The BIT - Barry Silbert's Cryptocurrency Investment Fund

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Barry Silbert has been a trailblazer on the intersection of technology and finance for many years. When he first spoke at DLD in 2011, reports gave SecondMarket a valuation of $200 million on annual revenue of $35 million. These figures were largely driven by Facebook – whose pre-IPO shares were traded on the platform. In September 2013, Second Market launched an investment vehicle for Bitcoins, the Bitcoin Investment Trust (BIT). In this interview, Barry speaks about his fascination for the digital currency, it’s design and how it has been evolving over time and where he sees it going.

How did you first get hooked on Bitcoin?
I became familiar with Bitcoin in the summer of 2011. At the time, the price went from a few dollars to thirty dollars over the course of a few weeks and back down to a dollar. The concept of Bitcoin, this digital currency and transaction network, not created or controlled by a government or company, had a real appeal to me. I didn’t think it was going to be successful but every month I did check in on the price and news. The price and volume going up forced me to take a real second look. In early 2012 I started speaking with economist and focussed on what Bitcoin really is.

When did you start investing in Bitcoin?
In 2012, I invested in Bitcoin first, subsequent to that I invested in Bitcoin companies. My guess is I am probably the most active angel investor in the Bitcoin field, may be not in terms of dollars but I invested in over fifteen companies. What I learnt through that process was it’s a fairly difficult process to purchase Bitcoin for investors. In the US, there are no exchanges operating, you have to rely on exchanges that are located in Japan, and typically these exchanges are not regulated. The idea of opening an account and wiring money there is something that most large investors don’t wanna do.

Is this easy access the main deficit you are trying to fix. Why should investors invest in the Bitcoin Investment Trust (BIT) instead of buying Bitcoins directly?
Yes, that’s the main issue we are trying to solve. The other issue is: once you own the Bitcoin you are responsible to keeping them safe. Early on, the Bitcoin enthusiasts tended to be technology savvy or at least they were keen to figure out how to store Bitcoin. Now it is moving to a broader audience, especially to high net-worth investor groups. They don’t have the expertise or the time to figure it out. So the second issue we are trying to solve was the security and safety thing.

Please explain how the BIT works and how it has performed since its inception?
Technically speaking it’s an open ended trust. What it means: you raise unlimited amounts of money into this vehicle on an ongoing basis. Basically, we replicated the very popular gold ETF – the spider gold – which was launched 10 years ago and was widely viewed being the first investment vehicle investing in gold possible for the general public. We launched BIT on September 25th 2013. It is geared towards institutional and high net-worth investors. In order to be able to invest, you need what the SEC calls investor test (you have to a certain income or certain net-worth). It is not publically traded and it is not open to all investors. It exceeded all our prospection. We initially hoped that the fund will grow to be ten million by the end of 2013. On Tuesday 31st, it was over 50 million dollars.

By design, Bitcoin mining is limited to 21 million. Similar to goldbacking, critiques argue that this is the main flaw. Such restrictions can eventually cause deflation, exploding Bitcoin value and bears the risk of economic breakdown once people start hoarding them. What’s your point on that?
It’s important to remember that Bitcoin really is two things: 1) Bitcoin is a digital currency and 2) Bitcoin is a global transaction network. They really serve two different purposes. VCs and technologist agree that there’s no debate that a global transaction network could be really disruptive as it relates to things like online payments, and money transfers. But where there is a lot debate is around Bitcoin as a digital currency and as a store of value. Bitcoin has many of the attributes that make sound money and it has many of the attributes of gold. Gold has – other than copper and steal - little intrinsic value. Specific to your point about deflation: it’s more an economic kind of debate between the Keynesian and the Austrian school. Imagine a world in which you believe the money you have has more value tomorrow. That would have a pretty dramatic effect on the economies around the world. But that’s really not what’s happening with Bitcoin where it’s either a transition over decades or, more likely, you just hold a portion of your money in Bitcoins.

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There are hardly any switching barriers between different digital currencies, Litecoins, Peercoins, Coinye West, etc all seem to have the same value proposition; why do you trust in Bitcoin specifically?
You are absolutely right. The beauty of digital currencies is that they are so easily exchangeable. Ultimately, none of our currencies today have much value from a utility perspective. From an investment perspective Bitcoin is really the first mover: it has the longest track record, it clearly has the largest money base and deepest liquidity. I personally think Bitcoin is the winner for two reasons: 1) at a 10 billion monetary base, there’s a substantial amount of money, reputation, time and energy by a lot of individuals around the world. There’s not much of an incentive for these millions of early adaptors and evangelists to switch. Further, it’s unlikely that there’s another group of cryptographers, entrepreneurs, investors, and early adaptors out there that had not embraced digital currency and is still waiting to jump onto something. Reason number 2) is that Bitcoin is a software, a living piece of technology that will react to whatever the market demands of it. All the alternative digital currencies are get-rich-quick schemes or great testing grounds for new features which could be potentially incorporated into the Bitcoin protocol.

You predicted “2014 is the year of Bitcoin and Wall Street”, can you explain that statement a little further and what do you think are the next waves for Bitcoin?
I think Bitcoin has five waves. Wave number one was the experimentation phase when hackers and hobbyists were playing with the protocol since Bitcoin was created in 2009 till 2011. In this time it was about technological advancements without value attributed to Bitcoin. Wave number two started in 2011 and is the early adopters phase where you start seeing entrepreneurs trying out new ideas, or like me, people investing in Bitcoins and the entrepreneurs. At the end of 2012, the venture capital wave began. Andreesen Horowitz, Google Ventures and a lot of great investors started to invest in Bitcoin businesses. This is certainly continuing through the next year as many investors are looking to move into this space. Wave number four starts 2014 and that’s Wall Street. Second Market as an organisation has always been at the intersection of technology and finance. Since we have launched the BIT, we are seeing a growing interest in Bitcoin by different types of Wall Street firms. Wall Street professionals are personally putting their money in our trust. They are tipping their toes and are testing before they are putting their clients’ money into the space. We are going to see that the BIT is going to be available on a growing number of wealth management platforms, institutional money like hedge funds will get active as investors, and the large Wall Street banks are going to trade Bitcoin.

And that will supply the critical monetary base for wave number five?
Wave number five is mass consumer adoption. I believe the only way that mass consumer adoption happens is if two things occcur: 1) the monetary base has to grow to something substantially larger than ten billion because otherwise a lot of merchants don’t see the opportunity and wouldn’t take the currency risk and change it immediately into their local currency, which is impossible at large scale with the monetary base as small as it is; and 2) a real proliferation of products and services are launched to acquire and hold Bitcoin easily. The VC backed startups who are going to launch their products and services now in 2014 are going to be the catalyst for mass consumer adoption in 2015.

Currently 12.1 million Bitcoin are in circulation, with a total value of about $8.8 billion. At this size, the value of Bitcoin can fluctuate violently based on actions by a few big investors or the Chinese government. The regulatory clouds are clearing. The currency is gaining legal legitimacy and finding political from across the political spectrum. Libertarians like the idea of a currency that’s not linked to a central bank. Liberals see Bitcoin as a way for consumers to escape high banking fees. The anonymous character has attracted also a certain crime scene which can transact drug deals, assassinations and launder money (think of the FBI takedown of Silk Road). In accordance, Barry made an awkwardly precise prediction for 2013 on Twitter:

Now if you think this was far fetched, his 2014 predictions are really bold:

Barry Silbert will speak at the upcoming DLD14, taking place in Munich January 19 - 21, 2014. Apply for a ticket to this exclusive conference, tune in on the beat of our community on the DLDpulse and find regular updates on the DLD14 programme and speakers here.



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