Every winter, Sunstone hosts an offsite event with the participation of executives from our portfolio companies, fellow VCs, and various thought leaders. The event is designed to mix informal networking, stimulating discussions around key topics shaping our industry, and intense skiing. We find that the best inspiration and ideas are generated when you least expect it, and in company with people that challenge your thinking. This year's edition took us to Courmayeur in the Italian Alps, and Bitcoin was on the list of topics we discussed. Here are the supporting slides from our Jan 24th presentation "Bitcoin: Primer, State of Play, Discussion". http://www.sunstone.eu

1. Primer, State of Play, Discussion
Yacine Ghalim & Max Niederhofer
Courmayeur, 24 January 2014

2. Bitcoin is becoming ever more popular in the public eye
GOOGLE TRENDS & SEARCH VOLUME
11.1m
Average Monthly Search Volume
(Google, past 12m)
1.2m
Data:
Google
Trends
1m
1.5m
Data:
Google
Keyword
Planner
1.5m

3. A dividing topic
PERSONALITIES QUOTES
Bitcoin
is
a
technological
tour
de
force.
Bitcoin
is
Evil.
Paul
Krugman
Bill
Gates
It
will
be
everywhere,
and
the
world
will
have
to
readjust.
John
McAfee
Bitcoin
is
the
beginning
of
something
great:
a
currency
without
a
government,
something
necessary
and
imperaBve.
Nassim
Taleb
Source:
bitcoinquotaBons.com,,
ecb.europa.eu
A
virtual
currency
scheme.
?
The
European
Central
Bank

4. Bitcoin’s origin as the experiment of an anonymous
cryptographer, Satoshi Nakamoto, is a boon to libertarian hero
worship
HISTORY / MYTHOLOGY
2008
-
Bitcoin.org registered by “Satoshi Nakamoto”
-
“Bitcoin: A Peer-to-Peer Electronic Cash System” paper posted October 2008 (link: PDF)
-
Bitcoin projected registered at Sourceforge
2009
-
Satoshi mines “genesis block” of 50 BTC – January 2009
-
Bitcoin v0.1 released on cryptography@metzdowd.com mailing list… and Usenet – January 2009
-
First bitcoin transaction, #bitcoin-dev on Freenode, v0.2 released
2010
-
First offline transaction: 10K BTC for two pizzas
-
v0.3 announced, Slashdotted, Mt Gox founded – July 2010
-
First specialized GPU hash miners and pooled mining operations
-
Bitcoin economy surpasses $1 million, $0.5/BTC
-
Satoshi hands project lead to Gavin Andresen, fades into background with est. ~1 million BTC

5. What exactly is Bitcoin?
DEFINITION(S)
-
Bitcoins are digital units of account issued, authenticated and transacted through a peer-topeer network
-
The network/ecosystem is Bitcoin, the units are bitcoins
-
Attractive due to low transaction costs, no taxation, (some) anonymity
-
Key features safeguard issuance, authentication, ownership and independence
-
For the first time in human history, a medium of exchange with no intrinsic value without a trusted
central authority

6. Bitcoin works like previous attempts at digital currencies, but
uses a public ledger of transactions instead of a central “mint”
HOW BITCOIN WORKS (1)
-
A bitcoin is simply a chain of digital signatures using public and private keys
-
This is based on previous work, like hashcash, bit-gold and many other e-cash attempts
-
The main problem of a digital currency is verifying ownership - double-spending and its most
obvious solution, a trusted central authority
-
Bitcoin solves this through a public ledger, which creates a time-stamped history of all transactions
-
This is known as the blockchain

7. A public record of all transactions implies a very different
model of privacy, one that is arguably more strict
HOW BITCOIN WORKS (2)
-
Bitcoin transactions are public, traceable and publicly stored…
-
This is similar to the idea of stock exchanges, where a tape of transactions is public, but the identity
of the transacting parties is not
-
Preserving privacy on Bitcoin requires effort: discarding Bitcoin addresses constantly

8. Nodes in the peer-to-peer network compete to validate
transactions and thus being allowed to issue new bitcoins
through “mining”
HOW BITCOIN WORKS (3)
-
The blockchain is built by the nodes in the network attempting to generate new blocks by solving a
difficult proof-of-work problem, and thus making fraud highly unlikely
-
In Bitcoin, this proof-of-work is incrementing a nonce, or arbitrary number, to the point of where its
SHA-256 hash yields a value beginning with a set number of zeros (getting more difficult over time)
-
Once a new hash has been found, the node broadcasts the new block to the network
-
The first transaction of the new block is a new issuance of bitcoins (currently 25), a reward for the
“miner”
-
Other nodes accept the block only if all transactions in it are valid, ie no double-spending
-
In case of a conflict (branch), nodes will work on extending the longest chain
-
In the long run, as issuance slows, Bitcoin allows for transaction fees paid to nodes for extending the
blockchain

9. While Bitcoin solves key digital currency problems elegantly,
some vulnerabilities remain
HOW BITCOIN WORKS (4)
-
While transaction validation in the blockchain is costly, single transaction verification is simple and
cheap
-
However: all of this assumes that a majority of honest nodes control the network
-
The blockchain generation means transaction confirmations take up to an hour

10. Bitcoin’s current use cases are threefold :
store value, transact and move money
THE CURRENT BITCOIN USE-CASES
Store
Value
•
OAen
compared
to:
•
Shares
the
most
aCributes
with
precious
metals:
• Limited
supply
increasingly
difficult
to
extract
• “Decentralized”
crea<on
• Non
yielding
asset
•
•
•
Transact
•
•
More
easily
fungible
than
precious
metals
No
storage
costs
(Temporarily)
unclear
tax
treatment
of
capital
gains
2,500+
brick
&
mortar
places
(mostly
mom
&
pop
shops)
50,000+
online
places
Large
online
players
accep<ng
it:
•
Move
Money
•
vs
Cash:
• Dematerialized
vs
Cards:
• Lower
transac<on
fees
• No
charge-­‐back
• Pseudonymous
•
•
•
•
Data:
Coinmap.org
Transfers
Interna<onal
remiCances
Officially
banned
it:
•
Circumvent
EM
countries’
capital
controls
(China,
Argen<na,
North
Africa)
Faster
and
cheaper
than
some
tradi<onal
transfer
services
Pseudonymous

11. Most of the bitcoin creation is designed to occur
between 2009 and 2025
MODELED BITCOIN CREATION OVER TIME
25,000,000
21m
(100%)
99%
20,000,000
15,000,000
12.2m
(58%)
10,000,000
Data:
BitcoinWiki
2141
2137
2133
2129
2125
2121
2117
2113
2109
2105
2101
2097
2093
2089
2085
2081
2077
2073
2069
2065
2061
2057
2053
2049
2045
2041
2037
2033
2029
2025
2021
2017
2014
2013
-­‐
2009
5,000,000

12. A wild ride up…
HISTORICAL PRICES ($)
• Trending
up…best
performing
asset
in
2013
(75x)
3
• Trading
in
step
func<on
(low
liquidity,
binary
events,
buzz
factor)
• Tremendous
vola<lity
(2013
realized
vol.
=
100)
$1,203
$1,045
Average
Daily
%
Move
6.3%
Biggest
up
day:
+42%
1.3%
0.4%
€/$
$0-­‐1
Data:
blockchain.info,
Bloomberg
$584
Biggest
down
day:
-­‐49%
75x
2
$210
1
$35
$2-­‐15
$14

13. Value of the outstanding stock – low, but not negligible
VALUE OF OUTSANDING STOCK ($)
$1,500bn
(large
denominated
bills)
ETFs
$1,300bn
(private
hands)
$50bn
(foreigners
deposits)
$11.5bn
Data:
blockchain.info,
BoFA
Macro
Research
#
Outstanding
Bitcoins
*
mkt.
price
=
$11.5bn

14. Transaction volume – once again: low, but not negligible
DAILY TRANSACTION VOLUME ($)
$17,559m
$487m
$9,863m
$7,562m
$2,434m
$397m
$216m
Infrequent
transac<ons:
41/min
(2,000/min
Visa)
Large
transac<ons:
$1,700
avg.
($60
avg.
Visa)
$100m
(normalized)
$15m
Circa
$100m
Data:
blockchain.info,
coinometrics,
companies’
reports

15. Increasingly consolidated value chain & ecosystem –
centralize to decentralize?
THE BITCOIN ECOSYSTEM
Miners
-­‐Validate
transac<ons
and
confirm
ownership
ghash.io
BTC
Guild
38%
26%
Exis<ng
Hash
Power
Equipment
Makers:
-­‐Avalon
Clones
-­‐Cointerra
Data:
bitcoinity
Exchanges
-­‐Buy/Sell
Bitcoins
against
fiat
currencies
(p2p)
32%
mkt.
share
26%
mkt.
share
20%
mkt.
share
Wallets
-­‐Store
bitcoins
-­‐Send/Receive
bitcoins
w/o
fric<ons
Payment
Processing
-­‐Enable
merchants
to
accept
bitcoins
payment
w/o
fric<ons
ETFs
&
Funds
-­‐Tradable
vehicles
with
bitcoin
underlying
-­‐Buy
bitcoins
in
the
open
market,
repackaged
into
financial
securi<es
-­‐Winklevoss
twins
filed
plans
to
list
a
Bitcoin
ETF
-­‐SecondMarket
launching
Bitcoin
Investment
Trust
(BIT),
non
listed
-­‐Fortess
Investment
forming
a
Bitcoin
Fund,
non
listed

16. Flourishing startup ecosystem, relatively muted VC
Involvement despite large outliers
VENTURE HISTORY
319
startups
VC/Angel
Funded
Total
Funding
$
Median
$
Funding
80
startups
33
startups
(10.3%)
$87.5m
$540k
Outliers
$31.7m
(USV,
A16Z)
Data:
The
Bitcoin
Database
(
compiled
by
Joel
Eriksson
Enquist
at
Creandum),
Crunchbase
$9m
(Accel,
GCP)

17. The most central parts of the “value chain” have attracted
most of the funding
$ VC/ANGEL FUNDING BY CATEGORY
70,000,000
60,000,000
$59m
50,000,000
40,000,000
20,000,000
10,000,000
Coinbase
30,000,000
$13m
$10m
$4m
-­‐
Exchanges/Wallets
Payment
Processing
Data:
The
Bitcoin
Database
(
compiled
by
Joel
Eriksson
Enquist
at
Creandum)
Miners/Mining
Equipment
Other

18. Bitcoin has currency features, but viewing it solely as
a currency ignores its more widespread application
THE CURRENCY QUESTION
-
Bitcoin Foundation and others call Bitcoin a “crypto-currency”
-
Bitcoin is “currency” in the most general sense, since it can be accepted as a means of exchange
-
Fulfills most criteria of a medium of exchange, but limited utility due to limited adoption
-
Widespread acceptance as a means of payment is key to meet definition of a currency
-
Problematic as a unit of account given volatility – hence Bitcoin becomes an intermediate asset
traded into or out of following a transaction in a more commonly accepted currency
-
Speculative interest fuels growth in value versus actual transactions, which suggests it is a store of
value rather than a means of exchange
-
Related key question whether Bitcoin will be treated like cash or asset: income vs capital gains tax

19. Bitcoins’ acceptance as a store of value currently relies on
speculation… “fiat” of a different kind
THE ASSET QUESTION
-
Bitcoins have no intrinsic value: there is no interest (cash deposits), no promises of future cash flows
(stocks/bonds), nor is there a use value (gold/silver/commodities)
-
However, Bitcoin has significant and interesting features that make it a possible alternate store of
value
-
outside of the current financial system
-
semi-anonymous
-
easily concealable from tax authorities
-
low/no correlation
-
Volatility, high barriers to transaction, lack of eg FDIC insurance currently preclude larger asset base
moving into Bitcoin
-
As volatility decreases, the utility of features above will likely cause significant capital in-flows

20. As Bitcoin volatility decreases, capital will flow into the
market based on utility rather than speculation
VOLATILITY VS UTILITY
Capital Inflows
(BTC)
Speculation
Value Store
Utility
Time

21. Bitcoin’s “fair value” will be determined by how widespread
its use becomes as a means of exchange
THE $1B QUESTION
-
If Bitcoin becomes an accepted alternative medium of exchange
-
-
-
Powering ~10% of global ecommerce transactions: approx. $5B annual transaction volume
Rising to become a player to rival Western Union/Moneygram: approx. $4.5B market cap
If Bitcoin becomes an accepted store of value
-
Similar to gold: no cash flows/interest, limited supply, limited traceability
-
Total gold outstanding in coins/bars/ETFs is ~ $1.3T
-
Based on silver (1/60 value versus gold): ~ $5B potential value
-
Medium of exchange + store of value = ~ $15B market, or $1,300/BTC
-
However, what if BTC becomes truly widely accepted?
-
Total currency in circulation: ~ $4T
-
If we assume BTC makes it to 1% of all currency = $400B, or $34,000/BTC
-
…and the upside is high from there

22. The implications of Bitcoin are as far-reaching as the
advent of the transistor, the PC, the internet…
DISCUSSION
-
Hype or reality: what do you think?
-
Friendster/Napster or Facebook/Spotify?
-
Vast economic, social, political, financial implications
-
-
-
What happens to an international financial system if you can opt out?
Kiss AML/KYC goodbye: say hello to drugs, terror and tax avoidance
And yet, this is thinking too short:
-
For the first time ever, Bitcoin decentralizes trust
-
You can deal with a perfect stranger at low/no transaction costs
-
And a Bitcoin is just a hash – you can attach anything to it contractually…