BITCOIN: THE FINAL PIECE OF THE PROTOCOL PUZZLE

Thank you for the kind introduction.

Ive 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.
Id like to start with an overall statement why I think is Bitcoin is so compelling: the Bitcoin
protocol is not a category killer, its 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.
Lately though the only thing getting killed is the price. Kinda feels like this

Id 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.

THE FINAL PIECE OF THE PROTOCOL PUZZLE

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.

THE ONLY PROTOCOL WITH A PRICE FEED

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 cant ask your buddy where SMTP is trading today. If your email jams, you
cant short SMTP.
Binary Financials Harry Yeh just gave a great presentation on trading bitcoin. That, again, is a
pretty wild concept. They dont have conferences talking about fundamental value analysis or
technical chart patterns on protocols like SMTP. That just doesnt exist.
Although there have been moments lately we may have wished bitcoin didnt 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 70s and then crashing for entire decade of the 80s. 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. Wed
have all given up. It never would have happened.
Bottom line: If TCP/IP had had a real-time price feed, wed still be doing data transfer on floppy
disks.

HYPE CYCLE
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 wasnt 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.
PANTERA BITINDEX
Ive traded currencies for 25 years. The price often diverges from the fundamentals. In bitcoin weve
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 Bitcoins 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 ecosystems
current state. Its 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. Thats Moores 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, weve 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, were past the hype bubble and its 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.

VENTURE CAPITAL WILL DRIVE CONSUMER APPLICATIONS

Bitcoins 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 arent 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 90s. 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 thats 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 didnt
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,

well see some really cool things come out. We cant 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 doesnt work, then the
companies in the space wont work either. Investing into Bitcoin companies isnt 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. Its up to around a $300 million dollar
run rate for 2014 and thats the same as the Internet in 1995. Its also interesting to note that 2015
has already exceeded 2013s and were 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 thats what were doing here in bitcoin. Were
hiring all the developers to build the applications that will be popular over the next 10-20 years.

THE FUTURE OF BITCOIN

The four areas Pantera is focusing on in 2015 are mobile money, cross-border money flows,
security/authentication technologies, and micropayments.
THE UN-LANDLINED SKIPPED STRAIGHT TO MOBILE PHONES

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 thats commonly used is an anachronism itself the un-banked. Thats 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, hes expressed enthusiasm over Bitcoin technology.

THE UN-BANKED MAY GO STRAIGHT TO MOBILE MONEY

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 arent 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. Im on the board of a company called
BitPesa[1] that does remittances back and forth between Kenya and the UK and the United States.
Its a fantastic use case thats 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 theyd be much wealthier and much better off than using
their paper version. (With one third of the Earths landmass covered in trees, paper provides little
protection against currency debasement.)

REMITTANCES

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.

CROSS-BORDER FLOWS

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

SECURITY AND AUTHENTICATION

The last big advancement in financial services was the credit card.
The credit card is so 1950s. 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 cards 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 Targets point-of-sale systems. tThe 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.

LaunchKey[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 youre 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. Itll also give
newcomers peace of mind as they confront something thats 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 customers 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, theyve 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 BRING BITCOIN TO THE TIPPING POINT

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 Andresens Bitcoin Faucet. When we look back in a years time, there is a good chance that
the majority will have received their first bitcoins free via ChangeTip[4].
I believe tippings 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 havent 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, ChangeTips
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 Years, I sent a bottle of champagne to a friend in London. The money gets to him
instantaneously, he orders it from the waiter, and its 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.

CONTENT MONETIZATION

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-articlepurchasing 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. Its 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 publishers 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.
Bitcoins 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, thats multi-millions.

LIVE DEMO
If you havent used ChangeTip yet, its quick and fun. Tipping is a great way to send value to friends
anywhere in the world. Let's do a live demo. Tweet me at @Dan_Pantera and Ill show how easy it
is. The first person to tweet me will get a lunch. OK, thanks, Joe got your tweet. It only takes a
few seconds for me to reply Have lunch on me @ChangeTip. Thats it. Joe has already received
$8 for lunch. Enjoy.

In this case with Joe sitting twenty feet away I could walk over and hand him a $10 bill.
However, if your friend is in Tokyo, paper, metal, and plastic money dont work. Before bitcoin there
was no way to efficiently send small amounts of value. ChangeTip gives us the ability to send value
free and instantaneously to anyone on earth.

If you want bitcoin to go viral, the single best thing you can do is send your friends a tip/coffee/bits.
Be the change.

Thank you.