This is not, to the relief of most, another primer on blockchain or cryptocurrencies, and it is not a breakdown on the difference between the two – I’d recommend that you go here, here, and here for those things, respectively.
Instead, this post is intended to answer some of the most common questions that our Forté team gets regarding the above topics. Fortunately, many better minds have already provided their thoughts on these topics, and I’ve provided links to prior articles and opinions below. Unfortunately, those references are just a small subset of the broader conversation on these topics, so we’d encourage you to provide your or others’ thoughts via email and Twitter.
Q: “Do you believe that blockchain will live up to the hype?”
A: Absolutely. Without a doubt. 100%. Blockchain, as a technology, offers a superior solution to countless problems across a number of industries and business models. Some of my favorite blockchain use cases include a more transparent supply chain, a better health record system, and, near and dear to a VC’s heart, a new form of legal document management (the days of scanning and emailing countersigned pages are nigh!).
There are still a number of problems that need to be solved before blockchain technology can be widely adopted, including, but not limited to, 51% attacks, integration of existing centralized ledgers and new blockchains, and scalability constraints. With those in mind, I would predict that the blockchain boom (and VC returns in that sector) might happen later rather than sooner, but I, also, believe that the impetus on various industries to adopt blockchain-based solutions will reach critical mass by 2020.
Q: “Does Forté Ventures invest in token launches / ICOs / cryptocurrencies?”
A: We do not today and are not likely to start doing so anytime soon. There are several reasons for this answer, but they mostly boil down to two things:
First, participation in any of the various cryptocurrency purchasing opportunities (more on the difference between token launches and ICOs here) falls outside of the bounds of the typical equity and convertible debt investments that our LPs have entrusted us to make. Despite what some may claim, holding a company’s token does not afford a VC the same terms as an equity or debt investment (no matter how outsized the potential returns may be). Thus, it becomes difficult for us to provide value to the company, in the form of guidance, introductions to strategic partners, and board oversight, and to protect value for our investors. This second piece around investor value is especially true given the legal uncertainty surrounding ICOs.
Second, our investment strategy of reducing risk through collaboration and co-investment with our strong network of corporate strategic partners does not fit well with the token / coin model. This is because the benefits to portfolio companies typically provided by strategic relationships, such as privileged distribution channels and technology collaboration, do not necessarily correlate to higher (or less volatile) token prices.
Forté is actively looking for exciting investment opportunities in companies that are using blockchain technology to disrupt various industries, but our desire is to invest in those companies through conventional venture funding, rather than through token launches or ICOs.
Q: “Is Bitcoin a bubble?”
A: In my humble opinion, I would say that, yes, a correction will hit Bitcoin at some point in 2018.
I, by all means, recognize and agree with many of the benefits of Bitcoin and its fellow cryptocurrencies. The circumvention of fallible governments and financial institutions, the reduction in fraud and counterfeiting, and the (near) instantaneous speed and low cost of global transactions are all appealing for various reasons to various audiences.
However, Bitcoin will face several hurdles, as both a currency and as an asset class, in the near future, and one or more trip-ups will lead to downswings in price. A few that are top of mind for myself and others include looming regulatory decisions around the world, high dependency on flawed exchanges (e.g., Coinbase), tension between Bitcoin’s appeal as an investment and as a currency (or its questionable viability as a currency, alone), and a good-old-fashioned crash from Main Street investors buying in on credit.
As with any good debate, key influencers and decision makers have split opinions on the matter. Japanese Finance Minister Taro Aso, who will have a big say in the aforementioned regulatory conversation, is taking a wait and see stance, whereas Fed Chair Janet Yellen came right out and called Bitcoin an “[un]stable store of value”. JPMC CEO Jamie Dimon and Berkshire Hathaway CEO Warren Buffett are probably the most high-profile Bitcoin doubters, but famed investors, including Bill Miller, Marc Andreesen, and Tim Draper, have all come out as both public advocates and investors in the cryptocurrency.
Although the “Bitcoin is a bubble” camp, into which I gladly place myself, is large, there remains a next question that divides pundits. The crux of that question is whether Bitcoin is a bubble more akin to the Dutch Tulip crash or to the dotcom burst. That is to say, will Bitcoin fall and see its value (and legitimacy) lost forever, or will the bubble burst serve as a reset and foundation for a more sustainable, stronger Bitcoin moving forward? The answer to that, in my mind, remains unclear, but I find it difficult to imagine that some form of cryptocurrency (or a group of them) will not emerge as a viable alternative to existing currencies, in due time.
To those friends and colleagues determined to join the investor frenzy, I recommend looking towards ether (ETH) as a Bitcoin alternative. Ether, which functions as a token for purchasing services on the Ethereum platform, is not a direct competitor to Bitcoin, as it is not intended to be exchanged for goods like other fiat currencies. Instead, it fuels the Ethereum platform on which many blockchain startups are being built, so its value should appreciate as more and more blockchain applications are developed and used around the world – instead of appreciating solely based on demand and exchange.