Who is Ryan Galt, Idiots?
Yesterday, I wrote about my exciting partnership with CoinDesk, which was supposed to start on Monday. However, it looks like you’ll get your first taste of “Ryan Galt” even sooner. My first CoinDesk articles may hit this weekend, as I made the last minute decision to head down to Miami for the North American Bitcoin conference. The editors and I agreed that it would be better for me to write under the new name for pieces on CoinDesk’s site so readers aren’t immediately skeptical when they open one of my posts. (I’ll remain a two-bit idiot on twitter and for this newsletter.) The new pseudonym scratches my libertarian itch, helps provide cover when I inevitably sign emails “Ryan” instead of TBI, and looks like I’m not trying to hide anything.
Speaking of not hiding anything…today, I’d like to tell you why my team at Inscrypto is working on the cure for Bitcoin’s volatility. Many of you have asked about the startup, some have even signed up for our beta (thank you!), and after this week’s write up in American Banker, I wanted to provide more color. Before you skip to the Tid Bits, keep in mind that I’m only focusing on why we formed Inscrypto. This Bit is more market thesis than product pitch.
For starters, I wake up every day unreasonably excited about Inscrypto because I believe that it can be the first company that effectively separates bitcoin the currency from bitcoin the speculative investment. In short, our product could securitize the holding risks of bitcoin. We plan to work with wallet services like Blockchain, Circle, Coinbase, etc. to guarantee the underlying purchasing power of “Inscrypted” bitcoins sitting in consumer and merchant wallets. Ideally, depositors won’t even know it, but they will be using our tech to offload price volatility onto professional investors. Simple idea, complex solution, and a potentially lucrative payout. We know that someone is going to solve this tricky problem eventually, and we hope it will be us.
I’m not going to elaborate on product specifics yet (obviously), but I will outline the problem we are solving, the failure of existing financial product alternatives, and why volatility is so difficult to contain.
As most of you know, Bitcoin’s price swings stem from the fact that it is simultaneously “e-cash” (currency) and “e-gold” (investment). This is problematic because combining the two usually means that one isn’t acting as it should. An investment with a 0% return is a crappy investment, and a currency that can swing 10%+ or more in a day is a crappy currency. Yet the ratio of bitcoin held for those vastly different purposes changes constantly and unpredictably. Expectations of good news underpin investors’ rationale for treating bitcoin as a speculative investment that could skyrocket in value, and yet the good news itself depends on consumers and merchants who use bitcoin as a stable unit of account. It’s a circular reference.
Bitcoin may go to $100k or it may go to $0, but one thing is all but certain—it will not trade at a constant level. In that respect, critics are correct to say that it sucks as a currency today. But will it always?
Many believe the fix is a stronger derivatives market, but Coinbase’s Fred Ehrsam told Wired last week that the current “derivatives, futures, and options market is largely underdeveloped”, making today’s “counter-party risk unacceptable”. In other words, today’s derivatives are garbage. Furthermore, they could be for some time. Speaking from Munich at the DLD Conference, Circle’s Jeremy Allaire suggested that hedging products wouldn’t improve until central governments provided better regulatory clarity. Only then will large, well-capitalized financial institutions from financial Meccas like New York and London build their own market-making platforms.
I’m skeptical, however, that even a healthy, liquid derivatives market could help individuals and smaller companies properly hedge against volatility. It’s unlikely that small depositors would be buying their own bitcoin futures, and even if they did, it would be expensive enough to offset any value gained from using Bitcoin as a payment system in the first place. Besides, we as consumers (speaking from the U.S.) are used to low inflation, “sticky” prices and stagnant wages. We simply aren’t conditioned to anticipate a need to protect the purchasing power of our savings.
What will really drive down bitcoin volatility are better methods for connecting bitcoin “banks” with the capital at their Wall Street counterparts. I’m sure that in an environment where some bitcoin-related startups struggle to open checking accounts, Inscrypto won’t face any shortage of hurdles (or critics from within the Bitcoin community), but we intend to build the pipes that connect Wall Street assets and bitcoin wallets. I know for a fact that algorithmic trading platforms will be introduced this year that improve liquidity and mop up some of bitcoin’s excess volatility. We’re going one step further — co-opting Wall Street to securitize all bitcoin volatility. We know there is a way to effectively separate the currency and the volatile investment. We know that there is an institutional market hungry to absorb the risks and soak up the rewards of bitcoin. And we know how to build the product. If we nail it, it could truly change the way ordinary people interact with the underlying Bitcoin technology.
Still, there is an obvious caveat: Inscrypto’s success depends entirely on execution, and that requires an exceptional team capable of building a strong foundational product and navigating murky regulatory waters. (We’re recruiting for our team in Boston and SF so drop me a line!) If the stars align, we’ll build a special company that provides an extremely valuable service to individuals, merchants, investors, and the entire Bitcoin ecosystem.
Someone will devise a method for containing bitcoin volatility. We think it will be us, but if we’re wrong, we’ll still be happy.
Because at the end of the day, we’re still holding some un-Inscrypted bitcoin, too.
Now for Today’s Tid Bits:
CoinSeed Announces $5m Investment in BitFury Mining Gear
http://ow.ly/sV4ee
Pinterest Competitor Fancy Adds #Bitcoin Payments
http://ow.ly/sV47Y
Naughty America Joins Porn.com In Bitcoin Acceptance
http://ow.ly/sV42W
Ethereum Launches ‘Cryptocurrency 2.0’ Network
http://ow.ly/sV4bw
Pirate Party Prompts Successful Campaign Finance Ruling for Bitcoin
http://ow.ly/sV4h9
Would JPM’s Dimon ever accept bitcoin? (via CNBC)
http://ow.ly/sV4km
Bitcoin-themed banner to be waved during Super Bowl in MetLife Stadium.
http://ow.ly/sV4tZ
Looking forward to seeing some of you in Miami! For those who can’t make it, just a reminder that I will be tweeting about it all weekend under the @twobitidiot twitter handle.
Cheers,
TBI
January 26, 2014 at 11:57PM
