We are at that uncomfortable inflection point. The internet experienced that in the early 90's. TCP/IP was invented in the 70s, but the protocol suite we now call the Internet didn't go viral until the browser's debut. It took two more decades for consumer-friendly applications to come about that made it useful enough for mass adoption.

Bitcoin is kind of like that. 10 million people have bitcoin - that's roughly one out of a hundred people in the developed world. To get the other 99% engaged, we have to rollout applications that use Bitcoin as just the payment layer, i.e., applications that abstract away the Bitcoin details. When the browser came out, it made the Internet useful for the other 99% of the population that didn't want to deal with the technical details of the Internet.

Demand-inspiring, consumer-friendly apps are the key to mass adoption. Over the next few years, we'll see some really cool things come out. We can't even imagine what a lot of them will be. In the early 90s, it would have been hard to imagine the usefulness of Amazon, eBay, or Google, let alone Twitter, Uber, etc. Socially-useful Bitcoin apps should bring explosive, Internet-analogous growth in the coming years.

You have the choice in bitcoin which is unique. To be able to invest in the protocol - bitcoin, the currency - or the companies in the ecosystem. The argument would be that companies in the ecosystem have more leverage to the performance of bitcoin - that if you pick the right ones and bitcoin works, the return will be much greater. Needless to say, if bitcoin doesn't work, then the companies in the space won't work either. Investing into Bitcoin companies isn't adding any diversification, but it is additional leverage.

The best way to see the future of Bitcoin is to see where the venture money is going. In 2014, there was a tripling of venture capital going into bitcoin companies. It's up to around a $300 million dollar run rate for 2014 and that's the same as the Internet in 1995. It's also interesting to note that 2015 has already exceeded 2013's and we're just a month into the year.
1995 was when a lot of the developers were hired to build the apps that then became the Googles and the Twitters along the next 10-20 years. I believe that's what we're doing here in bitcoin. We're hiring all the developers to build the applications that will be popular over the next 10-20 years.


The four areas Pantera is focusing on in 2015 are mobile money, cross-border money flows, security/authentication technologies, and micropayments.

Bitcoin is going to have a huge, positive impact on the developing world. Five billion people in the developing world have cell phones, but the majority do not have access to a bank account. I believe even the word that's commonly used is an anachronism itself - "the un-banked". That's like calling them "un-landlined". The developing world skipped the whole land line thing and went straight to mobile phones. They will skip banking and go straight to mobile money.

Mobile money is the cornerstone of Bill Gates' annual letter, which puts forward his humanitarian agenda for the year. In the past, he's expressed enthusiasm over Bitcoin technology.  
Digital currency or mobile money is no longer some sort of sci-fi, futuristic thing discussed in Silicon Valley. It is the reality on the ground in Kenya. Kenya is the world leader for mobile money. Over three-quarters of the adult population uses their mobile phone for commerce and the majority of the entire GDP of the country operates on mobile money. 
As the analog goes, if all of these developing countries chose not to build copper wiring down all their streets, then they sure aren't going to build big marble bank branches with bank tellers in every village. They are going straight to some type of mobile solution. A good example of how that change is happening is in the Philippines. There are three times more Facebook accounts in the Philippines than bank accounts. Those people will go straight to using a digital solution.   
Kenya proves that countries that lack the financial institutions the developed countries take for granted can switch quickly to a mobile money solution.  I'm on the board of a company called BitPesa[1] that does remittances back and forth between Kenya and the UK and the United States. It's a fantastic use case that's helping the developing world.

In the developed world, fiat currencies will be around indefinitely. But there are 180 currencies on earth and not all of them are as functional, viable, or stable as the dollar, euro, or pound. In five or ten years, I could see Currencies Number 150-180 being effectively replaced by bitcoin. There are many countries (Argentina, Zimbabwe, Russia, etc.) where if they had bitcoin or some other digital currency over the last few generations they'd be much wealthier and much better off than using their paper version. (With one third of the Earth's landmass covered in trees, paper provides little protection against currency debasement.)


Hundreds of millions of people migrate to other countries to work and support their families back home. They spend one month every year working just to pay their remittance company. They are left with only eleven months of wages to support their families.

Bitcoin - a global, free, instantaneous payment rail - will help millions of expatriate families retain more of their hard earned salaries.  



Remittance is just one category of cross-border flows. Other flows include international wires, B2B (e.g., invoice paying, etc.), and intracompany transfers.

It's currently free and instantaneous to call or Skype somebody anywhere on Earth. But if you want to send $300 to a friend in a foreign country, it takes days, you have to go to the bank, and it costs 45 bucks. Bitcoin as a payment rail will revolutionize the cross-border money flows.


The last big advancement in financial services was the credit card.

The credit card is so 1950's. Think about it - walking around with a piece of plastic that has some 8-track tape glued to the back. Almost everyone in the developed world carries an encrypted, biometric-capable, geolocation device in their pockets. Smartphone capabilities completely obviate the need for these plastic pieces and their associated passwords and PINs - not to mention how even more outdated paper and metal tokens of money.

Credit cards are "protected" by 4-digit PIN codes or short passwords that computers these days can easily brute-force crack. The credit card's increasing vulnerability makes it ripe for a massive disruption. Recent cases like Target are good examples. In December 2013, hackers stole 40 million credit and debit card numbers from Target's point-of-sale systems. the banks that back the cards are just as susceptible. In July 2014, hackers compromised JPMorgan Chase, accessing the account information of 76 million households and 7 million small businesses. 

The primary issue is that all of this data is being stored centrally, usually where only a password stands between a stranger and multi-million dollars of black market value. As Geoff Sanders, the CEO of LaunchKey, says "The problem with passwords is passwords".

Launch Key[2] is the first authentication platform to fully decentralize its service. Any personal data used for authentication (e.g., geo-coordinates, biometric data, etc.) is encrypted and stored locally on individual mobile devices rather than on LaunchKey servers, thereby eliminating the risk associated with a breach of LaunchKey or a breach of a client employing the LaunchKey service. Authorization into systems requires a combination of biometrics (e.g., heartbeat scans, retinal scans, fingerprinting, and voice recognition), geo-fencing, a piece of knowledge only you know, and a physical object that only you should have possession of in order to maximize security. If your phone is stolen, the thief cannot access your data insofar as LaunchKey detects that you're not usually where you access, say, your work systems and locks the account.   

For Bitcoin, this means better security for our industry companies and services. It'll also give newcomers peace of mind as they confront something that's being pitted against payment methods as time-tested as credit cards and too-big-to-fail as fiat money.

Also, companies like Xapo[3], the bitcoin storage company, are doing amazing things diffusing the risk of bitcoin theft as much as possible - and in creative ways too. They have broken the private keys of each individual customer's vault into multiple pieces, which are then stored in five different continents in bunkers under mountains. The countries they use are politically dispersed such that if any one suffers political turmoil, Xapo can still access the coins hassel-free. Recently, they've put some of their security architecture in space.

Multi-signature security is also going to be an interesting change for 2015. Right now, only about 6% of all bitcoins are protected by multi-sig. By the end of the year, I believe that number will grow beyond 50% soon.


Micropayments are likely to be Bitcoin's first killer app - seamlessly integrated into social media, enabling people to send money in a free, fun, instantaneous way, without borders or minimums. This could have a huge impact on Bitcoin adoption. Years ago I received my first bitcoin free from Gavin Andresen's Bitcoin Faucet. When we look back in a year's time, there is a good chance that the majority will have received their first bitcoins free via ChangeTip[4].

I believe tipping's going to be the next phase, giving a couple bucks here and there as payment to people that have done something good for you or repaying friends for dinner. You just send $5 or a lunch or a dinner or a beer or something like that. Bitcoin is so foreign to people mostly because they haven't had the opportunity to play with some. Tipping is our chance. This will bring the next 10 million people into bitcoin. This is one of the ways that the Bitcoin ecosystem will captivate the remaining 99% of the developed world.

ChangeTip abstracts bitcoin away by seamlessly integrating with 30 different social networks like Facebook and Twitter. Anyone can send a message mentioning the word "coffee", ChangeTip's system sees you put @ChangeTip at the end of the message, and, automatically, the user receiving the message will see the value of a coffee in their bitcoin wallet.

On New Year's, I sent a bottle of champagne to a friend in London. The money gets to him instantaneously, he orders it from the waiter, and it's done. Like Willy Wonka in "Charlie in the Chocolate Factory" who "accidentally" teleported Mike Teevee, we can now teleport arbitrary value to anybody in the world.


Although growing in presence, micropayments are not as pervasive as anticipated. This slow growth stems from problems inherent to legacy payments infrastructure.

Credit cards, SWIFT, ACH, SEPA, and other legacy payment rails maintain hard fee floors and minimum transaction times when sending or receiving money. It takes days for a payment to traverse the legacy rails, with each stop along the way asking for a cut. At certain price points, sending money this way is just too expensive, too slow, or too inconvenient to be worthwhile for content publishers.

Tipping is the first instance of micropayments. The next big step in Bitcoin-enabled micropayments is content monetization. Right now the way Internet content is monetized is incredibly inefficient, basically through annoying ads or requiring subscriptions.

In the case of periodicals, most publishers find it easier to charge for an entire issue or monetize through a subscription model rather than front the high fees required for any single-article-purchasing model. You end up paying for a lot more than you initially wanted - to comfortably read a single article.

Currently, the value of a Google or YouTube 30 second ad each service forces you to watch as you visit a video is 1/10 of one cent. It's obvious that most users would pay orders of magnitude more than 1/10 of one cent to not see the ad or pay even a bit more to remove ads for a period of time during your YouTube visit.

With the legacy payments system, tipping over YouTube brings with it a $0.21 + 5% fee - how can one tip $0.20 when it carries a minimum cost of $0.22? A million $0.25 tips via the legacy payments system amounts to a meager $20,000. A million $0.25 tips via ChangeTip amounts to about $250,000 - increasing the publisher's revenue by 12.5x.

Bitcoin micropayments allow for new, better opportunities wherever there has been a clunky payment arrangement between a consumer and merchant and every situation where fractions of dollars could not viably be accepted by merchants.

Micropayment solutions are going to allow you to essentially escape all the ads and the paywalls. Content providers will be able to sell their content to a whole new user base - users that were not willing to pay $7.99 a month to view just one article. There are millions, if not tens of millions, of these kind of people.

The entire long tail of $7.99 to down to some fraction of a penny, until now, has been unavailable to content publishers - like newspapers. Fiat currency being the only option was the problem, because there are minimums content providers must charge to make a Visa or MasterCard transaction profitable - about $5 on average.

Bitcoin's low fees are giving way to a payments revolution, part of which is an entirely new market on the order of pennies and fractions of pennies. At scale, that's multi-millions.