Bitcoin and Wall Street

A Conversation with Barry Silbert

By yBitcoin Magazine / June 20th, 2014

Ever since Bitcoin emerged fresh from the fertile mind of the fabled Satoshi
Nakamoto in 2009, the investment world has been watching with its usual
guarded—though steadily growing—interest. Over the past year or so, Bitcoin
has garnered headlines for its sizzling-though-volatile pricing, accompanied
by some high profile faceplants (Mt. Gox, Silk Road).

With Bitcoin now a strapping child of 5, all signs indicate that both Wall
Street and Main Street have developed interest. But as every sad-eyed pound
puppy knows, getting noticed and getting adopted are two different stages on
the path to happiness. For Bitcoin to finally earn widespread acceptance and
adoption into the everyday economy, it has become clear that Wall Street will
have to pave the way with the only important endorsement it knows: its
investment dollars. If history is any guide, Main Street will follow.

In order to glean some informed perspective on the ever-evolving relationship
between Bitcoin and Wall Street, yBitcoin had Senior Editor Andrew Hidas sit
down with Barry Silbert, one of the earliest investors in what insiders refer
to as “the Bitcoin space.”

Silbert is a longtime angel investor, chief executive officer of the private
investment firm SecondMarket, and recipient of numerous awards, recognitions,
and media credits. Silbert’s personal investments, coupled with his office
address on Avenue of the Americas and most of his workdays invested in
Bitcoin, indicated to us that he would be best equipped to inform readers
about the relationship status between Bitcoin and Wall Street. The following
is an edited version of his comments.

yBitcoin:Bitcoin has followed a rather jagged path these first
five years. What can you say in general terms about how it has evolved?

Silbert: I see the evolution of Bitcoin occurring in five phases. The first phase began with the launch of the protocol in 2009, followed by a period of experimentation, where you had developers and cryptographers playing around with it, with not much value being created. Fast forward to summer 2011, when you had that first price bubble. That was really, I think, the Bitcoin coming-out party. For the first time, we had a number of market forces coming into Bitcoin, and that kicked off Phase II, which was the early adopter phase, when the first generation of companies like BitInstant and Mt. Gox were formed. That’s also when early adopters like myself got involved.

Phase II went from 2011 to late 2012, which is when Phase III, the venture
capital phase, began. Successful early stage investors started getting more
involved, and that lasted through the past year, 2013. And I think we’re still
right in the thick of that phase now.

I think Phase IV is going to start this year, and it will be the Wall Street
phase. Phase V will follow from there—the phase of mass global consumer
adoption.

What are the prerequisites for Phase IV to occur?

Phase IV has awaited regulatory clarity and some guidance from the IRS as to
how gains on Bitcoin are taxed. The IRS guidance was published a few months
ago. I think it’s very clear that Bitcoin needs to be regulated, and it has
become equally clear that regulators have been paying attention, and that the
risk of Bitcoin now being shut down by the government has been significantly
diminished. That had to happen before Wall Street would get involved.

These recent developments have supplied the proper air cover for institutional
investors to get involved. I don’t know if we’re totally there yet for Phase
IV to begin, but we’re getting pretty close. When you have the likes of
Fortress Investment Group and money managers like Bill Miller, one of the most
successful investors on Wall Street, coming out bullish on Bitcoin, that’s a
big plus. Again, we’re not quite there yet, but you won’t get laughed off the
stage now if you come out and say Bitcoin is a sensible, albeit high-risk,
investment.

So what will be the prereq for Phase V?

Two things will have to happen: 1) the companies that have been on the
receiving end of venture capital money will need to roll out their products to
make it really easy to buy, sell and hold Bitcoin, and 2) The Bitcoin monetary
base, and really more importantly, its daily liquidity, will need to increase
dramatically, probably to the tune of 10X what it is today, in order for it to
be large enough to attract ongoing institutional attention.

I think we’re at the inflection point where Bitcoin has the ability to become
a very sought-after asset class on Wall St. Every large bank now has its
internal team looking at what Bitcoin is and what is likely to happen with it.
And institutional investors have started to dig in, too.

Also, the principals—the traders, portfolio managers and bank execs—have
personally started to invest in Bitcoin on their own. So you look where that
has come from even six or seven months ago, when there was still lack of
regulatory clarity, there was no air cover, and most institutions hadn’t
really heard of Bitcoin or hadn’t taken the time to really dig into it.

Fast forward to today, given all that has happened, what’s really holding back
the money is just that the price has been in decline, and institutional
investors tend to avoid anything where there’s a high probability they’ll have
to mark their investment down. Most investors I talk to, given the potential
that Bitcoin return is likely to be binary—it’s going to be either $5,000 or
more per bitcoin or zero—they have no problem waiting for the price to form a
new base and turn upwards. They would rather buy at $600 or $700 knowing that
the price is likely to increase, versus buying at $450 and running the risk
they might have to mark down their portfolio by 5% when it comes to reporting
time.

So institutional investors are in a wait-and-see mode?

Yes, but that means it’s very different from even six months ago, when the
last Bitcoin price bubble developed. That attracted a lot of attention, and
then when the Mt. Gox exchange exploded and the price dove but Bitcoin proved
resilient, it attracted investors with hundreds of millions of dollars who are
now sitting on the sidelines, who now know about and understand Bitcoin,
understand its investment potential, but are not yet ready to commit. So, I
think we’re setting the stage for what is potentially a rapid increase in the
price as that money starts to move in.

Will that create another price bubble?

I don’t know when the next price bubble will occur, but I’m positive there
will be more of them. The important thing to remember is that in the last two
years, in particular, we have seen some pretty major hits to Bitcoin, whether
it’s China’s on-again-off-again bans, or Apple kicking Bitcoin wallets off its
platform, the bankruptcy of Mt. Gox, or the shutdown of Silk Road. All of
these events had people predicting the end of Bitcoin, and while they have
certainly lent to its volatility, they have also demonstrated how resilient
Bitcoin really is.

So was Mt. Gox ultimately a good thing for the future of Bitcoin?

I think it’s really clear to everyone who’s been involved in Bitcoin for more
than a year or so that there was no great surprise in the Mt. Gox bankruptcy.
I think we would all agree that Mt. Gox going away was a good thing overall,
though certainly not for those who lost their money there. But it was just one
of those first generation Bitcoin companies that needed to make way for the
next generation of companies that are well-funded, well-run and, where
necessary, properly regulated.

What about your own investment of time and money in Bitcoin. Given the
volatility and risk, how confident are you that it will pan out?

I think Bitcoin is either going to be very, very successful, transforming our
financial system and becoming one of the highest returning investments of our
generation, or there could be a total loss of principal. So yes, this is a
huge professional, reputational, and financial gamble, but I’m an
entrepreneur, and that’s what we do.

That said, I’m 100% confident that digital currencies and associated protocols
are here to stay. And I’m highly confident that Bitcoin is the winner among
those. So, I am about as all in as you can get now. I’ve turned SecondMarket
over to my senior management team, and am pretty much spending all of my time
on Bitcoin. That includes launching the Bitcoin Investment Trust.

I’d also highlight that some of the most respected thought leaders and
investors have been, and continue to be, very positive on Bitcoin’s prospects
and the investment opportunity therein. Venture capitalists have invested
almost $200 million into Bitcoin companies, with the 2014 inflow expected to
pass $300 million. And these funds are coming from top-tier VCs like
Andreessen Horowitz, Google Ventures, Union Square Ventures, General Catalyst,
Accel, etc. While VCs may not always pick the right companies in a particular
space, they’re usually adept at picking the right trends and industries.

VCs are also very good at identifying ecosystems into which the brainpower and
human capital are flowing. All the big tech companies either have internal
labs working on Bitcoin projects, or their developers and engineers are
working on them nights and weekends. You’re also now seeing top talent
migrating to Bitcoin startups from tech giants like Facebook and Amazon.

Tell us about the Bitcoin Investment Trust.

The BIT is similar in structure to the SPDR Gold ETF, in that it is an open-
ended vehicle that passively holds and returns the price performance of an
underlying asset. In the case of the SPDR Gold ETF, the vehicle holds gold,
whereas the BIT passively holds Bitcoin. As such, the BIT was designed for
institutional and high net worth investors to put meaningful capital in
Bitcoin in a safer, more secure way, just like purchasing any other titled
security. Consequently, because the trust gives investors title, the BIT is
also available for purchase through certain types of IRAs and 401Ks. It’s
currently private and open only to accredited investors via our website
(www.BitcoinTrust.co). If things go as planned, we will bring the trust to a
publicly traded setting in the fourth quarter of this year, where it will
trade on the OTCQX, the top-tier electronicmarketplace operated by OTC
Markets. We’ll eventually look to transition it to the New York Stock
Exchange, but like many ETFs, there is a lengthy registration process. We
currently have $50 million of net assets in the trust and expect that figure
to increase greatly once it is available to the public later this year.

Why do you figure Bitcoin will win out over other digital currencies?

There are more than 200 alternative currencies right now. Many of them are
kind of get-rich-quick, pump-and-dump schemes, where the creators/adopters
launch and promote them, but don’t provide a useful service other than giving
people a chance to gamble.

Those companies aside, Bitcoin should beat out the rest of its competition for
two reasons.

One: Bitcoin has the greatest brand awareness and the first mover advantage.
There is $5 billion being held in wallets of Bitcoin owners around the world
who are unlikely to switch over to an alternative currency unless something
catastrophic happens with Bitcoin itself.

Second: Bitcoin at its core is technology, and more importantly, it’s an open
source project that is going to continue to adapt to the market. So if an
alternative currency starts to gain traction, there’s nothing to prevent
developers from incorporating into Bitcoin the unique features propelling the
new protocol. Bitcoin is not static, so it should just get better and better
over time.

Are there any viable alternatives?

A few. One being Ripple, which, per full disclosure, I have an interest in as
an angel investor in its developer, Ripple Labs. Litecoin and Dogecoin are
others that seem to have the most going for them.

Care to predict how and when the final phase leading to worldwide Bitcoin
adoption will occur?

I’m highly confident that in 2014, we’ll start the Wall Street phase. And that
will lead, either in 2015 at the earliest, but perhaps not till 2016, to Phase
V and worldwide adoption. But again, we need products that make it easier to
obtain, hold and use Bitcoin, and the monetary base needs to grow much larger,
with much deeper liquidity. We need roughly $50 billion of Bitcoin and $1
billion traded daily before Bitcoin fulfills its promise of becoming a global
payment system and remittance platform.