The market continues to be driven by blockchain hype, surging Bitcoin prices and confusion over ICOs. We thought we would share what we have learned about these trends and why they are connected. We acknowledge this may be a bit basic for some while enlightening for others.

Blockchain is the beginning.

Let’s start with a discussion of blockchain, the underlying platform for Bitcoin and other cryptocurrencies, which have been decoupled to allow the use of blockchain in a variety of other ways. Still in its “hype phase,” blockchain is stirring up lots of startup and project ideas — although many don't need blockchain to be successful.

You might recall our blog from several months ago defining  blockchain as a database. As a database, blockchain is useful for keeping records of what changes when an object/item/asset passes from one owner to another as well as other changes made to the database. It’s particularly useful for recording hard-to-track items like diamonds.

Blockchain is also helpful for tracking easily-created, falsified records intended to cheat people out of their rights to an asset. An example might be a land registry in a corrupt country. Although still it its early days, blockchain offers many uses for making markets more efficient and transparent.

Bitcoin and cryptocurrencies.

Knowing that the blockchain leads to Bitcoin and cryptocurrencies like Ethereum and Litecoin, let’s take a look at why cryptocurrency prices are moving so high. LPs and others ask us about this all the time.

On a side note, did you know that Litecoin was created by a developer at Google who was unwilling to accept that Bitcoin’s unsustainable transaction fees were simply the price of doing business?

In reality, the value of Bitcoin is unknown. We do know there is supposed to be a limited amount that can be mined at 21 million coins. The general belief is that over 16 million have been mined thus far. With a 21-million-coin limit, it’s likely the price will go higher as supply is capped.

Another potential reason for the surge is people’s distrust of their governments. A worldwide trend, this is impacting the past practice of storing value by buying gold bars or jewelry.

Now it's easier and in some ways safer to use a cryptocurrency — often in the form of very small Bitcoin purchases. The total value of Bitcoin today, even with the significant run up in price on December 15, is $325 billion while Apple stock is capitalized at over $800 billion. As you can see, it takes relatively few transactions to drive up Bitcoin.

My barber told me recently that he bought $1000 of bitcoin and sold when he made $200 from the transaction. This may be a sign of a bubble or that Bitcoin is accepted as a currency. Remember the late 90s when you could count on your taxi driver (no Lyft back then) for stock recommendations? The major exchanges are now doing future contracts on Bitcoin, which will make its acceptance even more universal. 

ICOs are the next step.

Now this leads us to the topic of ICOs. These are offerings of company equity in exchange for a token. You can buy the token with a cryptocurrency or real dollars. The token may have a stated cryptocurrency value in addition to the value of its call on future enterprise profits.

More often than not, an ICO is an offer of a future piece of software or service of some type. In fact, one of the most successful ICO’s created Ethereum. The way we understand it, it happened when a token was purchased at 40 cents of a Bitcoin for one Ethereum. The hope was that the value of the new crypto would be worth more with time. In the case of this highly successful ICO, it was.

In the end, this is the same as a security. Like a stock, the value transferred to you as an ICO token holder is handled in the same way as a stock certificate for Apple shares. This is why ICOs were banned in China, the US and other places.

In the US, the SEC has authorized ICOs with the condition they are offered with the same level of transparency as securities on an exchange. This led tzero, a subsidiary of Overstock.com, to launch an ICO to build an exchange. The launch was executed by registering the offering with the SEC like you would an IPO. We predict we will soon see a breakout in legitimate ICOs once the exchange is created. 

Check out the tzero website to learn more about the offering. (Note this is not a recommendation for you to buy.)

The entire blockchain ecosystem with its cryptocurrencies and ICOs is the latest, fascinating thing we see at Vestigo. We will look for ways to see how startups are thinking about these new tools.

Mark Casady
General Partner Vestigo Ventures