I will do everything in my power to drive, build and pursue progress and change

I wrote a book and will be releasing the the first few chapters on Medium in the coming weeks. The first half of the book centers around what I call “The Startup Hero’s Pledge”. You can read chapter one here. This is chapter two.

The Bitcoin Story

The first time I ran into the concept of virtual currency was when I was talking to a wealthy Korean industrialist in 2004. He said that a new massively multiplayer video game (MMOPG) was taking Seoul by storm. Something like 40% of the population was playing it. The game was called, “Lineage.” He went on to say that he was really into playing the game and that he actually hired someone to play his avatar for him while he was at work so he wouldn’t lose his virtual strength while he was away from the game.

He then told me that it was his son’s birthday, and he asked for a $40 sword. I wondered why he was telling me that, and I politely said, “Oh? What kind of a sword?” He said, “It is really just a picture of a sword and he can use it when he plays in the video game.”

I was shocked. “He wants you to pay for pixels on the screen?”

“Yes. The sword has powers and it will help him in gameplay.”

Then I got excited. People would pay for virtual products!

This revelation was an epiphany for me. It got me thinking that there was an amazing business in virtual currency coming. There were many efforts. FarmVille was a fun game that allowed people to buy and trade with virtual gold. People paid real fiat currency to buy more virtual gold. There evolved a market outside of the game for virtual gold. Some people would earn lots of it in the game and others would buy it from them to advance in the game. Something potentially important was beginning. My search for the universal virtual currency was afoot.

But it wasn’t until about 2011 when I discovered bitcoin. Bitcoin was a new currency. One that could be used to store value, and pay for anything, not just for advancement in a video game. It was a little retro in that it was set up as marketplace where “miners” would have to “dig” for bitcoin. They would do it by solving complex algorithms with their computers. Miners got their computers to run simulations that could help them mine bitcoins faster. Once found, they could be stored in a “wallet” and then spent as needed. There was a decreasing number of bitcoins made available to be mined each year, so it was likely that the price of a bitcoin would increase in value as fewer bitcoins were mined and usage increased. The system was set up so that only 21 million bitcoins would be ever created, so people would not have to worry about their bitcoin losing value due to “overprinting,” a practice that many governments have engaged in that lowers their currencies’ values and causing inflation. In fact, as bitcoins spread, and their usage increased, it was likely that the currency would become more valuable.

It felt like it was funny money for a while. But people started actually accepting bitcoin instead of dollars. Legend has it that one of the key bitcoin programmers ordered a pizza and didn’t have cash to pay the delivery guy. He offered him bitcoin and within about three months, the pizza delivery guy became a millionaire. Another person sold a house for bitcoin.

My son Adam started an accelerator called Boost.VC. He decided to completely dedicate the accelerator to bitcoin companies (and the blockchain technologies that went with it). He was the first investor in Coinbase, which would go on to dominate the retail use of bitcoin. He also brought together about 40 companies over two sessions or “tribes” all dedicated to working with, innovating around, mining and trading bitcoin.

Joel Yarmon first introduced me to bitcoin when he brought in Peter Vincennes and his company Coinlab to pitch us. Coinlab would become a bitcoin focused innovator and miner. It seemed a little out there, but I liked it and we made a small investment in the company.

Then I asked Peter if I could buy $250,000 worth of bitcoin. The price was around $6 per bitcoin. He bought some and stored them in Mt.Gox, the largest (at that time) bitcoin exchange. He said he would take some money and buy an ASIC, a high-speed mining chip from Butterfly Labs to get us even cheaper bitcoin. Then two things happened that made what should have been about 40,000 bitcoins disappear.

First, the mining chip was delayed. Rather than shipping it to Peter as ordered, Butterfly Labs used the chip to mine bitcoins for themselves. They mined bitcoins for months before shipping the chips to Peter, and during that time, more bitcoin miners entered the field, so it became rarer for any individual miner to find bitcoin. By the time Peter received the ASIC chips, we had lost our window of opportunity. And if all this mining competition weren’t enough, Peter stored the bitcoin he did mine in a wallet controlled by Mt. Gox, and Mt. Gox “lost” our bitcoin.

Ironically, my interest in bitcoin accelerated when I heard that someone associated with Mt.Gox had absconded with about $460 million worth of bitcoin, including some of the bitcoin Peter had stored for me. Initially, I was furious. I actually believed that that kind of a theft would wipe this novel currency out completely. After all, who would want to hold a currency that people on the inside could just steal. But the price of bitcoin only dropped about 20% on the news and the currency continued to be traded on other exchanges. I was flabbergasted.

But I was also fascinated. I realized that the demand for this new digital currency was so strong that even a huge theft would not keep bitcoin from creating a new way for us to transact, store and move money. Society needed bitcoin so much that it was willing to tolerate major failures and frauds as long as they could have this frictionless currency.

After all, since the financial crisis, people were losing their confidence in government or “fiat” currencies. They needed something to trade that was not tied to any government. This was clearly a big sea change, and as an agent for societal improvement and change, I intended to help support and drive it forward.

I became well aware of how important bitcoin would be as a new and potentially transformative currency and asset. I backed a number of the Boost.vc bitcoin companies, and as I was discovering more and more uses, an enormous opportunity arose.

There were a number of nefarious uses of bitcoin. One of the most notorious of these was the Silk Road, a group that allowed people to buy and sell anything from drugs and arms to hired assassins. And while people originally believed bitcoin use could not be traced, the opposite was true. Since every bitcoin has a unique path associated with it, bitcoins that are stolen or used for illegal products and services can be easily traced. So eventually I expect, all the crypto criminals will be caught. And many have already been caught.

So, while I was lamenting the fact that I had lost all that bitcoin, something happened that gave me another shot at getting involved in the bitcoin opportunity. The US Marshall’s office confiscated the bitcoins owned by the Silk Road, and almost 40000 bitcoins were put up for auction. I looked at this as an opportunity to rebuy the bitcoins I lost.

There were 31 bidders that came to the table, and the auction was a silent bid for nine blocks of 4000 bitcoins each. Most of the discussions among the bidders were about how much of a discount from market prices the large blocks of bitcoins would sell for. The market price then was $618 per bitcoin. At the last minute, I decided to bid higher than market price. I bid $632.

I won all nine blocks! After the inevitable buyer’s remorse that happens when you know you have paid a higher price than anyone else was willing to pay, I thought about how I could best drive a positive use for these bitcoins with a tainted past. I decided that I would use them to support the proliferation of bitcoin through emerging country marketplaces where people didn’t have confidence in their own currencies. In many countries, that lack of confidence was due to the practice of governments printing extra money for themselves, which corruption floods the market and decreases the money’s value. The people are often then riddled with inflation and mistrust.

To make matters worse, people who don’t have much money are not “bankable.” Banks lose money on people who don’t have enough to make all the paperwork worthwhile. Banking regulations set up to protect the little guy have actually kept the little guy from participating in the economy — almost guaranteeing that he will remain “the little guy.” These people are the “unbanked,” and there are billions of them. Bitcoin might be the solution for these people!

Avish Bhama, one Boost entrepreneur with a company called Mirror helped me figure out a good plan to spread the currency to emerging country markets. The idea was to allow people from developing nations the ability to invest in anything (even to go short against their own currency) by using bitcoin as the “rails,” the conduit for the trades. We held a big press conference together laying out our plans, but since then, the plan has been changed several times. In any case, our ideas gave a lift to the general attitude toward bitcoin, and the price and confidence in bitcoin was boosted. Bitcoin itself has been a godsend to the unbanked, providing an economic system for people who are shunned by the currently overregulated banks.

Before I did anything with the bitcoins, I had to accept delivery of the coins from the US Marshall’s office. Avish helped me make sure we could get the bitcoin into a safe wallet, and I also brought in Leif Jurvetson, my partner’s son, who was a 14-year old bitcoin expert. Leif is a big bitcoin proponent, so I invited him in to discuss the security we would be using, and he was with me when I discussed the transfer with the US Marshall’s office. He was actually quite helpful in figuring out the best way to secure the bitcoin.

When the transfer happened, there was some hold up. We were already one-half hour into what was normally a ten-minute approval cycle. We were getting a little anxious, and then we got a report of a .0007 bitcoin coming into the wallet. We all thought we had been hacked!

Eventually, the full transfer came in and the authenticators recognized the transfer on the blockchain. All was well with the world. We said, “Thank you,” to the Marshall’s office team, and hung up.

I learned later that Leif had sent the .0007 bitcoin to thank me for inviting him into the big meeting. Great kid!

Now that I had the bitcoins, I worked with Avish on his company, called Mirror, because he would set up the bitcoin to “mirror” the trades that happened in various exchanges. Mirror later decided to change its business model, but companies I backed later — Bitpesa in Africa, Bitpagos in Latin America and CoinHako in Southeast Asia took hold of the idea and made the emerging world their marketplace.

The obvious uses for bitcoin are 1) having a currency that is accepted everywhere without any government friction or interference, 2) a stored value solution that doesn’t require a holder to keep a room full of metals and art, and 3) a frictionless currency that can move automatically based on a contract without the usual drag that comes from regulations that need to be interpreted by a lawyer or an accountant. But there are many other uses. A bitcoin wallet can also be used as an escrow for a contract in transition, as a redistribution of an estate, or as a transfer agent to distribute payments, dividends or shares of stock. And we are only scratching the surface.

The technology behind bitcoin is called the blockchain. The blockchain, also has some amazing potential. The blockchain can be thought of as a giant ledger, keeping track of money, data, inventory, contracts, etc. “Smart” contracts can be designed such that they anticipate eventualities and automatically distribute appropriately.

And corporates can use the blockchain to automatically pay employees their wages and benefits, pay shareholders their dividends, and pay noteholders their interest and principal payments, all with precise accuracy and automated accounting. Furthermore, companies can use the blockchain to pay their suppliers and receive money from their customers, handling lay away payment plans and warranties without friction or human influence.

The blockchain can manage three-way transfers with ease, and eventually will handle retail transactions without the need for credit or debit cards. Insurance companies can use it to manage their claims and automate collections. Real Estate escrows and titles can all be done quickly and easily between buyer and seller. Drugs and food can be authenticated by blockchain to guarantee their origins.

And the US Government can manage social security, welfare, Medicare, worker’s comp, disability and all their data verification of citizens and businesses with bitcoin and the blockchain, since blockchain is the perfect government service employee. It is honest, incorruptible, secure, and fair.

Bitcoin and its underlying technology, the blockchain are changes that allow us to progress. But change is difficult for those people who don’t have the spark of a Startup Hero in their eyes, and many industries will have to go through fundamental changes to adapt to the advent of this new way of thinking.

People will have to learn that the bank, being the trusted third party for centuries will soon be replaced by computers that now monitor their holdings through the blockchain. Banking will be simpler, safer and easier than relying on people to do the monotonous work in some bricks and mortar facility. Over time, people may see as I see, that the money they hold at Coinbase is safer than the money they hold at Wells Fargo.

Still, the luddites will say that they like to know there is something behind their money like gold or the full faith and confidence of the federal government. Well, the gold standard is no more and in the financial meltdown, that full faith was seriously in jeopardy, and computers are less likely to steal their money. What the luddites might want to consider is that their money is flying around in the internet already in the current system, and putting it on the blockchain only makes it safer and the blockchain banker doesn’t take as much as it flies by.

This new digital currency deserves to live and thrive. It has the ability to create a new market unfettered by government politics. The currency can move across borders like gold, but be more frictionless than a bank wire. The reduction in friction (and increase in liquidity) will set the platform for a more prosperous and wealthy world.

Still bitcoin is going through growing pains. Over the next 18 months after I won the auction, there were many other incidents of theft and illegal use that brought fear into the bitcoin marketplace, so the value of my coins went down. The Silk Road bitcoins I bought dropped in value to just below $200 each. Fortunately for me and for our global society as a whole, confidence has returned and the price of the bitcoin has recovered as the market continues to expand and stabilize and as more uses for bitcoin are discovered.

I believe that this volatility will be looked back on as speedbumps in the road to us getting a globally distributed, liquid and fair economy. A society’s wealth is driven in part by its ability to trade freely. Bitcoin, because it is so liquid and so flexible can create a wealthier world.

It is interesting to note that countries, now recognizing that they are in competition with one another, are trying to make sure they win the bitcoin economy. The smartest of these are either allowing bitcoin to prosper or recognize that they need a light touch in regulating bitcoin to attract all the creativity, money and startups that are flooding into the field.

There are many parallels between bitcoin now and the internet in 1994. In 1994, the internet was just for hobbyists and hackers. I remember when I first used the Internet, the only things I could do were to buy diamonds and try to break into NORAD. There were very few uses. It took many years for the internet to become mainstream, but when it did, it transformed industries. HTTP was the first real working protocol so people standardized on it even though there were more elegant solutions, just as people today are frustrated with the limitations of bitcoin, but have made it a standard because of all the network effects around the early winner.

The US was wise to leave the internet unregulated and free because all the internet entrepreneurs created startups in the US and the economy around the internet blossomed. Keeping its regulatory hands light should help innovators stay in the US. At this writing, the CFTB and the SEC are both taking a wait-and-see attitude as they approach the burgeoning virtual market. The SEC did claim that one new crypto vehicle, the DAO was a security, but they are open to allowing other forms to be clear of securities laws.

Some countries have been early innovators and beneficiaries of the blockchain industry. Singapore and Switzerland have set guidelines for people to create competing crypto-commodities. Both individuals and companies can create commodity offerings or ICO’s (Initial Coin Offerings) that can have a mission attached to them.

I believe that losing the bitcoin economy would be akin to losing the internet, so countries should make sure they are well positioned to compete for the bitcoin entrepreneurs of the world. Bitcoin is here to stay, and the countries that are the most open to it will be the biggest beneficiaries. The US won big by allowing the Internet to grow unimpeded, and the Silicon Valley thrived. I would hope our new leaders would recognize the potential for bitcoin to similarly drive economic growth and prosperity.

More barriers in society create more friction, and more corruption. Fewer regulations make societies freer and wealthier with more jobs. More liquidity creates a wealthy society, less liquidity creates more poverty. When one country overregulates its banks or drives an inflationary or failing hopeless economy, the bitcoin economy flourishes. In some ways, bitcoin is a check on bad governance.

The long-term vision for bitcoin is to give the world economic emancipation. Banks will have to adapt their services as the need for trusted third parties and financial middlemen are eclipsed by a trusted crowd of blockchain monitors. The blockchain being a perfect ledger may change the accountant’s role to one of advisor, and smart contracts may change what it means to be a corporate lawyer. People will not need to hoard gold or hard currency since bitcoin is a far more convenient source for stored value. Governments may recognize that their fiat currencies are inferior to virtual currencies, and will have to allow more financial freedom to their citizens or risk losing those citizens. Taxing authorities and welfare service providers may be replaced by blockchain tax redistribution engines and welfare insurance wallets.

The potential if bitcoin is only limited by the imaginations of the entrepreneurs who work to drive this new virtual economy. To monitor and keep it honest, I believe that the community of users will ultimately self-regulate, possibly eclipsing or obviating the need for the various governments of the world to regulate the crypto world.

“The bitcoin revolution is coming. It is here to bank the unbanked, to democratize economic opportunity and to reevaluate governance. I expect that it will change everything from the banks and the financial system to healthcare, to democracy. even to government.

DAO’s and ICO’s

A new form of fundraising is happening around the blockchain architecture. People discovered that the blockchain could be used to raise funds for projects and startups. In effect, people found that they could create their own currencies using bitcoin as a model. These would be known as decentralized autonomous organizations (DAO’s). The first of these DAO Maker, had an inauspicious beginning. The company used ethereum (a decentralized currency built using the bitcoin blockchain) as its platform. A hacker figured out that when money was moving from one entity to another, they could siphon off ethereum collected from the sale of the tokens. The hacker managed to steal 3.6 million ethereum (at the time valued around $72 million), the price of ethereum dropped from $20 to about $13, and DAO offerings came to an abrupt end.

But then more people saw potential in these offerings. The DAO Maker offering had raised $100 million, and entrepreneurs saw potential there. After all, DAO’s (and ICOs as they became known), could raise private money for a project relatively easily without sharing equity and with little friction from any government organization. The tokens purchased could be immediately marketable, and the price would fluctuate as the value of the underlying asset grew.

Any project could be funded by a DAO offering, and any startup could raise their money by simply initiating their own currency. In fact, it wouldn’t be limited to startups. Anyone could set up an ICO. Imagine the societal change and the frictionless market, the wealth and the jobs that could be created if everyone could raise their own money and have their labor valued through a fresh currency.

As of this writing, Draper Associates has funded three ICOs. Bancor has the potential to transform marketplaces for projects and startups. Tezos has the potential to change how we govern ourselves globally, and Credo can be the vehicle we all use to put a value on email attention.

The Bitcoin/Blockchain/ICO technology is transformative. The changes that we will all encounter are only limited by people’s imaginations. We humans have the opportunity to progress far beyond what any of us have ever imagined. By decentralizing economic power, these tokens can open the economic world up to anyone anywhere with an idea and the willingness to put in the work to spread their idea and their token to the world.

And, as a Startup Hero, you will do everything in your power to pursue progress and change, so you can look at bitcoin as one of the current vehicles available to you to drive progress and change, move society forward, and drive your industry now that you have an awareness of these breakthroughs.

A note on the potential of Bitcoin

Bitcoin could be as important to our world as credit cards or paper money. When money velocity is increased due to reduced friction in the economy, a society becomes wealthier. Bitcoin reduces a significant amount of friction in the economy. People no longer have to pay a “trusted third party” or a bank to make a transaction occur. With all the fraud and hacking of the banks, bitcoin may accelerate as a currency even faster than it would have without these external threats.

Almost anything you now use your bank for, you can use bitcoin for. The immediate applications are sending money overseas, paying for products and services, making micropayments to people who need to be paid for their services (e.g. residuals for actors or cameramen), Overseas employee wages, payments by the unbanked, etc.

Longer term, any contract will be better served by being fixed on the blockchain. The blockchain allows any contract that revolves around an event (like a company sale, a dividend, a royalty distribution, a death, the outcome of a game, etc.) where cash or stock or something of value needs to be distributed or paid out, can be agreed to, executed and disbursed without a lawyer or an accountant, since the trusted third party is all of society, not a series of written documents, a regulated accounting firm and a bricks and mortar bank.

Bitcoin’s blockchain is technology that is open and transparent, distributed, frictionless and secure. This technology may be at least as transformative as the internet has been. While the Internet transformed music, communications, information, entertainment and transportation, bitcoin and its blockchain may allow governments to be virtual, banks to be unnecessary, ownership to be ironclad, insurance to be frictionless, and people to know who owns what.

ICOs have the potential to open up new highways of human creativity. Imagine services that bank the unbanked, insure the uninsurable, and give liquidity to markets that until now were illiquid. ICOs may be as big a breakthrough for economic progress as interest was for lenders or stock was for investors. I can imagine societal transformations that were only dreamt of before decentralized autonomous tokens. I expect to see a renaissance of breakthroughs in everything from finance to healthcare, from data to distribution, and from infrastructure to government.

Quexercises on Progress and Change

1. What will you do to drive, build and pursue progress and change?
2. What in your world seems wrong, stagnant, in need of revamping or renovating?
3. How will you go about making the change?
4. What forces for the status quo will you be up against?
5. How will they respond? What other obstacles will you face?
6. What resources will you need? What people will you need to help you?
7. How can you take advantage of an ICO? What kind of coin would you issue? What change would it promote?
8. Meet someone on the street who will listen to you and teach them how you make a living.

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