Sats Flow: z16a Killer

Ten31 Co-Founder and Managing Partner Grant Gilliam gave a keynote talk at the August 2024 Baltic Honeybadger Conference on how sats flows will totally reshape investing at all scales.

Bitcoin on the Ballot

Selected Potential Impacts of the 2024 Election

President-elect Donald Trump has aggressively courted the support of bitcoin-aligned voters and interest groups over the course of his campaign with a variety of proposals friendly to the bitcoin ecosystem. Trump gave a lengthy keynote speech at the Bitcoin 2024 conference and has surrounded himself with advisors like Cantor Fitzgerald CEO Howard Lutnick, who recently announced a multi-billion dollar bitcoin-backed lending facility after having been adamantly pro-bitcoin for years. Meanwhile, Republicans appear poised to capture control of both chambers of Congress (a so-called “Red Wave”), likely reducing friction for Trump’s legislative agenda and approval of his appointees to key cabinet positions. 

We acknowledge that campaign promises often diverge sharply from actual policy implementation and the President-elect may end up disappointing bitcoin enthusiasts in one way or another, particularly given his historical skepticism toward bitcoin. However, the combination of factors listed above could drive substantial tailwinds for bitcoin holders and the broader bitcoin technology ecosystem if the incoming administration approximately follows through on its proposals. The following is a brief summary of selected key impacts we see as most likely over the next four years if President-elect Trump’s campaign rhetoric translates to actual policymaking and cabinet appointments. In the optimistic case for bitcoin in President Trump’s second term, the tailwinds discussed here merit the serious attention of all individual investors, institutional allocators, and fiduciaries. 

Strategic Bitcoin Reserve

At the Bitcoin Conference in July 2024, Wyoming Senator Cynthia Lummis proposed a bill that would direct the US Treasury to build a “strategic bitcoin reserve” of 1 million bitcoin to be acquired over 5 years and held for a minimum of 20 years. The same day, President-elect Trump endorsed the idea of the US building such a reserve, though he did not specify a target amount. While exact details behind the implementation of any such plan are still to be determined, this initiative would add a net new bid of up to ~550 bitcoin per day (relative to current daily new issuance of ~450 bitcoin) from a price-inelastic buyer with an infinite budget who has historically been a net seller of bitcoin. 

To the extent the US does implement this plan, or is even thought to be seriously considering it, other large nations will likely be incentivized to make similar moves given bitcoin’s fixed supply. Several smaller nations including El Salvador and Bhutan have already been openly building their bitcoin reserves, but the world’s most powerful government doing so would materially raise the profile and credibility of this strategy, thus opening up a powerful new demand spigot for bitcoin (and consequently for the companies building the most successful bitcoin enabling technologies).

Reduction of Regulatory Risk

Given bitcoin’s well-established regulatory framework as a commodity (acknowledged repeatedly by both the SEC and CFTC across multiple administrations), the US government’s long history of open market sales of bitcoin, and the recent launch of spot bitcoin ETFs by massive institutions such as BlackRock and Fidelity, the left-tail risk of bitcoin ownership being “banned” in the US was already low and declining by the year. That said, the election of President Trump and a Red Wave in Congress further reduce the risk of adversarial regulatory action against key functions like bitcoin self-custody and bitcoin mining, both of which President-elect Trump has explicitly committed to protecting. 

Given Trump’s rhetoric and campaign platform, his appointments for key cabinet and administrative positions — which a Republican-controlled Congress would likely approve without much friction — are all likely to be more friendly to bitcoin holders and technology companies than their predecessors, creating a clearer and more standardized regulatory environment for founders and developers in the space. In particular, new leadership at the Treasury Department, FDIC, and OCC (and potentially the Federal Reserve later in Trump’s second term) should solidify better access to legacy banking rails for bitcoin companies, which had become a notable sticking point under the previous administration. Meanwhile, a Trump-appointed Attorney General would be likely to overhaul the DOJ’s recent trend of regulation by enforcement of financial rules that are often poorly defined or inconsistently enforced. 

Reduction of Career Risk

The above points further reduce the “career risk” capital allocators naturally face when advocating for exposure to a new technology like bitcoin. In a scenario where the world’s most powerful government is acquiring bitcoin (or at least explicitly protecting and promoting its use), institutional investors, corporate treasurers, and fiduciaries of all stripes will increasingly have the air cover they need to leg into bitcoin positions with the conviction that a catastrophic regulatory outcome is largely off the table. To take it a step further, if the US government and competitive foreign treasuries begin openly and aggressively acquiring bitcoin, capital allocators will increasingly be required to develop a serious bitcoin strategy to avoid becoming laggards in the adoption of a geopolitically significant technology. In such an environment, career risk will come from ignoring bitcoin rather than embracing it. 

Meanwhile, a clearer regulatory landscape and government-level adoption of bitcoin should help pave the way for more executives at legacy finance, technology, and energy companies to evaluate integrating bitcoin into their products and technology stacks across a variety of use cases. 

Continuing / Accelerating Fiscal Deficits

The US has spent the past two Presidential terms running peacetime fiscal deficits of unprecedented size, driving the publicly held debt to GDP ratio to ~100% for the first time since the 1940s. The CBO and the Treasury Department both project substantial increases over the next decade, and recent estimates suggest President-elect Trump’s policy platform (which combines sustained high spending with new tax cuts) will boost this metric even further. An acceleration of this trend under the new administration (enabled by an accommodative Congress) would likely be stimulative and inflationary on the margin, particularly if paired with the aggressive tariff policies the President-elect has floated, driving both individuals and institutions to seek exposure to hard assets like bitcoin or gold that have historically performed well in such environments.

US Treasury Department budget deficit projections, 2023.

At the same time, the growing burden of federal interest expense – which recently surpassed defense spending and will potentially exceed Social Security spending next year – will only get heavier as deficits widen under President Trump and inflation threatens a resurgence, potentially driving the need for more accommodative monetary policy by the Federal Reserve, which would also tend to drive more flows toward assets like bitcoin that best resist dilution. All such adoption growth would also be a tailwind for companies building the tools and services that enable bitcoin onboarding and extend the asset’s utility.

Greater Integration into Traditional Financial Services

With greater regulatory clarity and a more neutral or accommodative set of financial regulators at the Treasury Department, SEC, FDIC, and elsewhere, traditional banks and asset managers will likely have more leeway to enter the bitcoin custody market and provide associated bitcoin-native financial services. Bitcoin — which is highly liquid, fungible, permissionless, and globally salable 24/7/365 — has already proven itself to be uniquely pristine collateral, as evidenced by Unchained Capital’s 7+ year track record of originating more than $700 million in bitcoin-backed loans without a single loan loss across multiple turbulent market cycles. With fewer regulatory complications to bitcoin custody and financial services, we expect this “super collateral” value proposition will become much clearer to traditional lenders during President Trump’s second term.

Specifically and most significantly, a bitcoin-friendly President and Congress will likely allow for the repeal of SAB-121, a piece of SEC accounting guidance that has historically made bitcoin custody cost-prohibitive for traditional financial institutions. This guidance was repealed by Congress earlier this year in a rare display of bipartisanship, but that legislation was subsequently vetoed by President Biden. While BNY Mellon was recently granted an exemption to this guideline, successful removal of the rule would help clear the way for broader bitcoin participation among a wide base of banks and custodians, driving incremental institutional demand for bitcoin. This development would also potentially represent a tailwind for existing custody providers and bitcoin infrastructure businesses that may become attractive takeout targets among this large acquirer universe of banks and asset managers.

Continuation of US Bitcoin Mining Infrastructure Buildout

President-elect Trump has worked closely with several large, publicly traded bitcoin miners during his campaign and has made a variety of positive public comments about supporting the mining industry in the US. While various states like Texas and Tennessee have been highly accommodating to bitcoin miners over the past few years, several federal overtures such as the proposed DAME tax and an invasive but ultimately aborted “emergency survey” targeting bitcoin miners have threatened to send the industry into other jurisdictions. A more pro-bitcoin administration and Congress would ensure the industry can continue to grow sustainably in the US, a tailwind for the miners themselves, the energy and power industries that are increasingly intertwined with bitcoin mining, and adjacent infrastructure providers. 

Outperforming Bitcoin

Reckoning with the new cost of capital

At Ten31, our central thesis – which we’ve written about extensively elsewhere – is that bitcoin is superior monetary technology, and as understanding of it distributes over time, all self-interested actors across industries will ultimately have to adopt it in some form, driving trillions of dollars of demand for enabling technologies and infrastructure to allow for that adoption. Communicating that thesis to capital allocators has its own hurdles given bitcoin’s relative infancy and volatility, though every year brings this view closer to the mainstream, as most recently evidenced by record-breaking launches for spot bitcoin ETFs and the capitulation of previously ardent critics like BlackRock’s Larry Fink. But once we’re past that discussion, the next question we typically hear from both dedicated bitcoiners and bitcoin-curious allocators is: if our bitcoin thesis is correct, the asset will likely see huge upside over the coming decades, so how can Ten31’s investments possibly outperform that hurdle? 

This is an important question and one that is foundational to everything we do at Ten31 – we were the first investment platform to explicitly address this theme nearly three years ago, and it has informed all of our investment decisions since then. If investors agree with our view of bitcoin’s future adoption, they can always simply allocate directly into bitcoin to express that thesis. In the same way, the Ten31 team and all the founders we support could be spending our scarce time at larger companies drawing salaries to stack sats rather than investing in and building innovative bitcoin infrastructure, likely foregoing some near-term bitcoin accumulation in the process. As a result, we evaluate every investment we make relative to its potential to outperform bitcoin over relevant time horizons, and we seek to build a portfolio that can collectively do the same. At the end of the day, bitcoin’s performance is our cost of capital. 

This is undoubtedly a high bar to clear, and many investors attempting to hurdle it will fall short. However, for a platform like Ten31 with differentiated deal flow and superior investment selection, the case for this outperformance is much stronger than might be immediately obvious when first considering bitcoin’s expected price trajectory over the coming decades. As the largest investor focused exclusively on the bitcoin ecosystem, Ten31 has deployed over $130 million into 36 of the best companies – including both blue chip “picks and shovels” providers and forward-thinking incumbents who were not originally “bitcoin companies” – that will directly enable and benefit from bitcoin’s adoption growth, and we have high conviction that this portfolio and our future investments will deliver levered returns on bitcoin.

The 21,000 Foot View

To build the high level intuition underpinning this thesis, we’ll start with a caveat: if you’re reading this, you should own bitcoin. Allocations to bitcoin itself and bitcoin-linked equities are not mutually exclusive, just as ownership of an internet-connected smartphone is not mutually exclusive with owning shares of Apple or Google – the potential cash flows and expected returns of the latter are a direct function of the utility and adoption of the former. 

Owning bitcoin very likely offers more economic upside to a user than owning the latest iPhone, but that expected price upside forms the foundation of the bullish case for bitcoin infrastructure: ongoing and sustained growth in bitcoin’s price necessarily implies ongoing growth of bitcoin adoption (more users, businesses, and governments coming into the market to utilize bitcoin in a myriad of ways), which in turn implies growing demand for the technologies enabling and adding value to that same adoption. If you’re bullish on bitcoin, the only coherent position is to also be bullish on the infrastructure that will enable and propel its growth. 

Many investors inadvertently take an internally inconsistent stance on bitcoin technology investments, arguing that since bitcoin’s expected price performance is so strong, it won’t be possible to outperform bitcoin with technology investments in the space. The key disconnect in this logic is that these technology providers are directly enabling and benefiting from the underlying dynamics driving that price growth. It’s certainly reasonable to take the view that the vast majority of alternative strategies (e.g. generalist venture capital and private equity) will not outperform bitcoin, but Ten31’s strategy is not attempting to drive outperformance with investments in some uncorrelated theme; rather, our investments are directly strapped to the rocket of bitcoin’s adoption growth across payments, financial services, energy and power, consumer technologies, and eventually every industry on earth. Bitcoin-levered equity is therefore the only strategy with a durable opportunity to outperform bitcoin in the coming decades.¹

Moreover, there is strong historical precedent for this dynamic playing out in other industries. The best equity investments in the bitcoin ecosystem will be leveraged plays on bitcoin adoption, just as the leading infrastructure and technology providers in oil & gas and pharmaceuticals have historically been leveraged plays on their underlying themes:

Getting More Granular

With that broad framework in mind, we can delve deeper to illustrate how this outperformance might play out in practice for Ten31, starting with the hypothetical case of an individual investment in our portfolio. A critical precept as we make this evaluation is that Ten31’s funds operate with a standard 10-year life, which means – contrary to a misconception that often plagues investors thinking through these dynamics – that we are not trying to outperform bitcoin over an indefinite, open-ended future, but rather over a defined 10-year window. Bitcoin may well go up forever in purchasing power, but our task as fund managers is to deliver superior risk-adjusted returns levered to bitcoin’s performance over the span of a given 10-year fund.

The most straightforward and obvious way to do this would be to provide investors with expedited dollar-denominated returns – said another way, our best investments should be able to drive 10-100x dollar returns over a shorter period than bitcoin itself and thus higher IRRs than bitcoin. For example, an emerging leader in bitcoin technology (or a forward-thinking player from a traditional vertical leveraging bitcoin in creative ways) might return 50x over a 5-year investment window while bitcoin appreciates “only” 10x over the same time frame. In practice, these expedited returns will be driven primarily by traditional exit events like acquisitions and initial public offerings (IPOs), though we expect acquisitions will be the more common path near-term.

If bitcoin’s ongoing adoption trajectory continues to look much like that of the internet several decades ago, incumbent players will experience progressively more disruption to legacy business models and see growing strategic value in many of the companies in the Ten31 portfolio. This increasing strategic awareness of and interest in bitcoin-linked technology will likely start in the verticals most clearly affected by bitcoin’s properties – financial services and fintech, payments, credit & lending, oil & gas, power & utilities – but will ultimately expand outward to touch virtually every industry on earth, as we’ve detailed in prior writing. As this incumbent interest spreads, the most expeditious and capital-efficient path to integrate innovative bitcoin technologies will in many cases be acquisitions of the leading bitcoin companies that have already developed differentiated technology stacks, expertise, network effects, customer relationships, and brand equity (i.e. strategic acquirers will often choose to buy vs. build). 

When acquirers (or public markets investors evaluating new IPOs) take action, they will underwrite their valuations of the leading bitcoin companies by projecting the expected future cash flows of their targets, which will be at least partially a derivative of expected future bitcoin adoption. These acquirers and investors will be willing to pay the discounted present value of a bitcoin company’s future cash flows, in effect pulling forward bitcoin’s expected future performance and allowing early investors in acquired or newly-public companies to capture bitcoin’s price appreciation faster than they would have by holding the asset itself. 

To really dig into how this might work and the drivers that could flex outcomes higher or lower, we can posit both an illustrative outlook for bitcoin’s price over the coming decades, as well as an operating profile of a hypothetical early-stage bitcoin company with the kind of growth trajectory and margin expansion typical of a top-quartile software or technology business:²

Given the hypothetical projections above, how might a strategic acquirer or IPO investor evaluate this target? While the answer can vary substantially based on the acquirer’s discount rate, the company’s maturity when the acquisition is made, and many more factors, we can establish some basic error bars. For instance, assuming an initial investment by Ten31 in 2024 and an acquisition of this hypothetical target nine years thereafter (in this case, 2033), an acquirer’s valuation might look something like this:³

For investors who deployed capital into this hypothetical company at the Seed or Series A Stage, exit valuations in the range above would drive highly attractive returns that would outperform bitcoin in virtually every scenario, even ignoring any potential synergies (e.g. cross-selling or back office rationalization) an acquirer might be able to achieve, which would serve to push exit valuations even higher:

For those most concerned with bitcoin-denominated returns – which doesn’t yet describe many institutional investors but certainly applies to the Ten31 team – it’s important to highlight that the above return profiles equate to earning more bitcoin than was foregone in the initial investment. If Ten31 made a $1 million Seed stage investment in this company at a $15 million valuation in Year 0 (2024) with bitcoin’s price at ~$65,000 and achieved a ~86x dilution-adjusted exit in Year 9 (2033) with bitcoin’s price at ~$1.2 million, we would have effectively invested 15.4 bitcoin and returned the equivalent of 72.9 bitcoin, a 4.7x multiple on foregone sats. Note also that in most cases in the above scenario analysis, an acquisition of this nature even in later years would yield an IRR superior to bitcoin liquidated much earlier on, meaning an early-stage equity investor would be more than fairly “paid to wait” for an exit, even in bitcoin terms.

The more bullish an acquirer or public markets investor is on bitcoin’s long-term adoption growth, the more they should be willing to pay for the company’s equity all else equal. Even more importantly, as bitcoin adoption grows and its market cap rises to levels only achieved by the largest, most liquid assets in the world, its staying power will become more obvious and assured, and it will seem progressively more de-risked to both corporate incumbents and large institutional investors (including the world’s largest asset managers). This growing certainty and comfort in bitcoin’s longevity will allow acquirers and investors to a) more confidently and optimistically forecast cash flows for leading bitcoin businesses and b) apply lower discount rates to those cash flows, both of which will tend to drive higher valuations for the best companies with a bitcoin strategy. The Lindy Effect will work just as well for bitcoin-levered companies as it has for bitcoin itself. 

Finally, investors in the most successful early-stage bitcoin companies will benefit from a few additional levers that should further amplify returns:

• First off, Ten31 estimates roughly a 100:1 mismatch between cumulative funds raised for broader “crypto” funds relative to bitcoin-focused vehicles, meaning that investors deploying into this ecosystem today can often get deals done at valuations 25-75% lower than what might be expected in comparable rounds in broader crypto or tech thanks to the relative dearth of capital currently chasing the bitcoin ecosystem. Ten31 in particular benefits from this dynamic thanks to our deep network, reputation among founders, and our partners’ long track record in the bitcoin space, which have collectively allowed us to lead rounds or serve as exclusive partner for over 80% of the capital we’ve deployed, often at advantaged entry valuations. 

• Meanwhile, at the end of the investment life cycle, returns to early-stage investors could be compounded by the growing sense of urgency and optimism that typically accompanies the later stages of bitcoin bull cycles, with the resulting spike in corporate and investor appetite likely supporting higher exit multiples for the best bitcoin businesses at local cycle tops (a dynamic that could become particularly common over time after a few early movers have set a precedent for acquisitions). 

It’s still early, but Ten31 has already seen evidence of all these dynamics playing out in our portfolio, as several of our larger investments have undergone 20-30x valuation markups since initial deployment a few years ago while bitcoin’s price has increased only 5-6x over the same period. While these markup events still have yet to be monetized, they stand as solid early evidence that the market is validating our thesis that forward-thinking companies building on bitcoin can drive levered returns on bitcoin’s performance. 

Downside Mitigation

Another angle on this question that investors should consider is the potential downside volatility mitigation that a portfolio of bitcoin-levered equity positions could provide across bitcoin price cycles. Anyone considering an allocation to bitcoin inevitably notices its price volatility right away, as the asset’s history is littered with examples of 50%+ drawdowns (only for bitcoin to eventually jump back to new all-time highs). However, the same is not true for the overall trajectory of bitcoin’s adoption, which generally seems to move consistently up and to the right over time. The process of a user coming to understand bitcoin is typically a one-way function regardless of near-term price volatility, as evidenced by HODL Waves – which illustrate a consistently growing proportion of bitcoin buyers turning into long-term holders – as well as persistent growth in unique on-chain entities and the number of bitcoin addresses with balances >0.1 bitcoin. 

The users that continue to hold and interact with bitcoin across price cycles do so because bitcoin solves some underlying problem for them: a superior long-term store of value, a rail for cheaper remittances, a means of escaping hyperinflation, and many other use cases. Bitcoin’s unique properties can solve a variety of problems at the individual and enterprise levels regardless of the vagaries of short-term price action, and we expect a growing awareness of these properties to drive progressively greater appetite for bitcoin technology acquisitions among a diverse set of strategic players, even during price drawdowns. 

For example, oil majors like Exxon and ConocoPhillips are increasingly recognizing bitcoin mining’s potential to monetize otherwise wasted resources like vented or flared gas, and we expect this convergence to accelerate over the coming decade since mining represents a unique and unprecedented source of revenue for the energy industry. Meanwhile, power grids have become progressively more intertwined with bitcoin mining over the past several years, as mining represents a unique flexible power load that – unlike traditional data centers – can be switched off and back on almost instantly to accommodate a grid’s unpredictable needs. While interest in these applications will no doubt be higher during bull markets, neither of these use cases are direct functions of bitcoin price gyrations, as clearly demonstrated by bitcoin network hashrate increasing more than 300% from 2022 to 2024 even as bitcoin’s price ranged anywhere from 30-80% off its prior cycle highs during that same interval – a dynamic that directly benefited several Ten31 portfolio companies during this period.

Various other verticals where founders are building thriving bitcoin businesses not directly tied to bitcoin’s price include payments and remittances, which can drive substantial disruption to legacy infrastructure across market cycles as long as bitcoin remains sufficiently liquid; on / off ramps that see increased trading volume during both upside and downside volatility; and consumer applications that can leverage bitcoin’s unique properties for new use cases regardless of price swings. The Ten31 portfolio has representation from all these sectors, and we believe category leaders in each vertical can drive favorable monetization events for early investors even during bear markets.

To be sure, we certainly expect our portfolio to perform better during periods of more bullish bitcoin price action, but our investments are fundamentally a levered play on bitcoin adoption, not necessarily bitcoin price. Over a longer time frame, those two will largely look the same as price follows adoption, but over shorter intervals they can decouple in either direction: price can outrun underlying adoption growth during periods of leveraged euphoria, and underlying adoption typically continues growing even during drawdowns. Indeed, many of our companies saw exactly that dynamic this past bear market, and we would expect that scenario to become more common as bitcoin technology becomes entrenched into more industries and its perception becomes more de-risked, offering another lever for periodic outperformance of individual investments relative to bitcoin’s price.

Sats Flows

A final and unique driver of potential outperformance for bitcoin companies is their ability to generate positive bitcoin-denominated cash flows, or “sats flows.” As Ten31 first discussed when we coined the term several years ago, companies that understand bitcoin today (whether they’re building enabling technologies for the ecosystem or are simply leveraging bitcoin’s properties to build an unrelated business) are in the uniquely advantaged position of being able to accumulate (or distribute to investors) a greater share of bitcoin’s fixed supply than laggards that only come to understand bitcoin years from now. As we said almost three years ago, those companies that can combine this early understanding of bitcoin with a profitable business model are therefore positioned to effectively become “bitcoin miners” that use their operations to acquire more bitcoin than they could otherwise accumulate by buying spot with the same starting capital. Critically, though, in most cases these businesses will be both far less capital intensive and have far more durable competitive advantages than traditional bitcoin miners.

A major theme of Ten31’s investment process is therefore evaluating how quickly businesses can achieve net positive cash (sats) flows, and bitcoin is a forcing function biasing founders toward this outcome. Just like Ten31, the best founders consider bitcoin their opportunity cost, and they are universally focused on flipping to profitability as quickly as is practical so they can begin accumulating bitcoin. Meanwhile, thanks to the relative scarcity of institutional capital historically focused on bitcoin, these founders have not grown accustomed to coming back to market for another fundraise every ~12 months to sustain unworkable unit economics. As a result of these dynamics, the vast majority of our portfolio companies operate on incredibly lean teams, and several have already paid out bitcoin dividends to investors. 

While we expect that the majority of our fund returns in the coming decade will be driven by more traditional monetization events like acquisitions and IPOs, sats flows from efficient, profitable companies can further amplify performance. In some cases these sats flows could return an investment’s foregone bitcoin within a 10-year fund life even before any potential exit event of the underlying equity. For example, in the case of the illustrative company analyzed above, an investment could return 1x its foregone bitcoin solely through bitcoin dividends in as little as 6 years (and in most cases generally in less than 10 years) depending on a handful of variables:

Meanwhile, over the same period, this illustrative investment could drive positive bitcoin-denominated returns (i.e. returns that would more than compensate for foregone bitcoin) even if this company remained a private, independent sats-flow machine indefinitely:

While these returns would spill outside the boundaries of a 10-year fund life construct, investors in such a fund would still benefit from these longer term bitcoin returns either via 1) in-kind distributions of equity positions in this company at the end of the fund life or 2) secondary sales of equity positions to other financial buyers at the close of the fund. In either case, we would expect shares in a bitcoin-producing machine with a dominant market position to be highly attractive as bitcoin’s new supply issuance trends to zero and demand increases exponentially. 

Alternatively, this company could use some of its free cash flow to accumulate bitcoin on its balance sheet – a strategy we’ve discussed at length in prior essays – which could support materially higher ultimate equity value for early investors in the event of a more traditional exit. This accumulated bitcoin treasury would effectively establish a floor value for a liquidity event, and in some cases the uplift in the value of the accrued bitcoin relative to the investment’s entry valuation could by itself drive equity value outperformance vs. bitcoin.

In the case of this hypothetical company, accumulating ~200 or more balance sheet bitcoin would drive equity value uplift (relative to the Seed Round valuation) in excess of bitcoin’s returns even before considering the discounted present value of the operating business.

Once is Happenstance, Twice is Coincidence…

So far, we’ve established that individual investments in the best bitcoin companies have the potential to outperform bitcoin within a typical fund life by pulling forward bitcoin’s future expected performance through traditional exits like acquisitions and IPOs, mitigating near-term price downside through leverage to ongoing adoption trends, and / or sweeping free cash flows to bitcoin. But however we conceptualize a single investment outperforming bitcoin, the ultimate question any individual or institutional allocator will have to ask is whether the same claim can be made at the portfolio level – given the risk and failure rates associated with early-stage companies, what would we have to believe for a fund composed of 20-30 investments to have a chance of outperforming bitcoin? 

Assuming a $100 million fund ratably deployed over three years⁶ and a range of monetization outcomes similar to what we illustrated in the hypothetical investment above (and similar to outcomes for the best early-stage venture investments), we can envision a wide variety of scenarios where a fund could outperform even a very bullish price trajectory for bitcoin over the next decade:

As with the individual investment profiles above, this analysis is highly illustrative, but it paints a realistic case that an investor with access to the best deals and strong investment judgment has a path to building a portfolio that can meaningfully outperform bitcoin over a 10-year fund life, often by several multiples. We can make a few additional observations on the above: 

• In Scenario A, which posits 4 monetization events (a 16% hit rate in a portfolio of 25 companies) evenly spaced across years 3 through 9, this portfolio would return a post-carry IRR substantially above bitcoin’s in virtually every scenario, even relative to the best possible bitcoin IRR in this projection period. 

• In Scenario B, which assumes a more optimistic 6 monetization events – two in each of years 5 and 7 and one in each of years 3 and 9 for a 24% hit rate – the portfolio would outperform bitcoin’s 10-year IRR and its maximum possible IRR even if the portfolio were underweight its winners and if those winners averaged exit multiples well below 100x.

• Even in less favorable outcomes like Scenario C, which assumes only two monetization events in years 5 and 7, the fund IRR would still exceed most achievable bitcoin IRRs. 

• In any given scenario, returns from an investor’s hit rate could be compounded by skillful sizing. If this fund were to skew more heavily toward investments in the portfolio’s ultimate winners (i.e. with an average pre-dilution investment above the simple average of $4 million for winners), the fund would drive even higher total returns on the same underlying percentage of monetized investments.

• All these IRR figures – including bitcoin’s – are highly sensitive to the timing of cash flows. Earlier liquidity events would drive substantially higher IRR figures all else equal, though later exits might be more likely to drive higher MOIC as companies become more mature over the fund life. 

While we could construct a very favorable cherry-picked scenario wherein an investor could generate higher bitcoin IRRs by exactly timing cycle bottoms and tops (as indicated by the “Max Possible Bitcoin IRR” scenario in the output above), this is exceedingly difficult to do in practice, as the last few bitcoin cycles have illustrated. Moreover, this type of precisely timed trading strategy doesn’t capture the way the vast majority of capital allocators (from individual bitcoin investors to large institutions) tend to look at bitcoin; instead, most potential investors we interact with have at least a 5-10 year “buy and hold” time horizon for bitcoin, so it’s more instructive to compare a fund strategy to that investment horizon. That said, it’s noteworthy that in many cases the hypothetical fund above would still meaningfully outperform bitcoin’s IRR even relative to that maximally cherry-picked scenario. 

We believe the bitcoin price performance outlined throughout this piece is not overly conservative, as there are still few market participants anticipating $1 million+ bitcoin within the next decade. If this bitcoin forecast were to prove too pessimistic – as many of bitcoin’s most outspoken proponents might argue – that would certainly raise the hurdle for fund outperformance. However, that would also necessarily imply an even greater secular tailwind for companies building bitcoin infrastructure and thus likely also higher exit multiples and / or faster monetization events for a fund investing in those companies. 

The illustrative fund IRRs reflected in this piece are no doubt ambitious, so it would be reasonable to ask how these returns might compare to some historical benchmarks for early-stage investment funds.

The historical data shown here suggest the range of IRRs targeted by a bitcoin-focused fund should fall well within the established precedent of the best venture funds of the past several decades. This is obviously a bullish target to set, but it’s exactly what we should expect given the backdrop of the strategy. If we’re right about bitcoin’s monetization and its highly disruptive potential, we are sitting at the precipice of a transformative technological wave comparable only to that of the internet in the early 1990s, and the early investors in the blue chips of this wave should be able to achieve returns comparable to the funds that made similar investments during the early adoption phase of the internet.

Conclusion

Ultimately, the relevant question for an investor weighing an allocation to early-stage equity in bitcoin technology companies is not whether the emerging blue chips in the ecosystem can actually outperform bitcoin, or even whether a whole portfolio can outperform. In principle, the case for both of these is very clear, and there’s no fundamental reason either should be inherently unachievable. Instead, the right question is how do you get there? How do you select a fund manager that can provide the best opportunity to achieve positive bitcoin-levered returns?

As discussed, this is by no means a trivial undertaking, and it will require a manager with a combination of differentiated deal flow and superior investment selection. As the largest bitcoin-focused investment platform with over $130 million in cumulative capital deployed, Ten31 provides exactly these capabilities. We have served as lead investor for 90% of the capital we’ve deployed, and over 80% of our capital has been deployed on an exclusive basis. Our funds have sizable, unique allocations to both bitcoin bellwethers at the Series A and B stages and the most promising early-stage innovators at the Pre-Seed and Seed stages. Our team combines deep experience in bitcoin – including several partners with over a decade of focused work in the space – and long tenures at blue chip institutions including CVC Capital Partners, Goldman Sachs, and Citadel, giving us both an unmatched network of founders and the tools to identify and execute on the best deals with institutional sophistication. 

Outperforming bitcoin will put the funds that can achieve it among the best-performing vintages of all time, and no investor is better positioned to accomplish that than Ten31.

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¹ Some observers may contend that non-bitcoin “crypto” strategies have in some cases shown a track record of outperforming bitcoin. While this topic is beyond the scope of this piece, we question the long-term durability and risk-adjusted repeatability of such strategies as long as bitcoin continues to dominate the winner-take-all monetary race, a point addressed at length by Ten31 Advisor Parker Lewis here and here. We also note that a changing regulatory environment may limit some of the strategies that have historically driven outlier returns for some “crypto” funds.

² Metrics for this hypothetical company are partially informed by comprehensive benchmarking analyses from venture bellwether Bessemer Venture Partners. The operating profile shown here is highly illustrative and only intended to give a sense of a long-term glide path; in practice, most companies will likely show lumpier growth (higher peaks and lower valleys), particularly in their earlier years.

³ Valuation analysis in this section assumes 0 net debt at acquisition and includes no credit for any bitcoin treasury potentially accumulated by the company.

⁴ Illustrative Seed and Series A valuation ranges are broadly in line with median data from 2020-2023, per data collected by Carta.

⁵ Expected future dilution assumes this hypothetical company raises a $12 million Series A at a $60 million post-money valuation in Year 2 followed by a $21 million Series B at a $150 million post-money valuation in Year 5. Assumes the investor does not participate in any future funding rounds (e.g. no exercises of pro rata rights).

⁶ The hypothetical bitcoin deployment schedule shown here is aligned with the typical multi-year deployment of a standard private capital vehicle, which is representative of true opportunity cost given capital is generally called over a number of years rather than all upfront. We note that the illustrative bitcoin IRRs shown here would not materially increase even if all capital were deployed into bitcoin in Year 0.

Bitcoin: Medium o̶f̶ for Exchange

Introduction

Trying to explain what bitcoin is to someone unfamiliar with financial and computer science terms is usually pretty difficult and nearly impossible when the definitions are not clear. There are typically a lot of words like money, bearer asset, trust minimized, network, protocol, as well as many others being used to describe bitcoin. So, to say someone can get lost in translation is an understatement as it can be a frustrating experience for either party. Given that every human on the planet from almost our earliest days has participated in the exchange of goods and services, it is fair to say that there is an inherent understanding of money and why it is useful. This basic premonition follows that money facilitates the exchange when you want to buy a house, a car, or food at the grocery store to alleviate the coincidence of wants problem (i.e. having to barter). Today’s money and all the historical iterations (transition states) can therefore be thought of in a broader approach as mediums *for* exchange. Thus, it can be understood that the advent of money indicates the purpose of an environment for exchange to occur. Bitcoin is simply the end state digital transformation of money from the shared physical environment to a shared digital environment. An openly accessible digital environment without barriers to entry or seigniorage creating conditions that are better described as a medium *for* exchange.  What could be brushed aside as a simple change in wording is actually a fundamental shift on how to grasp and explain what bitcoin is. 

Medium

1. A medium is defined as the substance that transfers the energy from one substance to another substance or from one place to another, or from one surface to another.

2. surrounding objects, conditions, or influences; environment.

Of

1. expressing the relationship between a part and a whole.

For

1. used as a function word to indicate purpose

2. used as a function word to indicate an intended goal

Through this lens, Ten31 sees companies operating at today’s transition point as creating new technologies that will accrue outsized value facilitating commerce in different and innovative ways leveraging a new medium for exchange.  These bitcoin technology companies are allowing their customers to interact within the environment of bitcoin in such ways as for the visualization of the environment (Mempool.Space), entrance to a global marketplace for the environment (Strike), and many others Ten31 has supported over the last five years.

Visualizing Transparency

Historically, money has been understood through its functions as a medium of exchange, a unit of account, and a store of value, among other characteristics. However, when we adjust our viewpoint and look at money as a medium for exchange then the nature of the characteristics imbue money with an alternative framework affording for transition/upgrade from one environment to another.  For example, if gold were thought of as an environment to facilitate trade then some basic characteristics of that environment are: divisible, durable, portable, verifiable, and irreproducible. The second order effects of those characteristics create the historic concept that money is a store of value, unit of account, and medium of exchange.  Money should be thought of as being in a transition phase or evolution from physical to digital since man was able to write a numeric (digital) representation of money. From Mesopotamian Cuneiform to Flying Money of the 7th century to the first electrons creating wire transfers to the fiat US Dollar of the last fifty years, monies have been in a continuous transition state leading towards a medium for exchange natively embedded with superior characteristics (inclusive, auditable, finite, weightless, proof-of-work): bitcoin.  

This new, electrical, digital money opens up the aperture and creates kaleidoscope visualizations on the network of users interacting in this shared bitcoin medium.  Mempool.Space affords anyone anywhere utilizing its free and open source code the ability to see the bitcoin mempool of pending transactions and the confirmed transactions in each block of the blockchain. For the first time in history the totality of the money’s past, present, and future is readily viewable/auditable to all. Mempool.Space has a dominant market share for transaction analytics and current business lines are for transaction fee estimations, transaction explorer, and a transaction accelerator.  As more entrants continue to enter this medium for exchange the demand for improved transaction analytics and acceleration for accessing blockspace, Mempool.Space’s market power will expand.

Global Access

Entering bitcoin’s environment requires energy and computation as proof of work or trade to purchase bitcoin, and Strike is the leading global bitcoin access point for buying and selling bitcoin in over 100 countries. Unlike gold’s weight standardization of Avoirdupois, bitcoin’s numerical standardization provides the divisibility in a Base Ten Format like the fiat US dollar.  Base Ten Format provides a universal acceptance for the unit of account in both mediums for exchange. However, unlike the US dollar which has an increasing supply leading to perpetual debasement bitcoin is juxtaposed with a finite supply of 21 million. Strike provides its global users with the ability to seamlessly trade their local currencies for bitcoin.  We are witnessing first hand Gresham’s Law play out as Strike’s users exchange their local debasing currency for a fixed supply asset.  People are organically choosing to transition away from inferior mediums to the end state medium for exchange as they store value from today into the future.  The transition has been and will continue to be volatile across liquidity horizons. As the distortion of more and more fiat continues to press up against the inelastic supply of bitcoin, volatility will not just persist but at times increase. For, the total value being absorbed by the end state medium includes past, present, and future resulting in an unbounded amount bitcoin will ultimately draw in.

Strike, operating in over 100 countries and counting, provides a low friction ability to access a global standardized medium for exchange that is emerging and will compete with legacy payment networks worth $1 trillion (Visa & Mastercard). As more countries are incorporated into Strike’s global offering a Schelling Point will occur where consumers and businesses will organically migrate towards a simplified global value exchange. Instead of the slow correspondent banks and other intermediaries trading liabilities, a Strike user in America with US dollars will purchase a stein from a German craftsman who will receive Euros in final settlement.  There are only three hops as value is transferred between three different mediums, and eventually in the decades to come there could only be one. Natural selection will continue to occur for global market participants seeking out the most efficient medium for exchange.

Occupying the Transition State

At Ten31 we have partnered with over thirty bitcoin technology companies operating in the transition state between different mediums for exchange. From Fold allowing their users to transition their fiat rewards into bitcoin to Unchained facilitating a transition between US dollars and bitcoin all while in a long term security structure. The companies accrue value from the transfer between the legacy medium for exchanges to the end state medium.  One could envision these businesses at the intersection of a broadening landscape being carved out today as extremely valuable real estate. With this real estate in a purely digital medium connecting all participants (business and consumers alike) in an interoperable base layer protocol the power of density unlocks new portfolio network effects accelerating collaboration among all businesses. A key insight about portfolio network effects (we are witnessing in real-time) on an interoperable base protocol is how the Ten31 Tribe is an emergent middleware self-reinforcing value accrual across the entire portfolio and new connections hypostatize between what would be considered non-adjacent businesses to materialize new business ventures.

Cyberspace Native Future

The march forward towards growing up with a purely cyberspace native childhood is complete with the acceptance of global interconnections occurring through a screen is an experience babies now have building relationships with distant relatives.  Yesterday’s youth collected and spent Rupies in The Legend of Zelda, and today's youth buy Minecoins and build in the virtual worlds of Minecraft with their grandparent’s birthday money locked in cyberspace environments. This native familiarity with digital assets and online transactions is shaping generations that view bitcoin not just as an abstract concept but as an integral part of their financial lives.

As cyberspace natives mature, their comfort with and reliance on bitcoin will continue to drive broader adoption and integration of bitcoin into the mainstream economy. Because, they will demand a more efficient, transparent, and secure medium for exchange, which bitcoin and its supporting technologies are solely positioned to provide. The barriers that once hindered the transition to bitcoin are being dismantled by intuitive interfaces, robust infrastructure, and a growing ecosystem of services that make interacting with bitcoin as easy as using a smartphone app. In this cyberspace native future, the potential for innovation is boundless. We will see new business models, financial products, and services that leverage the unique properties of bitcoin to offer unprecedented value and equitable opportunities for generating, storing and transacting value.

At Ten31, we are committed to supporting the pioneers of the bitcoin frontier. By investing in and partnering with visionary technology companies carving out their prime real estate at the intersection of bitcoin and human ambition, we are helping to build the infrastructure and applications that will define the future.

Bitcoin Technology is the New Network Effect

I wrote about the bitcoin infrastructure flywheel several years ago. The premise was simple: investing in bitcoin infrastructure improves the network and makes it more valuable, which in turn creates increased demand and more users, thereby driving further investment and infrastructure buildout as the cycle continues. That is, investing in bitcoin technology drives network effects to the industry. 

This has been a core part of Ten31’s thesis, and we have deployed over $125 million of equity into the bitcoin ecosystem over the last several years with this understanding. Our thesis still very much remains intact, and more investors over time will come to realize the merits of our strategy as bitcoin continues to eat the world. If understanding the flywheel from investing in bitcoin infrastructure is Bitcoin Technology Investing 101: Industry Network Effects, in this essay I would like to present the next level topic, Bitcoin Technology Investing 201: Portfolio Network Effects.

A Primer on Network Effects

Network effects is by now a common concept, popularized in the mid-90s by W. Brian Arthur with Increasing Returns and the New World of Business. Arthur pointed out that while traditionally there had been an assumption of diminishing returns in a market (that is, “products or companies that get ahead in a market eventually run into limitations, so that a predictable equilibrium of prices and market shares is reached”), he saw evidence that in the world of technology, information, and ideas, the mechanisms at play could drive increasing returns instead: that is, the tendency for that which is ahead to get further ahead; or, more practically, as a company or product with network effects becomes more successful and scales, it actually will command increasing returns and share over time. 

Early examples of businesses that capitalized on network effects were Microsoft and IBM, and more recent examples include Airbnb, Amazon, Google, Meta, and Uber. David Sacks at Craft Ventures illustrated Uber’s network effects beautifully in 2014 when he tweeted “geographic density is the new network effect”. The network effects of Uber are obvious: the more drivers who sign up with Uber, the faster a customer can secure a ride; the faster a customer can find a driver, the more customers will want to sign up; and the more customers sign up, the more attractive Uber becomes to drivers. 

David Sacks’ observation about Uber’s virtuous cycle 10 years ago 

While the graphic above is applied specifically with respect to geographic saturation, it is easy to apply the concept more generally to any business with a network effect, particularly so-called marketplace businesses like Uber which provide a technology platform to connect providers (sellers) on one end and users (buyers) on the other. As the marketplace grows, it becomes a better value proposition for both providers and users, and this results in a more valuable tech platform for its owners.   

From Metcalfe’s law many will be aware the value of a network generally increases exponentially with scale, not linearly. As such, successfully investing in tech-enabled marketplaces with network effects has been a very lucrative business. Many investment firms have cemented their legacies based on the success of an early investment in just one of these marketplace businesses which later became dominant in its sector. However, marketplaces and network effect businesses can also present a number of potential issues and challenges for not just the participants on each side, but also the companies building the platforms and their investors: 

• Participant lock-in: Successful marketplace businesses often lead to provider and user lock-in. The inherent network effects imply high switching costs for market participants, as the alternatives offer a suboptimal experience, service or value, and lock-in can eventually lead to exploitation of providers and users. An example is Uber “blitzscaling” in NYC by undercutting taxi fares to establish geographic density and network effect, only to later raise prices after they had successfully run the taxi companies out of business or driven them out of the market. While initially users were better off, in the long run the end result was less competition, higher pricing, and worse service. 

• Bootstrapping problem: From an operator perspective, achieving truly sustainable network effects of meaningful magnitude is incredibly challenging. It is most common to underestimate the bootstrapping challenges with building a network and overestimate the likelihood of success. The last several decades of easy money pumped into VC funds which subsequently flowed into startup marketing budgets and “customer acquisition costs” only served to obscure this dynamic. What many thought were durable network effects proved only to be artificial growth driven by VC-funded user subsidies. As we’ve seen over the last couple years, once the VC money spigot dries up and marketing is pulled back, the “growth” and network effect go poof.

• Crowded trade: As the merits of seeking investments with marketplace characteristics and inherent network effects became more obvious over the last couple decades, more investors sought opportunities with this theme, and an entire category of investing and specialist funds evolved with this focus. These days you can go to virtually any Silicon Valley VC website and find tomes (tombs?) of content dedicated to investing in, building, and scaling marketplace businesses. It has become a very “crowded trade”. Not to say you can’t be skilled or lucky enough to pick a winner, but the competition is fierce, the upside is increasingly priced in, and the likelihood of success incredibly low without a unique informational or sourcing edge.

• Disruptive risks remain: Even if you have managed to achieve much sought after network effects, it doesn’t mean you are immune to disruption. There are a myriad of examples of network effects businesses which became obsolete after new waves of technology were adopted or user behavior evolved. For example, consider the famous Craigslist infographic depicting all the disruptors which spawned to compete in each Craigslist category, many of which proved successful in taking the lion's share of their respective categories. 

Bitcoin Network Effects Powering an Investment Portfolio

One of the most underappreciated aspects of investing in the bitcoin ecosystem is the open and interoperable nature of the bitcoin protocol and the benefits that accrue to all participants from development in the space. Any developer, entrepreneur, or business can build on top of bitcoin’s standards and immediately plug into the scale of the network and both benefit from and contribute to its development over time. 

What this means is that unlike what we’ve seen in the traditional Silicon Valley VC world, building and investing in exciting bitcoin technology companies is not zero sum. The success of one company does not have to be detrimental to another. This is because the network effect being developed is not at the company level, but actually at the industry level (i.e. across the entire bitcoin ecosystem). 

At its core, money is the ultimate network effect. Money generally converges around one medium because its utility is liquidity, and liquidity consolidates around the most secure, long term store of value. Those who are contributing to bitcoin and building infrastructure interoperable with the bitcoin network are therefore enhancing bitcoin’s network effect as superior digital money and strengthening the ecosystem around it in which all participants operate. There are numerous benefits:  

• Plugging into the bitcoin network provides access to a global base of users already on the network, thus helping bootstrap a potential user base and addressable market

• A company developing innovative technology, products or services for holders of bitcoin can enhance bitcoin’s utility, benefiting all participants in the network and driving increased adoption 

• In a reciprocal way, participating in the bitcoin network allows one to benefit from the work of others who are adding value to the network

• Finally, the open and interoperable nature of bitcoin allows for more significant opportunities for collaboration with others than was possible before bitcoin

This last point is perhaps the least recognized aspect of the intra-bitcoin network effects and the point I want to emphasize the most. Because of the interoperability of bitcoin and its industry wide network effects, there are mutual benefits to collaboration and opportunities for partnership which are simply infeasible in traditional industry when competing standards, closed systems, and legacy competitive zero sum dynamics are often at play. Consider Venmo and Paypal: Venmo has been owned by Paypal for more than a decade, yet payments between the two are still not integrated. And that is within the same company; integration between separate companies will clearly present additional challenges. 

The bitcoin network benefits from the opposite dynamic. Not only is interoperability ensured by compatibility with the base protocol, but the next order effect is an environment where collaboration can occur in interesting and unconventional ways, such as between companies which might otherwise be viewed as competitors in a traditional, non-bitcoin sense, or between seemingly unrelated companies whose only common ground is operating in the bitcoin network. One such example from within our portfolio is between Strike and Primal. Strike provides the backend bitcoin infrastructure which allows Primal to offer a native bitcoin wallet and bitcoin payments in-app within Primal’s broader social networking features. While there are many traditional companies that offer backend payments infrastructure for social media or online communities, the open source nature of bitcoin and nostr means Primal and Strike can still benefit from users within the network who are not locked into either business, and this is unprecedented. When viewed through a bitcoin lens, the aperture for collaboration presents compelling opportunities for groups to pursue shared objectives in an advantaged way relative to doing it alone. 

At Ten31 we began seeing glimpses of this dynamic as our investment portfolio grew from 10 companies to 20 companies and beyond, and as the interconnectivity between these companies increased. Below is a depiction of the portfolio connectivity today as compared to two years ago. Each dot represents a specific company I have kept anonymous for purposes of this exercise, and each line indicates where there is a collaboration, official integration, or formal relationship in place between companies. No dots have moved positions from the left chart to the right; only new dots have been added (with new Ten31 investments over time), and new lines have been connected indicating increased collaboration across the group.

It will be easy for any reader to gloss over the above graphic and not appreciate how remarkable the level of connectivity is and the potentially significant implications that follow, so I urge you to pause and think about this. I draw a number of initial conclusions from this graphic: 

• First, there are significant opportunities for cross-portfolio synergies in bitcoin, much more so than has ever been possible in traditional VC investing. You will not find any investment portfolio in any traditional VC fund which can demonstrate a similar level of collaboration with partnerships of significant substance. 

• Next, I believe some of the partnerships indicated in the lines above will enable groundbreaking offerings in the bitcoin market with the potential to produce astronomical value for the companies involved. While some of the most exciting companies are the most connected on the chart, there is also tremendous potential value in areas of the chart you may least expect. For example, the short, diagonally-down line to a single dot at “7 o’clock” on the chart could prove one of the most powerful partnerships of them all.

• Lastly, I believe the value of the portfolio will demonstrate increasing returns as it grows and becomes more interconnected.

The secret sauce to all of this of course is the bitcoin network effects. Everyone is rowing in the same direction. In addition, part of the portfolio effect is the ability of Ten31 to help facilitate connections between companies where a mutual relationship might not initially seem obvious to the parties involved, or where the Ten31 relationship can be additional common glue between companies to help reduce friction and encourage closer collaboration. As I have described previously, we created the Ten31 Tribe for exactly that reason–as a network of founders, investors, supporters, and interested parties whose main interest was actively supporting each other and the ecosystem as a whole. As one of the founders we are backing recently put it to me, “one of the best values we get from Ten31 is through involvement with the Ten31 Tribe”. 

It is a profound idea that one company in a portfolio can drive value in an investment portfolio not just based on its own success, but can also contribute positively to the investment prospects of other investments in a portfolio. In this way the value of the portfolio can truly be greater than the sum of its parts by leveraging the interoperability and network effects of bitcoin. In other words, bitcoin technology is the new network effect. Increased bitcoin technology investment provides greater infrastructure density and strengthens the overall network, adding value to the network and portfolio; increased investment density increases the opportunities for collaboration, allowing for better company performance and increased portfolio value. 

I also believe more favorable conditions persist with bitcoin’s industry and portfolio network effects as compared to the challenges I outlined initially with respect to business network effects:

• Lock-in: while it may be possible for companies to establish early leadership positions in certain segments of the bitcoin industry, any position is susceptible to competitive dynamics and less prone to lock-in given a participant can always seek a competing option and  remain compatible with the rest of the network, still benefiting from bitcoin’s network effects and interoperability. A company must continuously provide a superior experience to retain its users' loyalty. In the words of Jack Mallers, “open networks win”.

• Bootstrapping: as I highlighted above, using the bitcoin network can help jumpstart the bootstrapping process. Companies building in bitcoin towards the same network effects is inherently more additive than winner-take-all competition where everyone is fighting to establish their own siloed network dominance. The same points can be made about those building in the open nostr ecosystem, and the integration of bitcoin in the nostr ecosystem only compounds the scaling effects of building in the space.

• Crowded trade: a bitcoin-focused investment thesis remains a non-consensus strategy, and I have not seen any other group even identify the idea of unparalleled levels of cross-portfolio network effects within bitcoin, much less capitalize on them to the degree we are at Ten31. The upside for the companies, investors, and industry as a whole is that much more significant as a result. 

• Disruptive risks: I believe the industry and portfolio network effects will prove more sustainable with less binary risk of disruption, as any broken link in the network (e.g. from failed execution) or any new entrant in the market marginally reshapes the network effect topography while much can remain intact. This becomes increasingly true as the bitcoin network grows and the network or a portfolio’s interconnectivity increases. I believe this dynamic will encourage increased collaboration and result in more entrenched relationships across the network which may lead to a better value proposition for customers and users while fortifying the network as a whole. Much like a neural network, you can imagine the pathways in the network becoming more ingrained over time. This also reminds me of the network activity Slack observed after it  released shared channels. David Sacks was once again quick to point out that “inter-company network effects are the holy grail”, recognizing that greater levels of connectivity creates more resilience. 

Not many are paying attention yet, but I believe the next level of network effect economics is already at work in the bitcoin ecosystem. It is transforming the way companies work together and has significant implications. Bitcoin network effects are industry-wide and can deliver outsized value in a focused, interconnected investment portfolio. I am excited to see these concepts play out not just for the benefit of those companies in our portfolio and the investors supporting us, but also for the betterment of bitcoin as a whole as the network becomes more robust as a result.

Contrarian Investing in Bitcoin: Going Against the Grain, Looking at Things Differently, and Finding Value Where Others Don’t

Introduction

Over the last ten years our team has developed a deep and nuanced understanding of bitcoin's potential and its inevitable role in the future of finance and technology. This understanding wasn't immediate or obvious; it started as an inkling that became a belief and resulted in a conviction that bitcoin would eventually become the fundamental monetary good of the world. Our knowledge has been cultivated through rigorous analysis and hands-on experience questioning the very fundamental ideas underpinning money and global commerce. Our confidence in bitcoin has been cemented against the broader private investing market in what can only be described as a contrarian conviction, as 99.99% of individual and institutional capital allocators still have yet to recognize this outsized asymmetric opportunity of bitcoin and its ecosystem and are instead focused elsewhere.

Ten31’s first investment in the bitcoin ecosystem was in Unchained in early 2020.  At the time, underwriting Unchained’s unique model of leveraging bitcoin’s native multi-signature properties for collaborative custody and non-rehypothecation of customer assets was counterintuitive to traditional banking and the approaches by the leading crypto custody and lending platforms: Blockfi, Celsius, and FTX. However, we believed Unchained’s differentiated approach was the correct path forward for appropriately managing risk under a new paradigm underpinned by bitcoin, and this was ultimately proved correct after these now defunct crypto platforms zeroed out tens of billions of dollars of investors capital with near-overnight collapses as a result a fundamental misunderstanding and mismanagement of bitcoin. Meanwhile, for the last eight years Unchained has demonstrated an unblemished track record, with no losses of customer funds and zero loan losses on its lending product (even during 50% bitcoin price drawdowns), highlighting their position as one of the leading bitcoin financial services companies. We have continued to bolster our involvement with Unchained, investing in them multiple times further since 2020, and have grown our investment portfolio to more than 35 companies focused on bitcoin and freedom tech, many of which further exemplify our willingness to take contrarian positions in different ways when we have conviction in global bitcoin adoption and the companies which can enable and accelerate it. I highlight a few such examples below. 

Going against the Grain

Our investment thesis is anchored in two core beliefs: firstly, the adoption of bitcoin will accelerate, reaching the untapped 99% of the global population yet to engage with this revolutionary asset in the coming decade. Secondly, widespread adoption will catalyze the development of innovative technologies designed to meet the diverse needs of a global user base. This perspective on bitcoin guides our investment decisions, leading us to look for and support unique companies we think have made or can eventually make the zero-to-one leap on product-market-fit, resulting in a coiled spring-like action ready to explode alongside the adoption cycle of bitcoin. A clear example of this thesis is our investment in Coinkite, which develops and manufactures the Coldcard, the industry standard for bitcoin security hardware for over a decade and a device our investment team has been personally relying on for years. While most traditional VC investors would quickly dismiss investing in any hardware business, we took a different point of view, even if non-conventional.

Ten31’s investment into Coinkite aligns with our core belief that as the realization of bitcoin’s value continues to grow, so will the need to safely and securely store bitcoin private keys.  This need will become such an imperative that individuals and institutions will be forced to adopt security best practices because of the sheer value of bitcoin being secured. We see significant value in best-in-class physical security devices protecting bitcoin private keys which are entirely digital: when money moves to the digital realm, we believe security needs to move to the physical realm. The demand for the Coldcard has been robust and accelerating year over year, with the device’s value being validated by spikes in sales every time there are exchange frauds and hardware hacks, which dramatically reinforce an individual's need for secure ownership of bitcoin. 

In addition, security hardware businesses are more attractive and more recurring than they get credit for. Coinkite’s security offering is not a static endeavor isolated to one piece of software or hardware. Since security is a process that must be continuously refined for protecting against outside vectors and improving the user experience with updated software and hardware, first movers who continually innovate become impossible to catch, and the continuous innovation cycle drives repeat purchases from loyal customers. Security hardware competitors like Ledger and Trezor are not singularly focused on bitcoin, resulting in increased attack surface and continually compromised security for end users, as in the case of last year’s Ledger Connect Kit hack, the multiple hacks of Trezor products in recent years, and a variety of other noteworthy vulnerabilities. Coinkite has a decade head start in securing bitcoin value that has already grown 1000x since the company’s inception. They have kept billions of dollars worth of bitcoin secure in the early days and will keep trillions of dollars worth of bitcoin secure into the future.

Looking at Things Differently

Having invested in over 35 diverse companies to date, ranging from financial services and mining to consumer applications and scaling solutions, Ten31 has an unique vantage point in the ecosystem that bolsters our long term vision of how bitcoin adoption will evolve. This breadth of involvement allows us to identify and invest in companies that might not make sense to outsiders or those without the foresight to anticipate where bitcoin is going. The thesis driving our investment in Mempool.space, for instance, increasingly looks obvious in hindsight but was anything but just a few years ago. Our view was on the scarcity of blockspace and specifically the next block: we believed getting a transaction into the next block was going to become increasingly expensive as more users bid for the chain’s limited blockspace.  Wiz and SoftSimon, cofounders of Mempool.space, shared our vision of the future, and we have subsequently invested in Mempool.space multiple times over the past several years, during a period when blocks were usually empty and few cared about mempools. Each time we invested the company had progressively de-risked themselves as they moved from zero-to-one building the go-to block explorer.

Today, Mempool.space provides blockspace analytics and fee estimation behind most bitcoin apps along with their newly launched transaction fee accelerator. The new transaction accelerator provides a seamless way for enterprise clients to have transactions included in the next block reliably.  This is important because exchanges and other enterprises with large quantities of daily transactions interact with an open bidding market and therefore are at risk of frequently over- and under-paying miners to include their transactions in the next blocks.  Mempool.space’s accelerator helps to align the incentive structure amongst miners, pool operators and exchanges due to the shared economic benefit from out-of-band payments for the accelerated transactions as well as the enterprise clients receiving assurance on transaction inclusion in the blockchain. Mempool.space demonstrates an innovative business model with a clear vision for their role in expanding the bitcoin economy, and Ten31 is proud to be backing them and aligned on the same vision.

Finding Value Where Others Don’t

Bitcoin offers a blueprint on how to build a successful brand in an open permissionless manner, and at Ten31 we embrace investing in companies building open-source software that interacts with open protocols. What many traditional investors – and even some dedicated “crypto” funds – still haven’t grasped is that in an open system, all participants can benefit from advancements made by other independent participants. For instance, both individual academic researchers contributing to Bitcoin Core and large teams of engineers at PayPal, Robinhood, or CashApp can and have all added entry points for new users of the bitcoin network, which directly benefits all participants as the network expands creating exponential value. Thanks to Metcalfe’s Law we have a framework on how to model the future expected value of the network and thereby the companies servicing the bitcoin ecosystem. Thus, Ten31’s core beliefs align with the growing trend of new network participants (Argentina, BlackRock, ERCOT and TVA) and the outsized value to be captured as novel utility is unlocked for these new users of the bitcoin network and the resulting network effects.

Network effects or synergies usually do not exist across a portfolio, but they become more evident every day in ours. Traditional VC often takes a “spray and pray” approach across the broad digital asset ecosystem, and thereby completely misses the benefit of investing in singularly focused bitcoin companies. In contrast, Ten31’s sole focus on bitcoin companies provides our portfolio the ability to leverage one another with synergies emerging across every vertical we cover due to the open properties of bitcoin and the deliberate approach we have taken towards fostering an open community amongst our portfolio. Ten31’s initiatives are not just about capital infusion; we are about fostering a community, sharing insights, and building synergies that drive growth and innovation in an open and permissionless manner. Strike is a great example of the power of this approach. The interactions Ten31 facilitated between Strike and the rest of our portfolio helped Jack and team to identify unmet needs in the market that laid the foundation for new and upcoming Strike products. Strike Black now offers any company the ability to have a legally and regulatory compliant way to provide bitcoin services globally, thereby lowering the hurdles for start-ups to create new products and services seamlessly and legally in over 70 jurisdictions globally reaching 4+ billion people. Strike unlocking a global market for new companies to emerge creates a more rich and robust bitcoin ecosystem that can develop which aligns with our core beliefs at Ten31.  

This kind of true cross pollination leading to unlocking new markets across a portfolio can only occur because our companies are building out and contributing to open protocols, whereas the walled gardens and closed source software stacks in traditional tech investing limit intra-portfolio synergies. We’ve seen security infrastructure companies like Start9 partnering with lightning infrastructure provider Mutiny and leading Nostr client Primal; Primal partnering with Strike; and financial services players like Battery and Unchained partnering with Ibex and Coinkite, respectively. All of these unique collaborations exist because of the open properties of bitcoin and these companies’ direct proximity to one another in the Ten31 portfolio. 

Conclusion

Ten31's investment strategy, deeply rooted in our hard earned core beliefs, reflects a long-term, contrarian vision of finding the best bitcoin founders and helping them unlock value in new and unique ways. So, while others are chasing the next buzzword blockchain or shiny NFT we will be focused on the best founders building novel, long-lasting technologies in bitcoin that are ready to scale to the next billion people globally. Our approach is characterized by a blend of strategic investment, active involvement, and a commitment to fostering innovation and growth within our portfolio companies and broader ecosystem.  We will continue to lean into the open permissionless model that is bitcoin and focus on the outsized asymmetrical opportunities in the emerging and globally expanding bitcoin ecosystem, even (or especially) if it is at odds with conventional thinking or the approach by traditional investors.

Ten31 Marks First Public Listing for a Bitcoin Focused Venture Fund with GRIID Infrastructure

Ten31 Continues Leadership in Bitcoin Technology Investment, Announces the Launch of Two New Investment Funds

• GRIID is a uniquely positioned, vertically integrated bitcoin mining and energy infrastructure company and one of the first pure-play bitcoin miners to achieve public listing

• GRIID Chief Strategy Officer Harry Sudock to join Ten31 as Advisor

• Launch of Ten31 Fund III, which has already secured several anchor commitments and strengthens Ten31’s position as the world’s leading bitcoin technology investor

• Launch of Ten31 Tactical Fund, which provides access to individual accredited investors

• Ten31 also announced a grant to independent bitcoin developer calle for bitcoin powered Chaumian ecash

NASHVILLE, January 30, 2024 – Ten31 announced that its portfolio company GRIID Infrastructure has completed its listing on the Nasdaq Global Market stock exchange, representing the first public listing for any bitcoin-focused investment fund’s portfolio company. Ten31 served as GRIID’s exclusive institutional capital partner ahead of its public trading debut, investing in GRIID out of its second institutional venture fund, Low Time Preference Fund II. Ten31 is the world’s leading bitcoin technology investor, having deployed over $100 million through its prior two fund vehicles. Over five years of deploying capital, Ten31 has built an industry-leading portfolio of 36 companies focused on bitcoin and freedom technologies and served as lead investor or exclusive partner in 25 of its investments, including Pre-Seed, Seed, Series A, Series B, and pre-IPO rounds. 

Public Listing Milestone

GRIID’s listing is a notable milestone for the bitcoin mining company, which first announced its intention to go public via a SPAC transaction reported in November 2021. After having successfully navigated a long SEC and regulatory review process, the Nasdaq listing represents not just the first significant liquidity event for any bitcoin-focused venture investor but also the first major equity liquidity event in several years for the greater “crypto” venture landscape, marking a major accomplishment for GRIID, Ten31, and the bitcoin ecosystem as a whole. 

“As a vertically integrated operator, purpose-built for bitcoin mining from day one, GRIID is uniquely positioned to become one of the leading bitcoin mining companies in the world,” said Trey Kelly, Founder and CEO of GRIID. “We believe that listing on Nasdaq will enhance our visibility, liquidity, and broaden our investor base as we continue to strengthen our market position and reinforce our commitment to delivering shareholder value. Ten31’s capital support and strategic guidance were invaluable in helping us reach this milestone. We feel strongly that there is no better partner or investor in the bitcoin space than Ten31, and we look forward to continuing our close partnership.”

Harry Sudock Joining Ten31 as Advisor

In conjunction with GRIID’s Nasdaq listing, Ten31 also announced that Harry Sudock, Chief Strategy Officer at GRIID and a leading voice in bitcoin mining and energy infrastructure, will join Ten31 as an Advisor while maintaining his role at GRIID. “After many years building a bitcoin company, I know firsthand the crucial value of capital partners that both share our understanding of bitcoin and offer proven institutional investment expertise. They embody bitcoin’s proof of work ethos in everything they do,” said Sudock. “I expect GRIID to be the first of many success stories to emerge from the Ten31 portfolio, and I’m excited to help support Ten31 as it invests in the best companies in the rapidly evolving bitcoin ecosystem while serving as a resource to both portfolio companies and their founders.”

Ten31 Building on Its Success with Two New Funds and Continuing Contributions to Open Source Development

Ten31’s major milestone with GRIID coincides with the launch of Ten31’s third institutional fund, Low Time Preference Fund III, which has already secured anchor commitments and established an initial portfolio of investments, as well as the Ten31 Tactical Fund, which provides access to individual accredited investors. As the world’s leading bitcoin technology investor, Ten31 has unmatched reach and expertise across the breadth of the bitcoin ecosystem, driving a leading position in all verticals and all funding stages. Ten31’s investments include leading Strike’s $80 million Series B round in September 2022, leading exclusive Series A rounds for companies such as Coinkite and Upstream Data, as well as leading Pre-Seed and Seed investments in companies such as Mutiny, Primal and Mempool. 

Ten31 has also renewed its commitment to supporting open source development in the bitcoin ecosystem by providing a grant to independent bitcoin developer calle for his work on bitcoin powered Chaumian ecash. Ten31 is the most active investor in open source businesses in the bitcoin ecosystem and is the only investor in the industry which contributes a portion of its management fees to open source development. Ten31 was a founding contributor to OpenSats in 2021 and has supported a variety of open source efforts on a no-strings-attached basis, including making an early grant to Fedimint, a protocol for federated Chaumian ecash. Ten31’s early support of Fedimint, along with contributions from Ten31 Managing Partners Matt Odell and Marty Bent, were instrumental in catalyzing the formation of Ten31 portfolio company Fedi. 

About Ten31

Ten31 is the world’s leading bitcoin technology investor. With a footprint in Nashville and Austin, Ten31 seeks to support the ecosystem's most promising founders and companies, leveraging its deep understanding of bitcoin, extensive experience, and broad reach to create value for its partners. Since the fund's inception, Ten31 has directed more than $100 million in equity to companies focused on bitcoin and freedom technologies. For more information, visit www.ten31.vc/funds. 

About GRIID Infrastructure Inc.

GRIID is a purpose-built bitcoin mining company, founded in 2018, that has operated mining facilities since 2019. GRIID has built long-term power relationships securing affordable, reliable, environmentally responsible power, enabling a vertically integrated self-mining business model with significant growth opportunity. Headquartered in Cincinnati, Ohio, GRIID operates a R&D center in Austin, Texas and a development, deployment and equipment repair center in Rutledge, Tennessee. GRIID currently maintains mining facilities in Watertown, New York; Limestone, Maynardville and Lenoir City, Tennessee. To learn more, please visit www.griid.com.

Contact

ir@ten31.vc

Disclaimer: The information contained herein is provided for informational and discussion purposes only and is not, and may not be relied on in any manner as, legal, tax, or investment advice or as an offer to sell or a solicitation of an offer to buy an interest in any fund managed or sponsored by Ten31 or its affiliates (the “Fund”), or an offer or invitation to purchase or acquire assets, shares, partnership interests or other securities or interests in this regard. A private offering of interests in the Fund will only be made pursuant to offering documentation, including the Fund’s subscription documents (the “Offering Documentation”), which will be furnished to qualified investors on a confidential basis at their request for their consideration in connection with such offering. The information contained herein will be qualified in its entirety by reference to the Offering Documentation, which contains additional information about the investment objective, terms and conditions of an investment in any Fund and also contains tax information and risk disclosures that are important to any investment decision. No person has been authorized to make any statement concerning the Fund other than as set forth in the Offering Documentation and any such statements, if made, may not be relied upon. This communication has not been approved or disapproved by the Securities and Exchange Commission or by the securities regulatory authority of any state or of any other jurisdiction, nor have any of the foregoing authorities passed upon or endorsed the merits, accuracy or adequacy of the information contained herein. Any representation to the contrary is a criminal offense.

Our response to FinCEN on proposed surveillance rules for bitcoin

We submitted a legal response to the U.S. Department of the Treasury and FinCEN’s proposed rules that would seriously harm privacy by effectively prohibiting basic bitcoin best practices such as not reusing addresses and collaborative bitcoin transactions.

Below is an exact reproduction of the letter we have submitted to Treasury and FinCEN as part of the public request for comment period.

We are proud to have 26 bitcoin companies sign this letter to FinCEN in agreement with this position. They are listed individually at the bottom of this page.

You can view the letter below or download it here.

Andrea Gacki January 22, 2024
Director
Financial Crimes Enforcement Network
U.S. Department of the Treasury
P.O. Box 39
Vienna, VA 22183

SUBMITTED ELECTRONICALLY

Re: Docket Number FINCEN–2023–0016 – Proposal of Special Measure Regarding Convertible Virtual Currency Mixing as a Class of Transactions of Primary Money Laundering Concern

Dear Director Gacki:

We appreciate the opportunity to comment on Docket Number FINCEN-2023-0016 (the "Mixing Transaction NPRM"), released by the Financial Crimes Enforcement Network ("FinCEN") on October 22, 2023.[1] We are a variety of unaffiliated companies that rely on important cybersecurity safeguards and privacy-enabling software to protect our businesses and our users. The extreme breadth of the rules proposed by the Mixing Transaction NPRM would overly burden our use of such technologies in ways that would not assist FinCEN in achieving its mandate of preventing money laundering and other illicit use of money. As a result, we write to express our grave concerns regarding the novelty and scope of the Proposed Special Measures and the inadequate definitions contained therein.[2]

The Proposed Special Measures would unreasonably infringe upon the legitimate financial privacy interests of cryptocurrency users, and would apply to a variety of digital techniques that are not mixing transactions at all, but rather simply represent good cybersecurity practices. Moreover, the Proposed Special Measures are unnecessary to achieve FinCEN's aim, and we encourage FinCEN to either withdraw the Mixing Transaction NPRM altogether or to pursue a less invasive, less restrictive, and more effective approach—the same approach it has used since its first enforcement activities in the cryptocurrency space in 2013—to enforcement against specific bad actors.

1. FinCEN should exercise caution and either withdraw entirely or narrowly tailor the Mixing Transaction NPRM because if adopted, the Mixing Transaction NPRM would not only represent the first time FinCEN used its Section 311 powers against a class of transactions, but also the first time FinCEN has ever imposed Special Measure 1.

Historically, FinCEN has exercised caution in making designations under Section 311 and implementing Special Measures. Section 311 (31 U.S.C. 5318A), authorizes the U.S. Department of Treasury ("Treasury") to designate a foreign jurisdiction, financial institution, class of transactions, or type of account as being of "primary money laundering concern" and impose one or more of five possible "special measures." Treasury delegated that authority to FinCEN, which has used its power quite sparingly since Section 311's enactment. The first Section 311 action instituted by FinCEN in the virtual currency space occurred in 2013, when FinCEN instituted special measures against Liberty Reserve. Prior to that time, between 2002 and 2013, FinCEN had only ever implemented special measures against just four jurisdictions and 13 financial institutions. After a protracted legal battle regarding a Section 311 action between 2015-2017, FinCEN seemed reluctant to use its Section 311 powers widely. [3] The creation of the Global Investigations Division (GID) in 2019 [4] and the enactment of the Anti-Money Laundering Act of 2020, which increased FinCEN's authority "to prohibit or impose conditions upon certain transmittals of funds (to be defined by the Secretary) by any domestic financial institution or domestic financial agency," [5] coincided with an uptick in the use of Section 311 powers and a broadening of FinCEN's attention to all 5 available Special Measures.

Importantly, throughout its use of Section 311, FinCEN traditionally imposes Special Measure Number 5 to isolate a specific foreign financial institution and prevent it from accessing the U.S. financial system. Until this Mixing Transaction NPRM, FinCEN has only used Special Measure Number 1 one other time—in 2012 against JSC CredexBank ("Credex").[6] FinCEN later withdrew that proposed rule in 2016. [7] If adopted, the Mixing Transaction NPRM would constitute the first time FinCEN has imposed Special Measure Number 1 in exercising its Section 311 Powers. Moreover, this Mixing Transaction NPRM represents the very first time FinCEN has sought to designate an entire class of transactions as a primary money laundering concern. We encourage FinCEN to exercise extreme caution in the exercise of its Section 311 powers in such a novel way—the first-ever designation of a class of transactions and the first-ever imposition of Special Measure 1.

Exercising caution in Section 311 powers reflects the seriousness of Treasury's policy purposes for invoking its powers to make primary money laundering concern designations and impose special measures—namely, to act as a signal to the world that FinCEN is "serious about ensuring that the international financial system is safeguarded against the threat of money laundering." [8] As Treasury explained in the press release announcing the very first use of its Section 311 powers in 2002, when FinCEN uses Section 311, "[FinCEN] tell[s] the world clearly that these jurisdictions [or entities or transactions] are bad for business and that their financial controls cannot be trusted." [9] For the reasons further explained below, FinCEN's targeting of convertible virtual currency ("CVC") [10] purported "mixing" transactions does not achieve these aims. Rather than target transactions that are "bad for business," the Mixing Transaction NPRM targets an overly broad range of technical approaches used as best practices both by businesses and individuals for ensuring the security of CVC and impinges on privacy rights of legitimate users of CVC. In an attempt to exercise authority it has never used before (class of transactions) through a special measure it has never previously imposed successfully (special measure 1), FinCEN created a proposed rule fraught with misunderstandings and overreach. We urge FinCEN to withdraw the rule and reconsider its approach to this novel use of its authority.

2. The Mixing Transaction NPRM proposes a rule that is an improper and overbroad application of Section 311 measures to achieve transaction surveillance and suppression that FinCEN does not otherwise have a lawful basis to undertake.

Although the Mixing Transaction NPRM ostensibly designates a class of transactions as being of Primary Money Laundering Concern, its real goal is to uncover an alternative method for collecting information about and suppressing the use of digital currency in general. The Mixing Transaction NPRM is an improper and overbroad application of Section 311 measures for that purpose. Indeed, although the Mixing Transaction NPRM allegedly sanctions a class of transactions, it inconsistently throughout refers to "CVC mixers," "CVC mixing" and "CVC mixing services" by reference to specific business entities [11] and as a type of business model more generally.[12] If FinCEN has reason to believe specific entities conduct illicit activities, FinCEN could use the Section 311 powers it has traditionally and successfully used to target specific entities as financial institutions of primary money laundering concern. Such an approach offers a more targeted way to address actual money laundering while protecting legitimate users of legitimate privacy-enhancing tools.

Notably, Treasury has separately sanctioned what it refers to as CVC mixing transactions through its Office of Foreign Asset Control (OFAC) authority to designate people or property who conduct transactions with specifically designated foreign jurisdictions identified through executive order as posing terrorist threats. [13] Treasury is currently facing legal challenges to, and has been widely criticized for, its attempt to sanction the Tornado Cash open source software as property of a non-existent entity Treasury alleges is called "the Tornado Cash DAO entity." [14] Although we agree with the many arguments as to why Treasury's OFAC action with regard to Tornado Cash software is an example of agency overreach, we wish to make a different but related point here. To justify its OFAC sanctions against the Tornado Cash software, Treasury had to designate the software as property of an entity. [15] OFAC officially explained as part of defending its sanction to a judge that the Tornado Cash software was property under Treasury's regulations because it fell within the broad reach of "any contract whatsoever." [16] Although the definition of "transaction" under the BSA regulations is quite broad, it does not encompass "any contract whatsoever" but rather centers on monetary transfers and specific services offered by financial institutions, and provides a catch-all for "any other payment, transfer, or delivery by, through or to a financial institution, by whatever means effected." [17] No part of the definition applicable to CVC mixing is also a contract.[18]

In other words, in proposing the Mixing Transaction NPRM, one arm of Treasury is classifying CVC mixing as a transaction type while another arm of Treasury argues that mixing is a contract for services. Under the regulations governing both enforcement actions, mixing activity cannot be both a transaction type and a contract for service simultaneously. Treasury's attempt to designate mixing software as both a type of transaction and a contract is evidence of the arbitrary and capricious nature of its attempt to regulate open-source software that enhances the digital privacy of legitimate CVC users. To the extent that FinCEN really wants to target non-custodial, open-source software that individuals can use on their own accounts, FinCEN exceeds its statutory authority.

Indeed, tools that enhance digital privacy in CVC transactions simply seek to enable a form of digital cash. As a result, in its rush to find a way to suppress CVC mixing transactions, by whichever means, even if inconsistent amongst different internal branches of its own agency, FinCEN's Mixing Transaction NPRM amounts to an attempt to sanction "all transactions conducted in cash," which is both impossible and an unreasonable over-extension of its rulemaking authority.

3. The Mixing Transaction NPRM should be withdrawn because the proposed definition of "CVC mixing" is overbroad and targets lawful activity in a way that makes the agency's proposed action arbitrary and capricious.

Setting aside FinCEN's own apparent confusion about whether CVC mixing is a transaction, a service, a business, or a specific business entity, when FinCEN does attempt to define the "class" of transactions that it considers to be CVC mixing, the Mixing Transaction NPRM's definition of "mixing" is extremely broad and includes numerous activities routinely conducted by legitimate users as a matter of routine safety precautions in online transacting in CVC. Specifically, the Mixing Transaction NPRM provides:

The term "CVC mixing" means the facilitation of CVC transactions in a manner that obfuscates the source, destination, or amount involved in one or more transactions, regardless of the type of protocol or service used, such as: (1) pooling or aggregating CVC from multiple persons, wallets, addresses or accounts; (2) using programmatic or algorithmic code to coordinate, manage, or manipulate the structure of a transaction; (3) splitting CVC for transmittal and transmitting the CVC through a series of independent transactions; (4) creating and using single-use wallets, addresses, or accounts, and sending CVC through such wallets, addresses, or accounts through a series of independent transactions; (5) exchanging between types of CVC or other digital assets; [19] or (6) facilitating user-initiated delays in transactional activity. [20]

Indeed, most of the activities captured by the proposed definition of CVC mixing are considered established best practices within the industry for the use and safekeeping of CVC. Specifically, the proposed definition encompasses lightning transactions, single-use wallets, atomic swaps, decentralized finance protocols, privacy coin features, and multi-signature wallets, among other things. The main commonality among this broad range of software tools is that they enhance digital privacy and offer basic cyber-security techniques to owners or custodians of CVC. Employing these techniques to safeguard valuable digital assets is as routine and mundane and free of illicit purpose as using two-factor authentication to secure a digital wallet containing payment card information or an X (formerly Twitter) account to prevent an unauthorized announcement.[21]

4. The Mixing Transaction NPRM should be withdrawn because its inaccurate depiction of standard security practices as "mixing" impermissibly restricts the capacity of users to protect their property so that FinCEN can conduct a fishing expedition.

The proposed rule describes as red flags such everyday practices as "creating and using single address wallets" and "splitting CVC for transmittal." [22] The standard practice among cryptocurrency users is to change addresses with every transaction. For example, Coinbase Exchange describes to their users that: "[w]e automatically generate a new address for you after every transaction you make or when funds are moved between your wallet and our storage system. This is done to protect your privacy, so a third party cannot view all other transactions associated with your account simply by using a blockchain explorer." [23]

The fact that a small subset of users, who may be criminals, engage in the same operational security practices as ordinary users does not make those operational security practices suspect. The fact that criminals may use two-factor authentication to protect the security of their online applications does not mean that the use of two-factor authentication is itself an indicator or facilitator of criminal activity. In exactly the same way, the fact that users do not reuse Bitcoin addresses is merely indicative of basic operational security.

In an apparent recognition of the fact that these tools legitimately enable important cyber-security precautions, FinCEN exempts financial institutions from reporting on any of their own mixing transactions that they may conduct in the course of providing services to the public.[24] By exempting financial institutions from the rule, FinCEN creates a regime where financial institutions can take proper cyber-security measures for using CVC, but regular people cannot.

Perhaps even more problematic, throughout the Mixing Transaction NPRM, FinCEN justifies the proposed rule as necessary to enable law enforcement and the agency to better understand the transactions and the extent to which illicit activity occurs through CVC mixing. [25] The extraordinary and never before successfully invoked Section 311 power to designate a class of transactions and implement special measure 1 is not appropriate for use in a fact-finding mission. Employing such overly broad definitions as proposed in the Mixing Transaction NPRM for the purpose of authorizing an invasive fact-finding mission represents an arbitrary and capricious use of FinCEN's delegated rulemaking authority because FinCEN's justification for the rule lies outside of the statutory criteria for determining a class of transactions is of primary money laundering concern.

Specifically, FinCEN is statutorily required to consider the following factors when determining that a class of transactions is of primary money laundering concern: (1) the extent to which the class of transactions is used to facilitate or promote money laundering in or through a jurisdiction outside of the United States, including money laundering activity with connections to international terrorism, organized crime, and proliferation of WMDs and missiles; (2) the extent to which a class of transactions is used for legitimate business purposes; and (3) the extent to which action by FinCEN would guard against international money laundering and other financial crimes." [26] Throughout the Mixing Transaction NPRM, FinCEN acknowledges that due to a lack of data and a lack of understanding of CVC mixers, it cannot sufficiently assess the extent to which CVC mixing and the proposed rule measures up under any of these three criteria. [27] FinCEN's assessment ultimately boils down to: FinCEN does not have sufficient information to properly assess the statutory criteria required to justify the proposed rule, so the proposed rule is justified because, in FinCEN's own words, it "is necessary to better understand the illicit finance risk posed by CVC mixing." [28] Using a sanction to obtain the information necessary to justify imposing the sanction even when the agency knows that doing so will likely impose a high burden on legitimate uses and financial institutions is the definition of arbitrary and capricious regulatory action.

5. The Mixing Transaction NPRM should be withdrawn or significantly narrowed in scope because FinCEN's required statutory analysis fails to adequately value the legitimate uses of CVC mixing services and unduly burdens legitimate users and financial institutions.

FinCEN admits that public blockchains "make it possible to know someone's entire financial history on the blockchain" [29] and that it "recognizes that there are legitimate reasons why responsible actors might want to conduct financial transactions in a secure and private manner given the amount of information available on public blockchains." [30] Yet, in the same document, alleges that the Mixing Transaction NPRM is necessary because CVC "is not without its risks and, in particular, the use of CVC to anonymize illicit activity undermines the legitimate and innovative uses of CVC." [31] These two propositions cannot be simultaneously accurate.

As a matter of technical reality, FinCEN's assertion that public blockchains expose a user's entire financial history on the blockchain to the public for everyone to see and inspect is correct. [32] Indeed, that creates the fundamental need for legitimate CVC users to conduct CVC mixing transactions—to reintroduce the same level of financial privacy that they enjoy in the traditional financial system [33] to their transactions via CVC (for example, the traditional financial system does not expose a consumer's entire credit card history to the public, and indeed, federal law requires that financial institutions protect such information from being exposed to the public [34]). [35]

Ensuring their CVC transactions enjoy the same level of privacy as transactions in traditional finance reduces the potential danger of personal harm to legitimate users and enables legitimate users to avoid waiving their constitutional right to privacy. When the identity of a legitimate CVC user is known and connected to the wallets holding CVC assets, the user becomes a target for kidnap, robbery, extortion, and hacking schemes. [36] Further, because of this inherent transparency by design of public blockchains, the Fifth Circuit recently ruled that no expectation of privacy exists for users of permissionless public blockchains who take no additional action to privacy-protect their transactions. [37] Legitimate users employ privacy-enhancing software when transacting in CVC in order to avoid inadvertently waiving their constitutionally protected privacy rights.

Ultimately, FinCEN has completely failed in its obligation to adequately account for the impact on legitimate users as required by its rulemaking authority. In defending its selection of special measure 1 over 2 through 5, FinCEN emphasizes, without explanation, that special measure 1—additional record keeping—allows legitimate users to continue using privacy-enhancing software without interruption. [38] This is false, as covered entities must report on any transaction that may have involved CVC mixing and a foreign jurisdiction. Indeed, read broadly, it is possible that the rules proposed by the Mixing Transaction NPRM require reporting on transactions that involve CVC that were transacted through mixing software at any point in the asset's transaction history. Such reporting directly impedes the reasons for which legitimate users employ mixing software (to enhance financial privacy) by requiring the elimination of financial privacy (it is not a private transaction if an intermediary must surveil and report on the transaction). Software tools like mixers that enhance digital financial privacy provide a true electronic equivalent to cash. Notably, transactions in cash are not subject to rules such as those proposed in the Mixing Transaction NPRM. In an apparent acknowledgment of this deep and inherent conflict between the rules proposed by the Mixing Transaction NPRM and the legitimate uses to which legitimate users put CVC mixing software, FinCEN itself predicts that the rule will chill the use of CVC mixers.

6. The Mixing Transaction NPRM should be withdrawn because it requires covered financial institutions to perform law enforcement's function to accomplish FinCEN's AML goals, which FinCEN, DOJ, and law enforcement can achieve using existing tools when they have a proper legal basis to employ those tools.

Like the definitions of CVC mixing and CVC mixer, the Mixing Transaction NPRM's information reporting requirements demonstrate a deep lack of technological understanding. Notably, all of the transaction information that the Mixing Transaction NPRM proposes to include in required reports by covered financial institutions involves data that, in most circumstances, FinCEN can just as easily obtain itself through blockchain data analytics. Similarly, the customer information that FinCEN would require covered financial institutions to report includes the same kinds of information such institutions must already report if a transaction raises sufficient red flags to trigger the filing of a Suspicious Activity Report (SAR). Nevertheless, the Mixing Transaction NPRM seeks to require covered financial institutions to file such reports on every single transaction for which the CVC involved may have ever been transacted through the extremely broad set of software that FinCEN's proposed rule defines as CVC mixing software. In other words, because law enforcement investigations into activity involving CVC are sometimes more difficult, FinCEN seeks to impose broad surveillance of individuals without cause through covered financial institutions. Covered financial institutions should not have to become de facto law enforcement officers to make investigations easier for FinCEN.

FinCEN, the Department of Justice, and law enforcement have previously and successfully employed the very tools FinCEN asks financial institutions to use for reporting compliance under the Mixing Transaction NPRM to target specific illicit actors. FinCEN has demonstrated that it knows how to properly investigate and enforce against specific custodial CVC mixing service providers that are not complying with the regulations to which they are subject. Specifically targeting illicit actors about which FinCEN and law enforcement have built a clear, strong case using the available blockchain data analytics tools better balances the need to combat illicit CVC mixing with the legitimate use of CVC mixing by individuals seeking to protect their legitimate, constitutionally and statutorily protected privacy interests.

For all of the reasons discussed above, we urge FinCEN to withdraw the Mixing Transaction NPRM altogether.

Thank you for your consideration.

If you have any questions or would like additional information, please see the contact information below:

Rafael Yakobi, Esq.
Managing Partner
The Crypto Lawyers, PLLC.
rafael@thecryptolawyers.com
(619) 317-0722

Sincerely,
Samourai Wallet, Ten31, River, Strike, RoninDojo, Swan Bitcoin, Primal, GRIID, Zaprite, Peach, Mempool Space, Upstream Data, Stakwork, Vida Global, Voltage, Coinkite, Mutiny Wallet, Standard Bitcoin Company, Satoshi Energy, Cathedra Bitcoin, AnchorWatch, Bitnob, Oshi, Battery Finance,Fold, Start9

Bitcoin Is Eating the World

An Investor’s Case for the Biggest TAM on Earth

In the few centuries since the inception of the joint-stock company, equity investors have developed a toolbox of intermittently useful frameworks and heuristics for evaluating potential investments. Some focus on valuation, guided by the mantra that there’s always a price at which any investment can become attractive. Others anchor to market leadership, arguing that more often than not, you’ll succeed just by backing the best of the best. But one theme that unites virtually all investors is the search for large total addressable markets (or “TAM”). Explicitly or implicitly underpinning all discussions of valuation, competitive analysis, and projected run-rate profitability is this basic question of TAM: at the end of the day, how big is the prize? 

This obsession with TAM, especially prevalent among earlier-stage investors, stems from a simple expected value calculation any investor naturally has to make when deploying capital. For a given probability of success and holding all else equal, a larger addressable market translates to a greater revenue opportunity and a higher probability-adjusted return on investment. TAM is far from the only factor that explains investment returns, but it is a very powerful lever – it is almost always better to be a decent company in a fantastic market than a fantastic company in a middling market, as operational efficiency and defensible share will only get you so far if your market has reached its natural ceiling. 

A few decades ago, internet-enabled software began, in the memorable phrasing of Marc Andreessen, “eating the world.” Said another way, its TAM exploded. Internet-enabled software’s addressable market became one of the largest of any industry because its dematerialization of previously physical products and services collapsed the marginal cost of information storage and transfer, opening up new ways of producing and consuming that would eventually impact every business and consumer in the world. This became the foundation for arguably the most successful investing theme of all time: riding the software wave up.

By now, this is a decidedly consensus view among investors, but what remains highly underappreciated by virtually all market participants is that we currently stand on the precipice of another even more disruptive theme: today, bitcoin is eating the world. Just as software and the internet dematerialized information and communication, bitcoin has dematerialized the most fundamental primitive of economic interaction – money itself – and consequently opened up step-function improvements and entirely new applications across industries. And since money is half of every transaction and commerce at virtually every scale is dependent on and downstream from it, bitcoin’s addressable user base will ultimately extend, like the internet before it, to every person on the planet. 

As software ate the world, the greatest economic beneficiaries were the companies that carved out durable market positions as providers of software infrastructure and software-powered services, as well as the incumbents that moved first to adapt to this sea change. As bitcoin eats the world, the same will be true of innovative startups and forward-thinking blue chips that embrace bitcoin and leverage its unique capabilities. Internet-enabled software’s TAM is massive, but if bitcoin follows a similar adoption curve, then bitcoin infrastructure will become the biggest TAM on earth, and equity in the ecosystem’s bellwether companies will become the next generational investing theme. Crucially, though, few investors have yet to fully realize what’s about to happen – unlike in August 2011, when Marc Andreessen wrote his famous piece and many could already see the writing on the wall, this thesis is currently well outside consensus, meaning the asymmetric upside opportunity for those investing in bitcoin infrastructure today will be orders of magnitude greater. 

Why is bitcoin eating the world?

We acknowledge this will sound like a bold claim to many investors, but we believe it is also set to become an increasingly mainstream view over the next decade. If we’re right about bitcoin’s ultimate fate, the rest of our thesis at Ten31 falls neatly into place, as we’ll show below. So why do we believe bitcoin will eat the world?

Most simply, bitcoin is superior monetary technology, and as knowledge of it distributes over time, there is no self-interested economic actor in the world that will be able to ignore it.

As (i) parabolically growing global debt necessitates accelerating debasement of even the most stable fiat currencies, (ii) price inflation across both essentials and durable assets marches higher, and (iii) more governments and banks around the world move to seize deposits and censor payments, the value of the properties above will become abundantly clear to billions (in most cases this will be an instinctive realization rather than an academic one). Even if these trends were all to reverse tomorrow, the superiority of bitcoin’s monetary properties would still tend to push its adoption forward, as economic actors will always prefer to store more rather than less wealth over time and will converge on using and saving in the currency that best facilitates that goal (at the expense of both fiat currencies and “altcoins” that fail to effectively compete with bitcoin as money). 

Fifteen years in, bitcoin has now withstood a barrage of stress tests that have both demonstrated and increased its resilience, an incomplete list of which includes: four 80%+ price drawdowns; massive exchange hacks, bankruptcies, and rugpulls; “bans” by large sovereigns like China; and contentious hard forks of its code. These stressors help illustrate bitcoin’s antifragility, and each shock it survives boosts confidence in the network and the likelihood that bitcoin will continue to survive, thus drawing in more users and further increasing resilience in a virtuous cycle (the “Lindy effect”). This phenomenon can be directly observed in bitcoin’s on-chain data through “HODL Waves,” which illustrate a consistently growing proportion of bitcoin buyers turning into long-term holders:

Like the internet, bitcoin has dematerialized a fundamental pillar of economic interaction – in this case, monetary bearer value itself – and the two technologies’ adoption curves look remarkably similar. But while the benefits of the internet’s early incarnations were more abstract, bitcoin comes with a powerful adoption incentive baked in: the opportunity for rapid and unmatched accrual of purchasing power over time (or more colloquially, “Number Go Up”). Early adopters will reap outsized and compounding rewards from this trend (i.e. a greater share of finite available bitcoin) at the expense of laggards, incentivizing a self-perpetuating rush to move first. Inherent in bitcoin’s design, then, is its own engine of adoption growth. The only winning move is to play.

A comprehensive case for bitcoin’s monetization is beyond the scope of our current focus, but we encourage interested readers to dive deeper in the suggested reading highlighted at the end of this piece. Suffice to say that the investment case for bitcoin’s continued adoption and monetization is highly compelling, and we therefore expect its ultimate user base to be virtually everyone in the world. 

If bitcoin’s addressable user base is this large, then there will be a titanic wave of demand for new services increasing bitcoin’s ease of use and utility (the “picks and shovels”), giving rise to a generation of new innovators. 

Bitcoin’s design makes a set of trade-offs that collectively enable the best monetary technology in history, but as with any emerging, paradigm-shifting technology, accessing and using it effectively are not always intuitive for newcomers. Anyone first coming to bitcoin, even if they’re constructive on its potential as a store of value or permissionless means of payment, likely confronts a series of questions right away: What exactly is this thing? How does it work? How can I get some? How do I store it safely and send it cost-effectively? What else could I do with it? 

Bitcoin today is in a similar phase of its life cycle as the internet in the early 1990s, when the befuddled hosts of the Today Show famously asked “What is internet?” By that point, at least 10-20 million people were already using the internet, yet it remained a totally inscrutable tool to most mainstream observers. To take a bearish view on this technology because it was difficult for casual users would have been a terrible trade – the right question was just how long it would take for developers and innovative businesses to build approachable tooling and applications on top of the fundamental primitives of the internet protocol stack. That work would be carried out over the following decade with the proliferation of browsers (Netscape, Internet Explorer) built on easy, point and click graphical user interfaces (Windows, MacOS) offering access to applications and websites enabling previously inconceivable modes of interaction and commerce (Google, Amazon, Netflix, Facebook, thousands more). Less than 15 years after that Today Show clip, most Americans would have a miniature internet-enabled computer with them at all times. 

If bitcoin’s superior monetary properties continue to drive its growing adoption along a curve that looks roughly like the internet’s, then demand for acquiring, securing, and using bitcoin will naturally support demand for tooling, applications, and infrastructure to make all of that easy and practical for consumers and enterprises. This opens up significant opportunities for innovators to build businesses catering to this demand, with early movers like the companies in the Ten31 portfolio set to reap outsized rewards as they amass reputation, brand power, and network effects. In essence, this is the classic “picks and shovels” play, whereby investment in the enabling technologies supporting a major secular shift can provide levered returns on the underlying theme, like selling equipment to gold miners during a gold rush, oilfield services businesses that enabled the early days of oil and gas extraction, or modern tech titans that built the user-friendly tools anyone reading this takes for granted today. 

Moreover, just as with software, the addressable verticals available to bitcoin infrastructure investors will also proliferate and compound as adoption grows and the application ecosystem becomes more sophisticated. Use cases and business models that are inconceivable today will become multi-billion dollar opportunities in short order in the same way that cloud computing  – which depended on prior advancements in server architecture, network connectivity, and more – went from a ~$10 billion market to a half-trillion dollar revenue category over the past decade. Similarly, businesses like ServiceNow, Salesforce, and Shopify (all worth more than $100 billion) didn’t even exist at the turn of the century and couldn’t have gotten off the ground without work done by earlier innovators. 

We’re already seeing many examples of these dynamics within the nascent bitcoin infrastructure market and in our own portfolio. Products like Strike’s Global Wallet, Coinkite’s Tapsigner, and Fedimint applications being built by Fedi and Mutiny are making bitcoin and the lightning network intuitive and accessible for billions of consumers, often in ways that require little direct interaction with bitcoin. Similarly, Unchained’s collaborative custody network and AnchorWatch’s bitcoin insurance platform bypass the technical burdens and black-box counterparty risks that have plagued bitcoin custody for much of its short history, laying the foundation for widespread institutional and enterprise adoption of bitcoin as a treasury asset. Few of these applications were on anyone’s radar as commercial use cases even five years ago, but the outlines of the value they will generate over the next decade are already coming into view. 

Back in 2011, Marc Andreessen noted that internet-enabled software was taking off partially because “all the technology finally work[ed]” and could be “widely delivered at global scale.” We’re not quite there yet with all of bitcoin’s enabling technology, but the products above are clear evidence we’re getting much closer, and the companies building the infrastructure to make that a reality are in position to become behemoths. The first-order opportunity of this theme alone is likely in the trillions as bitcoin adoption advances parabolically upward, carrying bitcoin-native technology companies with it. 

If this wave of new innovators emerges on the back of exploding adoption, then incumbents across industries will have to adapt, eventually becoming “bitcoin companies” themselves. 

The “picks and shovels” thesis will prove to be a rich investing theme by itself, but it’s only the tip of the iceberg. Money is half of every transaction, so if bitcoin adoption proceeds as we expect, it will eventually touch virtually all economic activity in the world directly or indirectly.³ This tectonic shift in monetary technology is a trend that no commercial entity will be able to ignore indefinitely. Just as every company effectively had to become an “internet company” over the past few decades to both leverage the new capabilities offered by internet-enabled software and to keep pace with upstart competitors doing the same, so too will every business have to become a “bitcoin company” in some way to remain relevant. This will drive trillions of dollars of disruption to existing business models and open up massive new surface area for forward-thinking investors in bitcoin infrastructure. 

The most obvious industries that will need to adapt include:

• Payments infrastructure: In contrast to legacy fiat payments systems’ reliance on the transfer of credit obligations to facilitate transactions, bitcoin allows for the nearly instant transfer of digital bearer value anywhere in the world, bringing the settlement finality of physical cash transactions into the digital world. Bitcoin over lightning – pushed forward by innovators like Strike and IBEX – eliminates the need for credit transfers and delayed settlement, which will have stark implications for the vast array of middlemen and counterparties that have sprung up in the past century to manage those credit flows. In general, any business that sells immediately consumed resources (from bandwidth to telecom services to GPU compute) but only receives final settlement for those resources well after the fact will be transformed by instantly settled bearer value.   

• International remittances and FX: Bitcoin’s global, borderless value transfer network – which operates 24/7/365 and has achieved 99.99% uptime since inception – offers users an unprecedented settlement rail for international transactions. Cross-border payments drive over $150 trillion of annual transaction volume, but final settlement can cost as much as 5-10% and take weeks in some cases.⁴ Bitcoin infrastructure companies like Strike, IBEX, and Bitnob can facilitate the same types of transactions for a tiny fraction of the cost while providing final settlement in minutes or less, complete with local currency conversion at both endpoints, a massive challenge to the financial intermediaries that currently dominate cross-border payment flows. 

• Asset management and custody: Bitcoin’s purely digital, cryptographically secured properties mean that, unlike any other asset in the world, its custody can be both distributed and permissionless. Unlike gold or real estate, it doesn’t have to be “located” in any one place; and unlike stocks, bank deposits or other financial contracts, it can benefit from custodial support without surrendering to custodial permissions thanks to multisignature quora and miniscript. As bitcoin’s adoption and purchasing power increase, all financial service providers catering to high net worth individuals or institutional treasuries will need to add bitcoin to their clients’ portfolios, and they will need to find ways to offer the unique benefits of proper bitcoin custody via service providers like Unchained and AnchorWatch.

• Credit and lending: Bitcoin’s fungibility, global 24/7 liquidity, instant settlement capabilities, and customizable ownership schemes make it pristine collateral. Bitcoin can be held in multi-party custody with tiered permissions, simultaneously allowing a borrower to verify their collateral is safe and a lender to quickly liquidate that collateral in a margin call. Unchained and Debifi are pioneering this lending model, and Unchained’s lack of loan losses despite bitcoin’s substantial volatility through the company’s 5+ year history speaks to the power of this offering for traditional lending businesses. Bitcoin’s substantial expected price upside (inevitable if adoption proceeds as we expect) also paves the way for compelling return profiles for creative lenders like Battery Finance.

The second-order implications for industries well outside the sphere of payments and finance are just as substantial, and the effects are already becoming evident in markets as diverse as:

• Oil and gas: Energy producers, including oil majors like Exxon and ConocoPhillips, are increasingly recognizing bitcoin mining’s potential to monetize otherwise wasted resources like vented or flared gas, and we expect this convergence to accelerate over the coming decade since mining represents a unique and unprecedented source of revenue for the energy industry, and oil & gas producers are naturally positioned as the lowest-cost power sources for the hyper-competitive business of mining. Companies like Upstream Data and Giga Energy are well positioned to capitalize on this trend as more of the traditional oil & gas industry gravitates toward bitcoin. 

• Utilities and power: Power grids have become progressively more intertwined with bitcoin mining over the past few years, as mining represents a unique flexible power load that – unlike traditional data centers – can be switched off and back on almost instantly to accommodate a grid’s unpredictable needs (a process known as “load balancing”). Some publicly traded miners like Riot Platforms have made headlines through their participation in these flexible load programs, and emerging players like GRIID and Standard Bitcoin are ramping up this strategy with utilities throughout the US as well. We expect the success of these programs to drive an increasing convergence of bitcoin mining and electrical utilities both domestically and internationally. 

• Consumer applications: A wide variety of new ways for consumers to interact with bitcoin have come to market just since the last halving in 2020. The bitcoin-gaming convergence (exemplified by platforms like Zebedee and THNDR) is becoming much more widespread, as are consumer loyalty applications like Fold’s that pay out rewards points denominated in bitcoin, a concept Fold is set to scale up with a white-label enterprise SaaS product in the near term. Meanwhile, Primal, Vida, and a host of Podcasting 2.0 platforms are using bitcoin to allow content creators and brands to instantly earn and pay for content and attention through micro-transactions that are not possible over traditional fiat rails. Importantly, most of these use cases require no prior knowledge of bitcoin to get started, but rather leverage bitcoin’s properties as a means to an end. Brands, content creators, game developers and more will be progressively drawn to using internet-native money to drive customer acquisition and engagement over the coming decade. 

And even these verticals are still just scratching the surface. As we’ve addressed extensively elsewhere, the rapidly growing ecosystem of generative artificial intelligence technologies will converge with bitcoin and lightning in the near future thanks to bitcoin’s digitally native instant settlement assurances and high divisibility, which differentiate it from both fiat and altcoins and make it the ideal way to pay for AI compute resources. The last year has shown many early examples of that convergence, including the release of the L402 toolkit to help developers unlock the unique properties of lightning payments for AI applications, as well as the emergence of Nostr Data Vending Machines, a technique using lightning and nostr to outsource data processing requests to competing AI agents. Companies already expressing this theme in the Ten31 portfolio include StatMuse, which pioneered the use of Natural Language Processing (NLP) for sports data search and has recently launched extensive bitcoin and finance data as its next search vertical, and Stakwork, which has been combining AI training workflows with instantly-settled lightning payments for several years. As the internet-native money of the future, bitcoin will be instrumental in powering the machine-payable web and the emerging economy of autonomous agents. If you’re bullish on AI, you should be just as bullish on bitcoin infrastructure. 

The key intuition uniting all of these examples is that providing instant settlement of borderless bearer value is a unique and unprecedented phenomenon with derivative implications for every industry, and it will inexorably pull businesses that currently have nothing to do with bitcoin into bitcoin’s orbit. And as all these examples illustrate, this is not just speculation — we are watching it play out in real time across our portfolio. Bitcoin’s influence on a growing list of industries will lead to acquisitions of today’s foremost bitcoin companies, in addition to expanded addressable markets for bitcoin infrastructure investors as regular companies integrate bitcoin around the edges in their legacy businesses. To paraphrase Andreessen again: companies in every industry need to assume that a bitcoin revolution is coming. 

If bitcoin both creates new categories worth trillions and forces all legacy industries to adopt it in some way, then bitcoin infrastructure will become the biggest TAM on earth. 

What might this bitcoin revolution look like in practice for the companies pushing it forward? As a very rough, incomplete guidepost for the kind of value capture this secular shift could generate, it might be instructive to look at the revenue generated by all the industries discussed above. If bitcoin infrastructure captures even 1% of the annual revenue of those massive industries, whether through establishing a place in their value chains or outright displacing legacy business models, it will be well on its way to becoming one of the biggest categories in the world.⁵

Unlike any of these individual industries, bitcoin companies can capture a cross-section of all these disparate verticals thanks to monetary technology’s universal influence on all commerce.⁶ Even if bitcoin infrastructure captures only a minimal fraction of its most immediately addressable revenue pools – putting aside longer-term revenue opportunities like AI or telecommunications – it would still rival the size of the ~$200 billion SaaS market. Meanwhile, there’s a compelling case that bitcoin infrastructure should capture quite a bit more value in many of these categories, particularly those related to financial services. 

But even that still only tells part of the story. Crucially, most of the applications we’ve discussed in this piece were fundamentally impossible before the advent of instantly settled, highly divisible, globally liquid, digitally native bearer money. This means that bitcoin infrastructure won’t just capture some portion of the existing pools of value discussed here, but also – like the internet before it – create totally new ones, which in turn means that despite the massive opportunity already at hand, many of the largest “bitcoin industries” of the future have yet to emerge. We might compare this dynamic to Netflix’s displacement of Blockbuster, which didn’t just siphon off the incumbent’s revenue base but dramatically expanded it through technology that was previously unavailable,⁷ or to the launch of the iPhone, which not only kicked off parabolic growth in the smartphone market but also laid the foundation for the more than $1 trillion of revenue built on previously nonexistent mobile app stores.⁸ 

Taken together, bitcoin’s “picks and shovel” opportunities, its inevitable permeation into virtually all existing businesses, and the totally new industries its unique properties can enable will make bitcoin infrastructure the biggest TAM on earth over the coming decades. To return to the framework established earlier, this means equity investors focused on bitcoin infrastructure benefit from a massive advantage that should drive superior risk-adjusted returns – the prize is simply bigger here than anywhere else. 

Finally and importantly for any investor evaluating these claims: the market still has yet to fully appreciate the implications of this thesis. Given that only a few hundred million dollars have been deployed into companies focused on bitcoin, whereas well over $25 billion have been channeled to the broader “crypto” ecosystem, it is safe to say virtually every capital allocator around the world is substantially underweight bitcoin infrastructure. Those that recognize the opportunity now will not only have access to some of the most compelling investments of the coming decade, but will compound their returns by front-running the flood of capital that will eventually arrive as this theme becomes more obvious. Even if there’s only a 1% chance our view is correct, the potential asymmetric upside of moving first is too great for any responsible capital allocator to ignore. At Ten31, we have already deployed over $100 million into this thesis, and we are just getting started.

To quote Andreessen one last time: That’s the big opportunity. I know where I’m putting my money. 

Suggested Further Reading

• The Bullish Case for Bitcoin by Vijay Boyapati

• Gradually, Then Suddenly series by Ten31 Advisor Parker Lewis

• The Bitcoin Standard by Saifedean Ammous

• Layered Money by Nik Bhatia

• Bitcoin First by Fidelity Digital Assets

• Shelling Out: The Origins of Money by Nick Szabo

• Bitcoin is Worse is Better by Gwern

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¹ Data as of 12/31/2023.

² Data complete through year-end 2022. Inception date for the internet refers to 1983, the beginning of the TCP/IP protocol. Sources include the World Bank, Glassnode, and Blockware Solutions.

³ Much of this future activity will likely not involve users or enterprises directly manipulating UTXOs on the bitcoin blockchain given the scarcity of blockspace and bitcoin’s intentionally limited throughput. Instead, most users over the long term will likely interact with higher layers built on top of and anchored to the blockchain, including scaling solutions like the lightning network, fedimints, federated sidechains, statechains, and / or a variety of new constructs that may potentially be enabled by covenants. This dynamic can be compared to the scaling of the internet protocol stack or the way that modern card networks are built on commercial banks, which in turn depend on central banks for final settlement.

⁴ River cross-border payments research report, 2023.

⁵ Sources for market size figures include reports from Boston Consulting Group, McKinsey, IBISWorld, PWC, and public market data.

⁶ It bears mentioning here that the same cannot be said for any other “crypto” project. As long as bitcoin continues to dominate the winner-take-all monetary race – which it will thanks to its entrenched and growing network effects and its credibly fixed supply cap – no other currency will be able to compete with bitcoin as money, which means the few altcoins (if any) that don’t trend to zero will have an addressable market orders of magnitude smaller than bitcoin’s.

⁷ At its peak in 2004, Blockbuster generated just under $6 billion in revenue; Netflix, meanwhile, posted ~$32 billion in revenue in 2022. This represents an inflation-adjusted market expansion of ~3.5x (before accounting for revenues produced by the wide variety of additional streaming services that have emerged since Blockbuster's disappearance).

⁸ Apple press release, May 2023.

Bitcoin Treasury - The Fourth Lever to Equity Value Growth

Most companies do not hold enough bitcoin

There is a saying you often hear in bitcoin circles that “you can never have enough bitcoin.” This is typically expressed by those who have spent the time to both understand bitcoin’s unique and superior monetary properties and also to appreciate why those properties are protected from any attempted malicious interference. Bitcoin’s finite supply, protected by cryptography, game theory, and a decentralized computing network rooted in proof-of-work, was the 0 to 1 innovation. 

Once one develops conviction in the long term prospects of bitcoin, regardless of what near term volatility may ensue due to resistance from regulatory bodies, political parties, or interest groups elsewhere (these are simply blips on the road to long-term global adoption), one also realizes that most people still do not yet understand or appreciate the value of bitcoin. Fifteen years in, there is still tremendous informational asymmetry in bitcoin, and that is why one often hears many repeat “we are still so early.” 

The path to understanding bitcoin is long and arduous, requires humility, persistence, and an open mind, and the journey truly never ends. Most have simply not put in the work to go through this process, and therefore the knowledge of bitcoin has not yet been widely distributed. For that reason there is still tremendous economic upside in the purchasing power of bitcoin to be gained by those who hold it now as the understanding and appreciation of bitcoin spreads more widely over time. Therefore, for believers in bitcoin, no matter how much bitcoin they manage to accumulate, there is always a desire to acquire more. The opportunity is just too great, and the outcome is obvious.

Despite this belief, many of the same bitcoiners who cannot get enough personally often do not apply that strategy to their corporate balance sheets. With rare exception, most bitcoin companies (those who should clearly understand bitcoin more than others) do not hold much bitcoin. Their holdings are too conservative and incongruent with their personal beliefs about bitcoin and their companies’ positive operating leverage to the long-term success and adoption of bitcoin. It is not that they do not want to hold more bitcoin on their corporate balance sheets (they do), but they have deliberately (or implicitly) decided not to do so. I would encourage and challenge companies to consider holding more.

The conventional wisdom (or instinctual pushback) is that holding more bitcoin (relative to cash) in reserves is too risky and/or irresponsible for a company and that they cannot afford to stomach the volatility of bitcoin when their reserves are limited and precious (especially for early stage companies). I will not dwell on the fact that this sounds a lot like the argument of many bitcoin detractors, and instead I will acknowledge this is a tricky topic, and undoubtedly the consequences are significant. Making a strategic misstep with the company’s coffers could strike a fatal blow to a young company if adequate downside contingencies have not been planned for; but on the flip side, I would argue not being positioned to capture equity value appreciation from bitcoin on the balance sheet is actually taking on increased corporate risk of leaving value on the table as well in the form of foregone upside, the opportunity cost of being overly conservative. It is therefore every company’s fiduciary duty to consider a meaningful bitcoin position for their corporate balance sheet.

The fiduciary case for a meaningful bitcoin position

Most think of fiduciary duty primarily as managing risk and protecting the downside, but fiduciary duty goes both ways, encompassing both protecting against downside risks and pursuing opportunities for growth in equity value. In the context of a company, fiduciary duty includes both the executive leadership team and the company’s board of directors. The board of directors is responsible for overseeing the company’s management, setting its strategic direction, and ensuring the company is run in the best interests of shareholders, which includes corporate governance, appointing and incentivizing the management team, setting the strategic priorities of the business, and executing major financial transactions. The executive leadership team are responsible for day-to-day operations, executing the strategic plan set by the board, making operational decisions that impact the company’s financial health and performance, and managing the company’s assets, resources, and operations in a manner that maximizes shareholder value. Based on my descriptions above, I would assert evaluating the bitcoin treasury position is a responsibility of both the board and the executive team. 

If bitcoin companies are building products and services for holders of bitcoin based on expected secular growth in bitcoin users globally, then they have already come to the view that the benefits to pursuing their business plan both justify the resource commitments (time and capital) required to achieve their objectives and outweigh the downside risks of bitcoin actually not being adopted at the pace or to the extent expected. From a fiduciary perspective, if the companies have already gotten comfortable with this “bitcoin risk”, why are they not as comfortable with that same risk on their balance sheet? 

If it turns out there is some critical flaw discovered in bitcoin software or some catastrophic exogenous factor that suddenly makes bitcoin irrelevant, then it’s probably a safe bet there will be no need for the companies building products and services for the bitcoin ecosystem. As such, a bitcoin company’s fate is already inevitably linked to the lack of bitcoin adoption on the downside. On the other hand, if the adoption of bitcoin continues in the coming decades (as believers in bitcoin have conviction it will), then bitcoin companies are positively skewed to benefit from this growth operationally. While building products and services in the growing bitcoin ecosystem will not ensure success (this will depend on achieving product-market fit, developing a sustainable business model, and successful execution), a company’s proclivity for success is inevitably correlated to bitcoin’s upside. 

Considering a company’s balance sheet, if bitcoin turns out to be a failure, the amount of bitcoin a company decides to hold in its treasury will not be the deciding factor in the trajectory of its equity value… the company will be destined to fail alongside bitcoin. On the other hand, if bitcoin adoption continues and the value (and purchasing power) of bitcoin rises consequently, then the benefit and equity value appreciation to come from a company’s decision to hold bitcoin on its balance sheet will be directly proportional to the bitcoin position they accumulated and held in their treasury over time. 

To be sure, a company’s balance sheet should not become purely a speculation platform for the expected appreciation of bitcoin. However, as described above, to some extent bitcoin companies’ success is already dependent on the expected appreciation given these companies can be thought of as “derivatives” of bitcoin, and therefore it makes sense to consider whether a company’s liquidity is appropriately weighted between cash and bitcoin. 

Bitcoin treasury as a lever to equity value growth

As I have described previously, a company’s equity value appreciation over a defined time period can traditionally be thought of as being driven by three primary factors: (I) company growth over the period (typically revenue or profit growth, multiplied by some constant valuation multiple), (II) cash flow generation (and more importantly going forward, sats flow generation), and (III) any change in valuation multiple of the business relative to financial performance (increase or decrease in valuation multiple, multiplied by current revenue or profits). I believe the incorporation of bitcoin in the corporate treasury allows companies to capitalize on a “fourth lever” of equity growth, simply defined by the appreciation of value in the company’s balance sheet over the same time period (apart from net cash flow), which benefits the earliest adopters of bitcoin most and diminishes over time as bitcoin’s value appreciates.

Based on the above, how should companies think about sizing bitcoin as a treasury asset and a lever for equity growth, given their business prospects are already tied to bitcoin’s long-term success as an asset? As one might expect, there is not a one-size-fits-all answer to prescribe for each company; however, I do think there is a framework each company can use for thinking through the near-, medium-, and long-term factors at play in their own financial planning decisions to find a sweet spot that can not only offer some protection against potential downside risks and unknowns but also offer a sufficient level of balance sheet upside through bitcoin’s long-term appreciation (thereby appropriately fulfilling their fiduciary duties of managing risks while pursuing equity value growth). 

At Ten31 we have had a front row seat partnering with and advising more bitcoin companies than any other group, and our thinking on bitcoin treasury has evolved over time, particularly over the last twelve months. Our latest advice can be summarized as follows, with three big buckets I believe are important for including in a company’s treasury policy and goals: 

• Near term working capital needs (first priority): As we’ve seen with many banking insolvencies in 2023 (SVB, Signature, Silvergate, Credit Suisse, among others), the banking landscape is fragile, and available funds can disappear at a moment’s notice when the next “rare” black swan surfaces from within an over leveraged financial system. Combined with the additional risks of being de-banked at the whims of politicians and bureaucrats who target the out-of-favor industries du jour, in this day and age one can never be sure assets in a bank account are actually theirs or can be accessed at will (hence, one of the key value propositions of bitcoin…). With that backdrop, it is critical that every company should maintain a minimum of 3 months of working capital needs in bitcoin in case there is a disruption of access to dollar reserves (which hopefully is only temporary). This will provide some flexibility to meet near term liabilities such as payroll using bitcoin as a fallback option. 

• Medium term liquidity reserves (first priority): If a company is not already operating profitably or cash flow positive (which should be one of the top strategic priorities of any company), it should maintain enough reserves on its balance sheet to comfortably sustain itself until its next capital injection (i.e. a company needs to have enough capital to keep the lights on for the foreseeable future while it continues to build and invest resources behind its growth). For early stage companies, the requisite amounts can vary, but for example, this might typically amount to two years of runway in between sequential fundraising cycles. Ultimately, this will depend on what milestones a company may be targeting or what may be required by investors before the next fundraising “check point”. 

  Given most companies’ obligations are still in legacy USD or international fiat equivalents, the medium term liquidity reserves would typically be held in cash or cash equivalents (to match the liabilities), though they could alternatively be held in a mix of cash and bitcoin, or 100% in bitcoin, provided there is additional cushion built into the reserves to account for the potential risks of drawdowns in the purchasing power of bitcoin over any near-term period. 

  It is not unusual for bitcoin’s price to face 50-80% declines over shorter durations (despite an average four-year CAGR of 100% since the 2012 halving), so this must be taken into account if holding some medium-term reserves in bitcoin. Examples: (i) minimum 2 years runway if reserves held strictly in cash, (ii) 18 months runway in cash and 12-18 months runway in bitcoin (2.5-3 years total runway), or (iii) 3-4+ years runway if reserves held predominantly in bitcoin. These are suggested minimum starting points at the culmination of any successful fundraising cycle. 

  A properly managed bitcoin position in the treasury can also be a non-dilutive way to extend a company's medium-term runway if executed correctly (e.g. we saw this with certain companies in our portfolio which allocated some portion of a fresh raise to bitcoin during 2H22 / 1H23). Given bitcoin’s volatility, the best strategy here so as not to purely speculate on market timing is a simple dollar cost averaging approach, planned in advance and accumulated over an extended period. In this way the long-term value appreciation of bitcoin on the balance sheet can be a lifeline for some companies and reduce the degree of potential future equity dilution. 

• Long term balance sheet position (secondary priority / stretch objective): When a company’s near-term working capital and medium-term liquidity needs have been satisfied with adequate reserves as laid out above, the ideal end state is to also accumulate a long-term bitcoin position which is meaningful enough to positively influence the company’s equity value trajectory as bitcoin appreciates, since the success of the company is already inextricably linked to the success of bitcoin as an asset. 
  As alluded to above, when doing a back-testing of bitcoin’s price appreciation over every possible four-year holding period since the 2012 halving, the average appreciation of bitcoin has been roughly 100% annually (worst four-year return: 25% CAGR; 95th percentile: 165% CAGR). When assessing performance metrics of investments into private companies, most benchmarks would suggest top quartile performance in venture and private equity funds typically achieves at least 20%+ annual equity growth. With this as hopefully a lower bound of what should be achievable in the bitcoin ecosystem (where there is higher volatility, but also higher growth and exponential upside), then a sizable enough bitcoin position to have a meaningful impact on a company’s total equity growth is likely 10% of a company’s total equity value. For example, if a company is valued at $10 million, it would target $1 million in long-term bitcoin reserves; a $500 million company would target $50 million in long-term bitcoin reserves. Under this framework, if bitcoin delivers average appreciation of 50-100% per annum (below the performance of the last 12 years as specified above), a 10% position in bitcoin relative to equity value could contribute 25-50% of the growth required to hit top quartile benchmarks, before accounting for any equity upside delivered by company growth and financial performance (i.e. bitcoin would contribute 500-1,000 bps in annual equity appreciation).

A few notes to the idea above: first, this assumes a company has sufficient provisions to hold long-term reserves as just that, i.e. is willing and able to hold for at least 4 years (beyond assumed fundraising cycles which may be required if not yet cash flow positive). Second, I am aware there may be corporate finance rebuttals to the above, arguing a company holding excess assets in bitcoin may imply they have no better use of capital to achieve outsized returns in their own business and that this liquidity should instead be distributed to shareholders who can decide how to invest that capital at their discretion (including deciding whether to hold bitcoin themselves). Third, I acknowledge a 10% bitcoin target relative to equity value may be ambitious, especially given most early stage companies typically raise equity representing 10-20% dilution in each fundraising round just to provide them enough capital to hopefully successfully make it to the next capital injection (i.e. establishing a sizable long-term treasury position may not be feasible or practical in the context of just one fundraising cycle). As such, perhaps the 10% position becomes a stretch target to be achieved over time, either over multiple fundraisings, or by generating profits / sats flows which can accumulate as bitcoin on the balance sheet, or by allowing a smaller bitcoin position to grow into that level over time as it appreciates. For further context, I have shown balance sheet positions of several selected public companies below. A 10% target may be challenging, but I believe it is a worthwhile and achievable goal, particularly with the appreciation potential of bitcoin relative to traditional cash and marketable securities.

Conclusion

Successful implementation of the above strategy can extend a company’s runway as bitcoin appreciates (thereby minimizing potential future dilution), deliver a strengthened balance sheet over time, and even potentially position a company for the proverbial “last raise ever”. Further, accumulating a meaningful bitcoin position early enough can allow challenger companies to establish a solid foundation relative to incumbent legacy companies who may not decide to begin accumulating bitcoin until much later after the value has appreciated demonstrably (at which point their fiat cash flows will earn them considerably less bitcoin than would be available to them today). 

Finally, as a thought exercise, imagine the scenario where a company has raised equity over a series of fundraising rounds, has accumulated a large bitcoin position over that time which has appreciated in value, and by the time it seeks its next round of fundraising the then-current value of its balance sheet has exceeded the cumulative amount of equity raised up to that point (including potentially reaching profitability and positive sats flow generation by that time). This would be the holy grail of building a sustainable bitcoin business to endure generations, and would likely require new ways of thinking about valuing businesses going forward. 

I believe the end result is a return to a focus on profitability and sats flows. It is my hope and expectation that more companies in the space will begin thinking about these topics in a similar way and begin to accumulate a larger amount of bitcoin in their treasury. Those that do will be best positioned to survive and drive equity value creation over the long-term.

Bitcoin, Scarcer Than You Think

As the global economy grapples with ongoing financial turbulence, bitcoin remains a prominent subject of discussion that has increased in importance over the last decade. To an outsider  who is merely glancing through a singular lens, bitcoin is only seen as a speculative asset. However, such a perspective only scratches the surface of  bitcoin’s full potential. To truly fathom the possibilities of how this new medium will be used in value exchange, we must move past the surface level of market price and delve into the diverse financial functionalities this new technology affords. As we unearth more sophisticated avenues to leverage bitcoin’s properties of finite supply, fungibility, divisibility, and liquidity, a fundamental shift in its perceived and actual scarcity is inevitable. We will realize we have lived in an abundance of bitcoin with over 90% being distributed and easily accessible in the first decade, while in the coming decades acquiring bitcoin in size will become harder as companies begin to unlock bitcoin’s value.  Companies like Unchained, Battery Finance, and AnchorWatch are creating novel ways to pair bitcoin with the $46T US credit market, $4T US real estate market, and $1T US insurance market in a truly uncorrelated way for mitigating risk and increasing returns.  Unlike in previous cycles where dormant bitcoin has flowed onto exchanges for investors to access liquidity, in the coming cycles liquidity will be unlocked by novel products and services for holders of bitcoin, eliminating the need for selling bitcoin and further reducing the marginal supply available for purchase.  

Bitcoin-backed Loans

Ancient Rome pioneered various financial instruments, with a formal process for collateral-backed loans standing paramount. Citizens often pledged tangible assets, such as land, as collateral to borrow capital. Bitcoin-backed loans are the digital age's interpretation of this practice, and Unchained, a bitcoin native financial service company, has produced the standard for lending in the digital age with their over-collateralized loans in a multisignature account. Much like how Roman farmers would leverage their land value while still cultivating it, today's bitcoin holders can secure liquidity without relinquishing their asset, preserving potential long-term appreciation while minimizing counterparty risk for both the lender and borrower through the use of distributed multisignature accounts that are easily verifiable on the blockchain.

Unchained currently offers loans at a 40% loan-to-value (LTV) ratio using Bitcoin as collateral protecting the borrower and themselves from the emerging asset’s volatility. Time and again, Bitcoin has showcased its superiority as pristine collateral thanks to its global availability for trade every minute of every day, which sets it apart from traditional collateral assets like real estate.  Traditional assets often require lenders to factor in liquidation discounts due to a limited buyer pool, high transaction costs, and other restrictions. In contrast, Bitcoin's vast accessibility makes it the ideal collateral.  Over the past six years, Unchained has successfully issued loans worth over half a billion dollars, all while maintaining a record of zero credit losses, even during dramatic 50% daily value dips.  Whereas some competitors have ceased lending operations or closed down due to significant losses stemming from counterparty risks, Unchained has thrived across multiple cycles and drawdowns. 

Battery Finance Powers Novel Financial Solutions

Battery Finance is an innovative institutional platform providing structured credit opportunities powered by bitcoin to meet real world asset financing needs. Battery’s solutions add a small amount of bitcoin collateral to traditional asset-backed loans while allowing lenders and borrowers to share in the long-term price appreciation of the asset, fusing the digital and the physical worlds. These innovative loan structures are designed to enable lenders and borrowers to both smooth out the short term volatility of bitcoin and create a return profile that is superior to that of traditional real estate lending alone.  The infusion of bitcoin changes the financial contract’s overall profile like a pinch of spice changes a common dish into an exotic cuisine. Just as bitcoin revolutionized the concept of money and value, its union with real world assets is expected to further transform our understanding, laying the groundwork for a future where their interplay could redefine wealth and property in the 21st century.

To zoom in on real estate lending, Battery Finance’s solution is the creation of a dual-collateralized loan composed of bitcoin and the real asset. The way this can be envisioned is when a property owner enters into an agreement where they are refinancing an underlying physical asset along with financing a bitcoin purchase.  By pairing two uncorrelated assets, Battery is able to express its constructive long-term view on bitcoin as supplemental liquid collateral in a downside case, but also with bitcoin upside shared between the lender and borrower as the loan reaches maturity. Battery loan terms offer attractive borrower cash flow requirements through lower amortization or interest only rates and flexible repayment options without yield maintenance, compared to traditional loans that entail substantial interest, amortization, and make-whole clauses or prepayment premiums. In some instances, the cumulative difference between the cash flow requirements of a Battery loan and those of a traditional financing are close to the value of the bitcoin being financed (meaning the cumulative cash flow savings can nearly pay for the bitcoin being acquired).  Put another way, the borrower is getting a long-dated bitcoin call option at a very low cost through a Battery financing.

During the past cycle we have seen multiple institutional collapses with >$100 Billion equity value evaporate from businesses who were promising “yield” on your bitcoin.  What these businesses didn’t say was where the yield was coming from.  Turns out the yield came from greater fool games, along with outright frauds.  Unfortunately, a lot of hard lessons were learned by a global population of investors who may or may not have been fully informed on the risks they were taking.  Battery represents a different, new, and promising path, with a more ethically minded sharing of risk of future performance. Meanwhile, in downside scenarios the pledged bitcoin is available to over-collateralize the loan, and provide the borrower better terms than if they had only the one asset. By better mitigating risk and sharing upside, Battery is able to more efficiently utilize productive capital.

Bitcoiners can also use their bitcoin to sustainably acquire income-producing properties, reorienting their returns to include both income from the traditional asset and appreciation from both the traditional asset and the bitcoin.  Given that income generating assets often have extensive histories on their productivity, bitcoin holders will be better able to understand “where the yield comes from” and make informed decisions on the total risk they are assuming.  Strategically combining bitcoin with other income-generating assets, investors can cultivate a steady flow of income from one or more projects thereby diversifying their overall assumed risk. Like dividends, this income stream is derived from the underlying asset's performance, allowing bitcoin holders to diversify their portfolios and realize consistent returns while still maintaining bitcoin upside.

Bitcoin Insurance Breaks New Waters

There have always been watershed moments when innovation has paved the way for new markets. The genesis of maritime insurance in the 17th century occurred as seafaring trade grew exponentially.  There was an imminent need to cover the risk of valuable cargo being lost to pirates or natural calamities. Lloyd's of London, originally a coffee house where merchants and shippers met, transformed into an institution that started insuring ships and cargo. This innovation didn't just provide protection against losses; it fundamentally fueled global trade, allowing merchants to venture into new territories with minimized risks.  Fast forward to the present day, and we witness a similar transformation with AnchorWatch leading the way in the realm of a digital asset, bitcoin. 

For the first time, bitcoin stored in multisignature accounts can now be fully insured, a stark contrast to today where exchanges and qualified custodians can only cover up to a certain limit, and do not allow insured customers to hold their own keys, thus injecting additional counterparty risk.  With 99% of all capital still to come into bitcoin the waters just got safer thanks to AnchorWatch who is able to fully insure institutions against lost and stolen bitcoin.  This groundbreaking stride has been possible due to the native scripting language of the bitcoin protocol, which lays the foundation for truly programmable money.  Multisignature accounts, by relying on multi-institutional custody and/or layered key permissions (such as AnchorWatch’s innovative and unique approach to Miniscript), dramatically reduce the risk of single points of failure and introduce robust disaster recovery pathways.

Just as ancient ports transformed from simple docklands to sprawling harbors, and then evolved again with the construction of colossal container terminals, AnchorWatch is redrawing the financial horizon. Container terminals became an inextricable part of modern seasides, so too will fully insured collaborative custody solutions become the standard for all fiduciaries interacting with bitcoin. AnchorWatch recognized and acted on this paradigm shift allowing bitcoin and bitcoin-collateralized lending to stand shoulder-to-shoulder with traditional assets and collateralized credit. A new wave is upon us, placing bitcoin-centric financial instruments on the same pedestal as their conventional counterparts.

Implications for Demand and Supply Dynamics

The 19th-century gold rush serves as a compelling analogy for bitcoin's supply-demand dynamics and its ultimate use as a medium of exchange.  As thousands flocked to California, most miners’ immediate instinct was merely to sell the mined gold. Entire ecosystems — from infrastructure developments like railways to nascent financial systems — sprouted around the transaction of the precious metal. As new financial participants entered the fray to offer everything from bills of exchange to collateralized lending, there was a decline in the need to actively sell gold as value was exchanged in the form of a liability against an asset. This example showcases a historical path humanity developed for unlocking gold’s ability to be used as a medium of exchange in business without having to interact with gold directly.  Similarly, as bitcoin evolves into a cornerstone of diverse financial instruments, the impetus to outright sell the asset for liquidity will diminish.  Instead, leveraging bitcoin in a myriad of ways as presented above will become the norm.  Just as towns and ancillary industries burgeoned around gold mines with the requirement to directly liquidate gold diminished for transacting business, bitcoin’s future is unfolding now with innovations that maximize its utility without holders having to deplete their reserves for utilizing bitcoin as a medium of exchange.

Conclusions

Historical parallels aren't just exercises in retrospection; they provide a lens to predict the trajectories of emerging phenomena. Financial innovations such as the Roman collaterals, coffee houses turned insurers, and boom towns of the gold rush have often broadened economic horizons, fostering societal wealth and advancing financial inclusivity.  As our understanding of bitcoin transmutes around these time-tested analogies, its present day utility expands.  Instead of merely being a speculative asset or static store of value, bitcoin is swiftly becoming a foundational pillar in modern financial architectures. The diverse and growing  ways it can be interlaced with traditional asset classes not only accentuate its utility but also underline our evolving understanding of its scarcity.

Bitcoin is poised to be the cornerstone of 21st-century financial architecture on the back of innovative companies like Unchained, Battery Finance, and AnchorWatch, and will inevitably become far scarcer than many anticipate. As liquidity mechanisms evolve, selling bitcoin will become progressively less necessary, leaving less and less of bitcoin’s static supply available for sale against an accelerating market demand, radically amplifying bitcoin's scarcity. To be ahead of this curve, one must reevaluate their stance on bitcoin. The future is not just about owning Bitcoin; it's about comprehending its evolving utility.  By harnessing these emerging financial innovations, we don't just witness history — we become active architects of a new financial system. So, as stewards of the future, let's champion, embrace, and pioneer these avenues, ensuring that we are not just spectators but active participants in this financial odyssey before us.

Forbes’ Steven Ehrlich Interviews Ten31 Co-Founder Jonathan Kirkwood

Jonathan Kirkwood is a cofounder and managing member of Ten31, a venture capital firm that exclusively invests in the bitcoin ecosystem. Kirkwood previously served as a physician for several years, earning his medical degree at the Ross University School of Medicine in Barbados in 2009. He received an M.B.A. from Ball State University in Indiana in 2020 and a B.S. from the University of Evansville in 2005. Kirkwood started in crypto in early 2017 and became interested in a bitcoin-only strategy in 2019. In this discussion we cover why Ten31 only focuses on bitcoin, how his firm tries to pick winners in the space, his thoughts on the rise of ordinals and meme tokens on bitcoin and how he is preparing his portfolio firms for the halvings. We also focus on bitcoin miners and ways that they are trying to take advantage of the surge in artificial intelligence demand.

FORBES / Tell us a bit about your company.

JONATHAN KIRKWOOD / We’ve deployed a bit more than $100 million over the last four years into 30-plus companies within the bitcoin space. This includes vertically integrated miners, whether that’s oil and gas, renewables, co-location, on-grid or off-grid firms or other companies that are building linkages to financial services, like Strike, Unchained Capital and Fold.

FORBES / You only invest in the BTC ecosystem?

KIRKWOOD / We like to think of it as technology companies that are leveraging the bitcoin stack. You may have companies like Fold that are offering bitcoin rewards. They are utilizing the properties of the asset for attracting customers to its product and services, but you have other companies like Strike that are using the Lightning Network for providing instant global finality and settlement. We think that’s interesting.

FORBES / What about exchanges? Obviously, they have to integrate with the networks and many are also integrating Lightning as well to facilitate deposits and withdrawals.

KIRKWOOD / They are slowly doing that and some of them are partnering with companies in which we’ve invested.

FORBES / What kind of checks do you write? What do you look for in an investment?

KIRKWOOD / Our North Star has been bitcoin winners, building great products and services that we would want to be utilizing ourselves. We write checks for as small as $200,000 for early firms, where it’s just a founder with an idea they’re working on, all the way to Series B. We led Strike’s Series B last year, where they raised $80 million, and through our strategic partners delivered over half of that.

FORBES / What types of services do you provide portfolio companies?

KIRKWOOD / Between my partner Grant Gilliam and I, we sit on seven boards. And we also have two other partners, Marty Bent and Matt Odell.

One really unique thing we do, and we started last year, is having a portfolio retreat. We think bitcoin is a very interesting model to follow in that it is an open, permissionless system. And it is taking down a walled garden. In October, we bring together all the portfolio companies. They are all working in different sectors of the economy, but they’re all interacting with bitcoin in some way. So that there is this initial tie of camaraderie that can easily be fueled for synergies. We have seen real dividends over this last year from the event that we put on this past year.

FORBES / I think there’s a misperception that bitcoin is just this static, rigid thing that was unleashed on the world 15 years ago and hasn’t really changed much. Obviously, that’s not true. How do you see the bitcoin ecosystem evolving? What are you trying to sell to your prospective LPS in this new fund when they say what’s next?
KIRKWOOD / We think that bitcoin as an ecosystem is still nascent and emerging. Since 2013, the U.S. government has had a specific stance that bitcoin is a commodity—it will be regulated as a commodity and is taxed as a commodity—and they’ve been absolutely consistent about this over the last decade, through different administrations and regulatory bodies. Because of that we see bitcoin on a risk-adjusted basis as very low risk, and that as the adoption of bitcoin diffuses outward the amount of dollars and users coming into the space is going to be growing exponentially. As those users come in there’s going to be infrastructure built around the network and the asset that will be capturing value. The early movers and the companies we identified and targeted are building out the technology to be able to service the needs of these new users who are coming into the bitcoin ecosystem. And those different infrastructure plays or their technology then eventually will become the infrastructure that holds up the entire ecosystem, whether that’s mining, financial services, lightning or other layer services, consumer applications or emerging
markets. Each one of these buckets will have initial movers that are going to be gaining such outsized advantage that trying to displace them is going to become almost insurmountable.

FORBES / Why hasn’t bitcoin adoption really taken off, especially from a payments point of view?

KIRKWOOD / This isn’t a one-year or five- year time horizon. Our belief is that bitcoin is going to be the next world reserve asset. Right now the world is in flux. We don’t think that the world has settled on a world reserve asset. After having the U.S. Treasury market over the last 40 years hit that near zero bound, we’ve ended that period. And so now, over the next 10, 20, 40 years, while bitcoin makes this ascent to the world reserve asset, we think there’s going to be large-scale adoption.

One massive recent signal is BlackRock getting in with their bitcoin spot ETF. I think that is a monster of a signal that the market just hasn’t digested. What I think it does is lower the hurdle for financial institutions and financial advisors, because no longer are they going to have career risk. Over the last 15 years the mainstream media has classified bitcoin as something that is only used by criminals, for dark markets or money laundering. But now with BlackRock lowering the hurdle for these institutions to be able to come in I think that’s a big signal. I don’t think BlackRock takes a shot unless they think they’re going to hit it. A second thought is that it reduces the friction for anybody, anywhere with two clicks of a mouse to be able to sell their Apple stock and buy a bitcoin ETF.

FORBES / How does all that fit into your strategy? How much utility does there have to be for bitcoin to deserve the digital gold narrative?
KIRKWOOD / Let me answer like this: Look at what Strike is doing with its Send Globally payments service. This example highlights the second piece of the bitcoin network or the Lightning Network. We’ve needed five years of maturation on the Lightning Network for it to be able to be where it is today. And, yes, Strike allows users to send value anywhere in the world over the Lightning Network. But the real interesting piece, and what I don’t think people understand, is what they are allowing businesses to do. Let’s say a business in Nigeria wants to be able to purchase an input or a product from Ghana. But they can’t either move into or doesn’t want the naira currency. They want U.S. dollars. Now through Strike’s Send Globally, businesses in Nigeria can take their naira, convert it to bitcoin, move it to a U.S. bank account, where it’s in dollars, and then purchase those inputs in Ghana using U.S. dollars, so they can build and grow their business in Nigeria. All that happens instantly. And that has nothing to do with the price of bitcoin because that happens in a fraction of a second. All because this is a final settlement network.

FORBES / What are your thoughts on BRC-20 tokens, the Ordinals Protocol, and bitcoin meme tokens?
KIRKWOOD / Block space is a finite resource. I wrote a piece at the end of last year about block space, and I didn’t realize that you’re going to have ordinals coming out three months later or BRC 20, and that we would be innovating on ways to use block space. Do I think that ordinals or BRC 20 are something novel and investable to date? I don’t. I’m waiting for a bit more clarity, actual time in the market for people to decide. But I do think that is valuable and that there will be a use case.

FORBES / I want to go back to mining. Do you invest in public or private miners or both? and continued building

KIRKWOOD / Mainly private but we do have one public miner. We typically look for best in class, like Upstream Data.

FORBES / What is most important to you now?

KIRKWOOD / I think what’s shown to be most important is rack space. And who has the ability to build out low-cost rack space and highly attractive geographical locations. And what’s happening in the TVA (Tennessee Valley Authority) is very attractive, because they’ve really leaned into bitcoin miners and the programs that they’re offering. One of our companies targets rural de-industrialized areas so the regulators in these co-ops seek us out and say, okay, we have 10 megawatts or 20 megawatts for you guys. So we’ll go in and we’ll co-locate a 10-megawatt site. What we provide is the purchasing of that power, otherwise the co-op would have to decrease the amount of power they were purchasing. And then that would increase the rate that the end user would be paying. That’s why they seek us out because us coming in either maintains the current cost of electricity to the end users within those rural communities or reduces it, along with the ability to be able to turn off or put the energy back on the grid during peak times.

FORBES / Many miners are making noise about getting into artificial intelligence now. What are your thoughts?
KIRKWOOD / I group this all into distributed compute because bitcoin was the first distributed compute you can easily turn off and the network continues to function. The same is going to be for AI in the amount of rendering required. You can look out just a couple of years from now and I fully anticipate where these LLMs (large language models), like ChatGPT, will be where you will be able to watch a movie that never existed until you were viewing it at that time. But all the amount of rendering it’s going to take to be able to provide that to a billion people on the planet will require a massive amount of computing power. If you go back 15 years ago, a 50-megawatt site for building out a data center was enormous. Now that is almost average. And so, I think we’re going to have to 1,000x the amount of rack space over the next decade to be able to meet the amount of distributed compute requirements.

FORBES / Are there going to be some companies that just do bitcoin mining and ones that want to have flexibility? How do they do that in a cost-efficient way?

KIRKWOOD / I think there’s going to be multiple revenue streams. Right now with a data center you have one revenue stream where you’re taking energy in, and you are producing hashes with that. We’re now moving into where you have two revenue streams, where the second add-on is these programs where you’re returning power back to the grid. So I lock in a 5-cent power contract for five years, and then during peak times I sell it back to the grid for 15 cents. You’ll add on an AI amount so you will have 30%, 20%, 40%, depending on where the market falls. So you’ve got multiple lines that are very near term for these bitcoin miners.

FORBES / The halving is about a year away. I’d like to hear what you think about how the halving will impact the entire investable bitcoin ecosystem.

KIRKWOOD / We made a significant push in the first quarter of 2022 to make sure that all our companies had enough runway to last well past the second half of 2024. The halvening, BlackRock ETF, election cycle coming up, and federal funds rate in the second half of the year are expected to be a perfect storm for bitcoin and the middle of 2024. Then the second piece is that 90% of its total bitcoin supply has been distributed. So over the last 15 years, I’d like to think of this as an abundance of bitcoin that has been sloshing around the market and has been easily accessible. The next 10% isn’t going to be distributed for the next 120 years. The next 5% isn’t for the next ten years. So if you look at that on a relative basis of the last ten years 90% was distributed, the next 10 years only 5% is going to be distributed. That’s a 45% increase. I don’t think people understand that we’ve gone from an abundance to a supply that just doesn’t exist.

FORBES / Are there any interesting use cases or innovations coming out related to bitcoin that you think people should keep an eye on?
KIRKWOOD / I think we need to be paying attention to Nostr. This ties back into bitcoin providing the best way to build a business from scratch. If you look at bitcoin like a company, the asset has accrued $600 billion in market value with no CEO and no marketing budget. I think Nostr, as an open- source communication protocol, is going to do the same over the next ten years. And we’ll be utilizing bitcoin to be able to transfer value for value over this open- source communication layer so that eventually X (a.k.a., Twitter), Meta and Instagram are all going to be Nostr clients operating in an open permissionless network that is built on Nostr.

Ten31 Announces Investment in Primal

Ten31 is excited to announce its investment in Primal’s Seed Round capital raise. Primal is a first of its kind platform for the Nostr protocol that combines a client, caching service, and analytics tools to address several unmet needs in the nascent Nostr ecosystem. Through the combination of its sleek client application and its caching service, Primal seeks to offer an end-user experience as smooth and easy as that of legacy social media applications like Twitter, unlocking the vast potential of Nostr for the next billion people.

As we’ve written elsewhere, Ten31 believes that the Nostr protocol (“Notes and Other Stuff Transmitted by Relays”) has the potential to be among the decade’s most significant steps forward for global communications. Nostr leverages public key cryptography to allow anyone in the world to create and manage a profile without permission, then seamlessly plug that identity and its social graph into any application using the Nostr protocol. Users can then transmit data including text, images, and video content through a distributed system of message relays that anyone can operate, ensuring resistance to corporate or government censorship. As an open protocol, Nostr allows any individual or company to freely build applications on top of its very simple architecture. Much like bitcoin, then, Nostr is permissionless, censorship-resistant, simple, and open, a powerful combination that has several significant implications: 

• No gatekeepers: No user is beholden to the whims of any middleman. If one relay won’t broadcast your content, you can just connect to another of the dozens that have already sprung up, and broad-based censorship just creates market incentive for paid relays, which can charge a fee to broadcast content. Even if all relays refuse to broadcast your data at any price, you can always run your own, meaning the days of online deplatforming are coming to an end.    

• Portable social graphs: Because each user’s content is tied to a public key identity (an “npub”), creators can build large social graphs across many different end-user interfaces (“clients”) – all their followers need to do is plug the creator’s npub into their favored client. This dramatically expands the network effects of the Nostr protocol since content isn’t siloed to one particular platform (as is the case with legacy social media like Twitter and Facebook) and can be automatically pushed to hundreds of clients at once. This also ensures creators can’t lose their audiences just because one client might not allow users to see their content, and they can’t be locked out of interacting with their followers (a problem that also plagued prior attempts at decentralized social media like Mastodon). 

• Better value capture: Creators on Nostr don’t lock their content into a centralized walled garden that can farm it for advertising dollars, demonetize it, or delete it on a whim (or at the behest of “misinformation” busybodies). So long as they maintain the security of their private key, anyone posting on Nostr fully owns their content and can receive value for it without permission or interference from middlemen extracting their cut, as evidenced by the proliferation of “zaps” – instant bitcoin micropayments over the lightning network – which have transferred nearly 1.2 billion sats (12 bitcoin) directly to creators over the past six months. This permissionless, direct value transfer can also become a powerful discovery tool since there is a real cost (and thus higher signaling value) associated with sending zaps, unlike “reposts” or “likes.” 

• Real market competition: While we expect some relays and clients to eventually begin charging for services (e.g. paid relays could charge for enhanced filters, clients could charge for premium features), Nostr’s architecture ensures all these entities will be highly constrained by true competition. Since anyone can set up a new relay and users can almost instantly port their profiles to a different client without losing followers, all service providers will need to fiercely compete on both the user experiences they offer and the fees they charge, a stark departure from legacy online communication platforms. 

• Rich, diverse ecosystem: Nostr’s simple, open standards allow developers to easily create a wide array of new applications, many of which were impossible or impractical before. While the applications with the most early traction have been Twitter-like social media clients like Primal, there is a host of other use cases already being built out, including longform content (Habla.news), music distribution (Stemstr, Wavman), marketplaces (CivKit, Nostr Marketplaces), exchanges (n3xB), and even totally new types of shared online content (Highlighter). We expect this ecosystem to grow substantially over the next several years. 

• Privacy: Users can interact on Nostr with a much higher degree of privacy than is possible on any centralized social media platform. There is no need to verify one’s identity or provide sensitive personal information to get started or enjoy a high quality user experience, which is increasingly important given the growing KYC burden imposed on Twitter users – something Ten31 partner Matt Odell has warned about extensively in recent months. 

This compelling set of benefits has led to explosive growth in Nostr use since late last year when the protocol began receiving more attention. In just over six months, the total Nostr user count has ballooned from under 20,000 to somewhere in the neighborhood of 300-500,000 with users showing solid 30-day retention rates, and all without any marketing budget or paid influencer endorsements. The organic and rapid expansion of the Nostr ecosystem since late last year confirms our long-held thesis that the real “Web3” will not be built by centralized, closed-source companies peddling their own proprietary and worthless “tokens,” but rather on open standards and decentralized, censorship-resistant infrastructure, with monetization powered by bitcoin, the native currency of the internet. The opportunity for true innovation that Nostr opens up is substantial, and we’re not the only ones who think so:

All that said – and as Jack points out in the post above – Nostr still suffers from many of the limitations typical of an emerging technology standard. Most notably, Nostr applications generally still can’t offer parity with the UX of the more widely adopted centralized systems they seek to replace. While many talented developers and contributors have made great strides in improving client UX over the past 12 months, most applications today are still at least somewhat slower, clunkier, less reliable, and / or more limited in functionality than the more established mobile and desktop apps to which users have gotten accustomed over the past couple decades. As a result, Nostr users today have to be willing to tolerate some subpar UX elements, which tends to select for users who are ideologically motivated (e.g. proponents of bitcoin, open source software, and / or censorship resistance). To take the next step forward, Nostr applications need to continue improving in accessibility and ease of use.

Primal fixes this. Through a first of its kind caching service and fully open-source tech stack, Primal – available now on the web, iOS, and Android – regularly loads full Nostr profiles and conversation threads in under a second, while offering an infinite feed that users can scroll for hours on end without lags, crashes, or other performance degradation. The Primal client also offers a full suite of discovery features that social media users have come to expect, including advanced and fluid search tools, trending content, recommended profiles, and more, all while making optimal use of both bandwidth and device battery life. Taken together, all this functionality gives users a Nostr experience that feels, for the first time, truly comparable with what they can get on a centralized platform like Twitter. 

Meanwhile, Primal’s caching service also helps strengthen Nostr overall, as it both reduces load on the network’s relays (thus reducing the tendency toward relay centralization) and adds another layer of content propagation that potential censors would have to shut down in addition to the relay network. Simply put, Primal levels up Nostr’s UX to bring its benefits to a mainstream audience while further bolstering its resilience. 

Though Primal’s initial focus revolves around its Twitter-like client, users should expect much more to come over the next couple years. As discussed above, Nostr’s primitives enable much more than just a recreation of more resilient, censorship-resistant social media tools, and Primal will be at the forefront of pushing those new use cases forward while maintaining a commitment to best-in-class UX. With an expansive vision to make Nostr-based applications not just comparable to but even better than legacy platforms, Primal is set to become one of the world’s premier Nostr companies, and we’re very excited to help support those ambitions. 

Bitcoin is a Cheat Code for Technology Companies

Introduction

At Ten31 we started with the premise (i) bitcoin is a disruptive technology, and (ii) as adoption of the digital asset and network continued, there would be a growing demand for products and services built on top of the network to meet the needs of a growing user base.  We believed businesses building bitcoin technology would not only prove more robust and sustainable as a result of the secular tailwind i.e. long term trend of bitcoin adoption, but also companies building bitcoin-related technology would be afforded unique competitive advantages relative to legacy players based on the attributes of bitcoin and its network effects.  Specifically, companies building in the bitcoin space could leverage the network to benefit from (i) market segmentation, attracting high quality talent drawn to the larger mission of bitcoin; (ii) the “flywheel” of innovation, investment and development, where company development benefits the network as a whole and reinforces a feedback loop where both collaboration and competition can drive additive network effects; (iii)   a truly global addressable market, given bitcoin’s open nature and accessibility across borders which historically was not possible and (iv) an exponentially growing user base, driven by the emerging adoption of a new digital money, which is comparable to and is as unrepeatable as the adoption of digital communication was with the internet.  We understood first movers would benefit disproportionately from these network-oriented advantages, and this would enable growth and development with significant implications for the potential to generate profitability earlier in a company’s lifecycle. I will outline these ideas further in the sections below, using the examples of Fold and Strike, two Ten31 portfolio companies who are both poised to disrupt legacy categories in their respective markets in part because of these advantages. 

Market Segmentation - Think Differently

Market segmentation has served as a unique tool for companies to set apart products and services, but segmentation could be thought about differently where companies adopting a bitcoin strategy are able to set themselves apart and thereby attract engaged talent from across different industries. Thanks to its unprecedented innovations, huge design space, and potential for positive social impact, bitcoin has successfully drawn in passionate entrepreneurs and dedicated customers that actively contribute to the development of applications, products, and services.  For example, Will Reeves, who began his career in venture capital and technology, went on to found Fold, a platform initially formed to enable users to exchange bitcoin for gift cards.  Around the same time, Jack Mallers started independently building out a bitcoin and lightning wallet – though initially a passion project, that wallet would become a precursor to Strike.

The success experienced by these innovators was accelerated by the embrace of bitcoin, which not only differentiated them in the market but also fostered a fervent community of developers and builders. Fold has witnessed first hand their ability to leapfrog into pole position for disrupting the rewards and loyalty market because of the knowledge and experience brought by individuals from Chase, Rakuten, Blackhawk, Lloyd’s and Lending Club.  Fold made a significant pivot early on, ultimately transforming their business model providing bitcoin as rewards instead of using it as a means of payment.  The market has confirmed this strategic shift was a correct move which has allowed Fold to grow at an advanced rate.  Instead of relying on conventional rewards programs such as frequent flyer miles or Starbucks points, Fold’s customers benefit from their unique rewards system on bitcoin, which offers distinct advantages over traditional platforms. In contrast to the depreciation seen in rewards platforms like Starbucks this year, which devalued customers’ points by as much as 50%, Fold users have the certainty that their rewards will remain a fixed proportion of the finite 21 million bitcoin supply.  Over time, this asset has demonstrated a tendency to appreciate substantially, thereby enhancing the value of their rewards and enabling Fold to unlock the creative potential of their dedicated workforce to develop an engaging platform for users that aligns with their passion for bitcoin.  Fold's innovative approach led to an enthusiastic reception when they launched their debit card on the Visa platform, a response echoing the corporate card craze of the 80s and 90s. This success contributed to Fold becoming a preferred partner of Visa, a recognition driven by impressive user growth and transaction volume during and after the launch.

Similarly, Jack Mallers, who has been innovating on the lightning network with Zap Wallet in 2017, scaled up his bitcoin ambitions substantially in 2020 with the launch of Strike.  Strike is working towards becoming the global leader in payments leveraging the bitcoin network and has recently extended its reach to 65 countries, enabling users to easily interact with bitcoin and a US dollar stablecoin. Strike's audacious mission to provide financial tools to everyone, everywhere, has attracted talent from across the board due to their shared passion for bitcoin. This includes top-tier professionals from technical, legal, design, and business development sectors who left established senior roles to join Strike. This team, comprising leaders from companies such as Nike, Robinhood, and Tiffany's, is committed to creating lasting and impactful products based on the mission of bitcoin and Strike's potential to uplift humanity.  Strike is currently leading the way forward as the premier technology company utilizing bitcoin to service customers covering the globe. 

Open Network Effects

Open source networks like bitcoin offer a unique competitive advantage due to their inherently collaborative structure. Companies such as Fold and Strike are prime examples of businesses that leverage this advantage. Each contribution made to this open-source network by various participants across the globe invariably improves the whole system's value, benefiting all users. Companies initially working in a self-interested way to maximize their edge will end up laying the foundation for others to integrate and build on thereby enhancing the overall network's value.  Because contributions to an open system have downstream benefits to everyone, including direct competitors and potential startups, using the bitcoin network will result in a positive flywheel of innovation. For instance, The Lightning Network is a revolutionary technology facilitating faster and cheaper transactions owing its success to an open-source movement involving various companies and individuals who at times can be direct competitors.  The lightning protocol, which operates as a layer-two solution for bitcoin has allowed for greater scalability and efficiency in conducting digital payments enabling new companies to emerge and leverage this open standard.  Both Strike and Fold have embraced this open standard, as it has enabled them to offer seamless and cost-effective payment solutions to their users and merchants.  Each company independently leverages the technology to expand the ecosystem of users resulting in a positive value accrual to all companies operating within this growing user base.

This collective effort stands in sharp contrast to the limitations imposed by closed networks.  An illustrative example of this is BlackBerry's struggle to compete against the open-source nature of Android. While BlackBerry had control over its ecosystem, Android's open-source model allowed an influx of diverse contributions, leading to rapid innovation and a wide spectrum of device compatibility. This open-source development approach has been estimated to be worth billions of dollars when accounting for the sheer volume of man-hours put into these projects. For example, the Linux operating system, another open-source project, is estimated to have received contributions from over 7,500 person years in development of the Linux kernel. If a company were to recreate the Linux kernel from scratch today, it would cost approximately $1.4 billion, illustrating the immense value inherent in open-source development. This highlights the competitive edge that open networks like bitcoin can offer, through collaborative development and the shared benefits of open source innovation. We wrote about this dynamic at length in our piece on Open Source Businesses.

Globally Available

In the digitized financial landscape, global availability and interaction have emerged as critical competitive advantages. Traditional banking systems, characterized by operational limitations, bureaucratic red tape, and temporal constraints, often obstruct cross-border transactions due to complexities in correspondent banking, exchange rate volatility, and rigid capital controls. These obstacles significantly impede the ability of businesses to expand globally. However, bitcoin, the decentralized network, presents an appealing and paradigm-shifting alternative. Bitcoin’s around-the-clock accessibility, worldwide interoperability, and insusceptibility to capital control mechanisms allow businesses to flourish beyond the limits imposed by the traditional banking infrastructure.  Thus it is no surprise, Strike and Fold have recently announced they are leveraging the forward leaning El Salvador for expansion into the global market.

Strike's "Send Globally" service epitomizes this new paradigm. By harnessing the inherent capabilities of bitcoin, Strike bridges the gap between consumers and businesses (C2C, C2B) and business-to-business (B2B) transactions. This platform allows companies to conduct seamless financial operations regardless of geographical boundaries. For the first time, businesses can sell their goods and services globally with instant and final settlement.  Consider a conventional dilemma in cross-border payments where a company in Nigeria needs a product from Ghana but is unable to procure it due to capital restrictions or exchange rate risk.  With Strike's "Send Globally" feature, any company anywhere can offer final settlement on sourcing inputs instantly.  This opens up unprecedented possibilities in the B2B segment, which handles over $100 trillion in payments annually.  Meanwhile, Fold’s bitcoin rewards are globally portable without gatekeepers anywhere in the world, a value proposition that is unheard of in the world of permissioned, vendor-locked rewards of the past.  

Target a Growing, Passionate User Base

Successfully targeting an expanding user base holds paramount importance in the realm of any technology company with new products and services. The bitcoin ecosystem benefits from a continued increase in active participants seeking stable and debasement-resistant assets and has played an instrumental role in propelling bitcoin-related businesses such as Fold and Strike to new heights. These users not only act as early adopters but also assume the critical role of brand ambassadors, passionately spreading the word and attracting new users to these respective companies. This ripple effect fosters increased awareness and wider acceptance of bitcoin technology and the companies supporting adoption.  The correlation between a passionate user base and the triumph of bitcoin-based companies cannot be overstated. By embracing and championing these companies, these users become indispensable advocates, effectively acting as the foundation for further market expansion. Their positive experiences and endorsements generate trust and credibility within the wider community, thereby attracting new users who are intrigued by the possibilities offered by bitcoin and its associated services.  By strategically catering to this dedicated user base, businesses can unlock their growth objectives while simultaneously contributing to the broader adoption and recognition of bitcoin as a transformative force in the financial landscape.

Consider General Magic, a failed software and hardware startup that serves as a compelling cautionary tale highlighting the importance of a dedicated user base in the success of a groundbreaking product. General Magic was an innovative company that developed a revolutionary handheld device well ahead of its time, incorporating features that would later become commonplace in smartphones. Their visionary approach was commendable.  However, despite their pioneering efforts, General Magic faced a significant setback—they struggled to attract a sufficient number of users to sustain their business.  Marc Porat, the founder of General Magic, expressed deep regret over the lack of user adoption.  He recognized the importance of the product they were building, but unfortunately, they underestimated the challenges of selling it to a new audience.  This example vividly showcases the critical role users play in the success of innovative technologies.  Even the most groundbreaking ideas can falter without a passionate and supportive user base.  In stark contrast, companies creating bitcoin technology, such as Strike and Fold, have embraced a different approach.  Rather than building products and hoping for customers to appear, they focus on serving a large and expanding user base primed for substantial organic growth.  As people worldwide seek stable debasement-resistant assets and new payment solutions, these companies are well-positioned to meet the needs of an eager and receptive audience.

Conclusion

Fold and Strike stand out as examples of pioneering enterprises that have fully embraced and capitalized on the bountiful competitive advantages offered by the bitcoin ecosystem.  Their innovative approaches, which leverage bitcoin's global accessibility and open network while effectively utilizing market segmentation and benefiting from an exponentially growing user base, have propelled them beyond traditional competitors in their respective domains.  Such businesses are not mere participants in a changing paradigm but are at its forefront, embodying the future where companies fully integrate bitcoin into their core strategies, thus shaping an economic environment where bitcoin is foundational and early entrants reap outsized returns.

Fold has shown immense potential to revolutionize the substantial $200 billion loyalty and rewards market. The unique concept of earning bitcoin as rewards has not only created a new segment in the market but also offered an innovative and enticing proposition for consumers. In this unfolding landscape, the stakes are high and the rewards, transformative. Strike, on the other hand, is poised to become the comprehensive global money app, delivering financial services to anyone, anywhere, thereby democratizing access to financial tools, thanks to the borderless nature of bitcoin. The growing user base of these companies attests to their potential and the compelling appeal of their value propositions.

The early success stories of Fold and Strike are a call to action for businesses and entrepreneurs globally to acknowledge the overwhelming potential benefits of incorporating bitcoin technology into their strategic framework. Those who heed this call will gain significant competitive advantages, foster innovation, and secure a prosperous place in the evolving digital economy.  Adapting to this new normal is no longer a choice but a necessity for businesses to maintain their competitive edge in an ever-changing global market.  Grasp this opportunity, dive into the bitcoin revolution, and shape the competitive landscape of tomorrow - the moment to act is now.

BlackRock Spot Bitcoin ETF

Observations and what it could mean for bitcoin products, services, and infrastructure development

Last week, BlackRock officially threw its hat in the ring for a spot bitcoin ETF. A lot has already been said about the magnitude of this announcement. Not just because it’s BlackRock, the largest asset manager in the world with nearly $10 trillion in AUM and whose iShares ETF business is the clear leader in the US ETF market with a 33% share and $2.5 trillion in AUM, but also because BlackRock is 575-1 when it comes to success rate of ETF attempts. When BlackRock swings, it does not miss.

After all the recent failures of others to successfully launch a spot bitcoin ETF (e.g. VanEck, Ark / 21Shares, WisdomTree, Grayscale, etc.), why would BlackRock attempt this now? Do they know something others do not? With the recent Binance and Coinbase SEC actions, has it become more clear that the best path forward is a focus only on bitcoin in the midst of regulatory and securities risk surrounding the rest of the “crypto” ecosystem? Or, might BlackRock have just enough influence to get a spot bitcoin ETF over the finish line, despite others’ failures? One cannot be sure, but in any case this is a strong signal to others who have been watching from afar or lurking closely behind the scenes that it’s time to take bitcoin more seriously. The legacy financial incumbents have entered the room, and as expected many others are quickly following suit with similar spot ETF filings so as not to lose any early mover advantage (e.g. WisdomTree, Bitwise, and Invesco Galaxy; likely many others imminent). [Also of note, we just saw Citadel, Fidelity and Schwab announce a new exchange. Momentum from traditional players seems to be building, possibly suggesting a shift in sentiment or hinting at greater regulatory acceptance.]

When reading through the BlackRock S-1, it is unsurprising to see lots of disclosures concerning the risks inherent in investing in a securities product which is meant to closely track the USD price performance of bitcoin. SEC filings like this are meant to provide investors fair disclosures of the risks involved in investing in a given security, and typically the approach is to include “everything but the kitchen sink” as potential risks (many may recall the Coinbase S-1 had 60 pages of risks related to its 2021 direct listing). With this amount of disclosure it’s easy to drown in pages of financial and legal minutiae, but if you carefully read through the BlackRock document in its entirety, there are also some real gems sprinkled throughout that would be easy to overlook, highlighting the slow creep of bitcoin signal being disseminated publicly and entering the mainstream investor consciousness. The following are a selection of verbatim quotes from the S-1, which I thought were noteworthy and telling:

The Bitcoin network is the most established digital asset network. /

Bitcoin was the first digital asset to gain global adoption and critical mass, and as a result, it has a “first to market” advantage over other digital assets. /

The Bitcoin network operates based on an open-source protocol maintained by the core developers and other contributors, largely on the GitHub resource section dedicated to bitcoin development. /

A greater degree of decentralization generally means a given digital asset network is less susceptible to manipulation or capture. /

No single entity owns or operates the Bitcoin network, the infrastructure of which is collectively maintained by its user base. /

Governance of the Bitcoin network is by voluntary consensus and open competition. /

Prior to engaging in bitcoin transactions directly on the Bitcoin network, a user generally must first install on its computer or mobile device a Bitcoin network software program that will allow the user to generate a private and public key pair. /

Private keys must be safeguarded and kept private in order to prevent a third party from accessing the digital asset held in such wallet. /

If the Bitcoin network grows in adoption, it is anticipated that service providers may expand the currently available range of services and that additional parties will enter the service sector for the Bitcoin network. /

BlackRock is working closely with well known custodians in Coinbase and BNY Mellon and also has top tier legal advisors, so one would expect the S-1 to accurately depict the nature of bitcoin in the statements above, but nonetheless the fact that a major incumbent institution accurately described many technical aspects and facets that differentiate bitcoin is still a moment to be recognized. These statements and BlackRock’s stamp of approval are now filed publicly for institutions, investors, RIAs and others to evaluate for themselves.

So what are the implications when a spot bitcoin ETF is finally approved? Of course, the obvious first consequence will be the significant capital inflows seeking exposure to this market. There have undoubtedly been large groups of investors sitting on the sidelines over the last several years, waiting for either an easier or more traditional way to gain bitcoin exposure, greater regulatory clarity on the consequences of doing so, or a clear sign of the maturation of the industry, among other potential factors. Traditional investors like these are generally seeking convenience, familiarity, and assurances/protections from others. On the other hand, those who better understand bitcoin already know investing in a spot bitcoin ETF is a poor substitute for real bitcoin, and at Ten31 we will always recommend users instead acquire bitcoin directly and custody it themselves or through a collaborative custody partner like Unchained. Whereas assets across all other traditional asset classes are either impossible or impractical to directly custody without counterparty risk, bitcoin is uniquely suited for self custody. Bitcoin created the first credibly scarce, digital bearer asset which can be held and controlled with relative ease. Sure, it requires a new way of thinking and a level of personal responsibility which most have become accustomed to handing over to someone else in other aspects of their financial lives, but safely securing bitcoin oneself is in fact easy if one makes the effort to learn and gives it proper mindshare. With bitcoin, removing counterparty risk is the whole point…

With that being said, an ETF will clearly appeal to groups that don’t want that responsibility or don’t fully appreciate (or care) that without holding one’s keys, one does not have actual bitcoin (but rather an IOU that might not be redeemable when wanted or needed). Groups like these will therefore obtain their first bitcoin exposure synthetically through an ETF (and hopefully many will graduate to holding actual bitcoin themselves later on), and I expect fresh capital from these groups will enter the space in droves once a spot ETF is approved. The gold ETF (GLD) launched in 2004 was the most successful ETF launch ever at the time, gathering $1 billion in assets in just three days. The ProShares bitcoin futures ETF (BITO) hit $1 billion in assets in just one day after its launch in October 2021 (admittedly, BITO top-ticked the bull market when BTC/USD was $64,000). With the backing and distribution of BlackRock, a macro landscape with risks across other asset classes which could lead to a flight to quality (or flight to safety) in bitcoin, and the upcoming bitcoin halving early next year, the ingredients are in place for any finally approved spot bitcoin ETF to potentially surpass these benchmarks. Time will tell.

While many market prognosticators are most interested in the impact of the spot bitcoin ETF on the BTC/USD exchange rate, I am most excited about how it could impact the growth of the network and development of the ecosystem, namely around the continued buildout of products, services and infrastructure catering to this market, built by companies focusing on bitcoin. As the BlackRock S-1 stated:

If the Bitcoin network grows in adoption, it is anticipated that service providers may expand the currently available range of services and that additional parties will enter the service sector for the Bitcoin network.

As more people get their first exposure to bitcoin through the ETF, it will inevitably drive increased adoption of the bitcoin network, even if only a small percentage of those buying the ETF graduate to self custody and a fuller understanding of bitcoin. This will lead to increased network activity and demand for products and services built to increase the utility of owning and using bitcoin as an asset. There will be greater demand from business and retail users alike for connecting with and interfacing efficiently with the network and utilizing the asset. This will encompass a diverse group of bitcoin products, services and infrastructure, including:

• Bitcoin financial products including trading, lending, and insurance;

• Bitcoin payments services, remittances, settlement, and community technology services;

• Bitcoin security infrastructure including custody, computing, hardware, networking, analytics, reporting, wallet software, and communications;

• B2B and consumer bitcoin applications like rewards, loyalty/marketing, peer-to-peer trading and lending, gaming, and communications / social applications;

• Energy and bitcoin mining infrastructure, including on-grid and off-grid mining and mining services and infrastructure.

The last couple years have seen tremendous momentum in the buildout of bitcoin-related infrastructure, as evidenced by all the referenced links above (most of which we are proud are already represented in the Ten31 portfolio). The demand for these services is growing uninhibited by challenging macro factors and broader market illiquidity, and I expect any spot bitcoin ETF will only add fuel to this fire. The foundation for the next big adoption cycle is being built and fortified right now.

Whether BlackRock is eventually successful or it is someone else first to market, this filing is a big deal. Bitcoin is an unstoppable force, and if you zoom out it is clear there’s bitcoin and there is everything else. BlackRock did not file an ETF for ETH or SOL or Cookiecoin or any other unregistered security; they came for bitcoin, the King. Whether they eventually get the approval and how this plays out over the near term remains unknown, but over the long term it is clear the demand for bitcoin products, services and infrastructure will only increase from here. There has never been a better time to be supporting the buildout of the network and ecosystem, and there will be significant economic rewards for those who invest in this future now. If you are not paying attention, you probably should be…

Investing $100 Million into the Bitcoin Ecosystem

A look back on what we've done and a preview of what's to come

As we are now in Ten31’s fourth year investing in companies building in the bitcoin ecosystem, I wanted to provide some commentary on our progress to date, reflect on what we’ve seen in the market over that time (particularly more recently), and share some of our plans for Ten31 looking forward. I also wanted to provide some perspectives on how Ten31 views the investable landscape for bitcoin companies, most notably how we expect it to grow over the coming years. 

Ten31 Thesis and Vision

Ten31 was formed as an investment platform to scale and institutionalize investments in companies building products, services and infrastructure dedicated solely to the bitcoin ecosystem. Our thesis is simple: bitcoin is a humanity-shaping technology whose value and potential economic, societal and ethical benefits globally are not yet understood, and there is both a significant need and an asymmetric opportunity to invest in the companies building foundational infrastructure to support the growing demand for bitcoin products and services as more consumers and institutions inevitably adopt bitcoin over time based on its superior monetary properties.   

The Ten31 Thesis.

As a result of broad investor misunderstanding of bitcoin (which generally still exists today), there has been a dramatic imbalance of capital allocated to newer, unproven “crypto” projects which were mostly speculation platforms built on poor incentives with significant counterparty and securities regulation risk, leading to an incredible under appreciation of more fundamentally sound bitcoin infrastructure. It is undeniable that the multidimensional nature of bitcoin–rooted in cryptography, game theory, monetary economics and energy–make it a very difficult topic to attempt to begin to grasp, and therefore it is understandable that most initially ignore or dismiss it, often instead gravitating elsewhere and accepting the fancy terminology and bold claims of crypto at face value without appreciating that the real innovation and focus of their attention and capital should be on bitcoin. But this flawed common perception of bitcoin vs. crypto is inherently why the asymmetry (still) exists in investing in bitcoin infrastructure. 

We recognized there was a significant gap in the market for bitcoin-aligned capital partners, which were highly desired by founders and companies in the bitcoin space but in scarce supply, and with Ten31 we thought we could not only fill that void, but also attract institutional capital into the ecosystem and bring an institutional investing pedigree to the space while providing unique value to the bitcoin companies. When we announced more publicly in 2021 what we had been building, our strategy for investing in the space, and our plans for the future (“Ten31 - A Vision for Supporting the Bitcoin Ecosystem”), we asserted that a bitcoin-focused strategy–even though it was not popular at the time–would prove to be more successful than the approaches taken by other traditional and crypto-focused investors who did not yet understand bitcoin, and that we would create more value investing $50 million in the bitcoin ecosystem than traditional VCs investing billions across crypto more broadly.

The initial vision articulated for Ten31.

Progress

Ten31 Positioning and Backing

I have been an institutional investor by profession and working directly with companies in that capacity for nearly 20 years. With Ten31 we have combined institutional investing experience at leading global investment firms (CVC Capital Partners, Goldman Sachs and Citadel), matched with deep industry and technical talent and specialist advisors providing subject matter expertise (bitcoin financial services, technical advisory, and energy/mining). Our team has been involved in bitcoin for over 10 years, and from the outset we have presented Ten31 as "bitcoiners supporting bitcoiners". We very deliberately and explicitly do not refer to Ten31 as a ‘VC fund’; we are an investment platform. It is incredibly important to differentiate ourselves from traditional venture capital, operating with a mindset and approach which contrasts with the stereotypes associated with the VC label. Just as bitcoin requires a new way of thinking about money, we believe the same applies to investing in companies and supporting the growth of the ecosystem.

We began building an initial portfolio of investments from a first fund in 2020 (Low Time Preference Fund I), came out of stealth in 2021, and then proceeded to raise the largest institutional-oriented fund focused exclusively on bitcoin (Low Time Preference Fund II). Our investors include long time bitcoiners, HNWIs, family offices, university endowments, pension funds, well-known bitcoin-focused institutions, even some of the other known bitcoin funds and their partners, and other institutional investors. 

Fast forward two years, and we have raised and deployed capital across two funds, directing over $100 million into leading companies in the space, and we will soon start deploying a third fund, which we expect will take our support of the bitcoin ecosystem to the next level.

Investment Portfolio and Partnerships

We are incredibly proud to be backing and supporting a portfolio of over 30 leading bitcoin companies working to make bitcoin more accessible, usable, and robust for current and future bitcoin holders. Ultimately, bitcoin is a movement of individuals, and we have endeavored to support the best founders and teams in the space building critical technology to push bitcoin forward. 

There has been much debate over whether the bitcoin ecosystem could support a more significant level of equity-oriented capital similar to what has been raised across broader crypto, and we believe we have proven in the affirmative that yes, not only is it possible, but it is also the correct strategy, further validated by the differentiation of bitcoin vs. crypto last year. Amid a sea of crypto blowups in 2022, bitcoin companies were largely unscathed, with many thriving as more users and industry observers recognized the resiliency of the ecosystem and flocked to bitcoin. 

Ten31 has led the charge in deploying capital at scale in the industry, assembling a differentiated blue chip portfolio. We have often been the first investor in some of the most promising bitcoin companies, but we have also led large rounds for more established and higher profile companies (e.g. Strike’s Series B, Unchained’s Series A+). We invest across all parts of the bitcoin ecosystem, and our portfolio demonstrates healthy diversification across sectors. 

Low Time Preference Fund II portfolio mix by capital deployed.

Further, we are not afraid to go against the grain. We pride ourselves on leaning into opportunities others will not and making investments that don’t fit a typical VC profile. For example: we invest in hardware; we invest in profitable businesses (which we have long written about and referred to as ‘sats flowing’ businesses); we support and invest in tools providing privacy services; we have been extensive investors in mining (and even mine directly into our fund leveraging stranded gas assets); and we invest in and are one of the most active supporters of open source businesses (discussed below).

One of the most underappreciated aspects of investing in the bitcoin ecosystem is the significant opportunities for synergies that exist across the portfolio. Because of bitcoin’s open network, each company’s success contributes to the development of the entire ecosystem (benefiting all other participants, which I have written about and referred to as the “bitcoin infrastructure flywheel”), but that is not all. The open nature of bitcoin also allows cross-industry and cross-portfolio collaboration and partnerships in a way I don’t think you can find elsewhere in a traditional VC portfolio (e.g. Strike/Bitnob, which is just one among several others in our portfolio with either formal partnerships or ongoing collaboration). It is a very powerful concept that one company in a portfolio can contribute positively to the investment performance of the rest of the portfolio (and that there would be many such opportunities across a portfolio), and we think that will become more appreciated over time. As a result, we have been deliberate about trying to facilitate relationship building and collaboration across our portfolio, particularly where a potential partnership might not have occurred naturally otherwise (e.g. teams in different geographies or with non-overlapping areas of business focus). We host an annual retreat exclusively for Ten31 portfolio companies explicitly for that purpose.

Ten31 Bearclaw Retreat, 2022.

Our relationships with founders and companies are our most valuable assets. In addition to leveraging a wealth of prior experience across all functional areas of business to support companies at the board level, the value proposition we offer bitcoin companies is that we live and breathe bitcoin 24/7, we are bitcoiners and active contributors to the space on a day-to-day basis, and we can open up a deep network to our partners and provide extended reach, which in aggregate is a differentiated combination they can’t find anywhere else. Since bitcoin companies and new entrants to the bitcoin ecosystem often navigate issues unique to this industry, our focus, experience and expertise are very much valued, making it very difficult for unaligned crypto funds and traditional VC funds dabbling in the space (but mostly focused elsewhere) to compete.

Open Source Contributions

We are very proud to be significant supporters of open source development in the bitcoin ecosystem. We have historically written about the importance of supporting and investing in open source businesses in bitcoin, and Ten31 has been the most active investor supporting businesses with FOSS business models and other companies contributing to the open source movement in some way. 

In addition, a key tenet of Ten31 from day one is to use a portion of our management fees to provide non-investment capital as grants to developers and others making important contributions to the open source ecosystem. We thought this first-of-its-kind management fee-driven contribution framework would be an attractive way to create a recurring developer support model that other funds would also consider emulating. 

We were a founding contributor to OpenSats, gave a grant to BitcoinQnA for his work in bitcoin education, sponsored the travel of several open source developers to attend the Oslo Freedom Forum, provided an early grant for the open-source Fedimint protocol, and support both the Bitcoin Commons and Bitcoin Park providing a Ten31 sponsorship seat for a developer contributing to open source (our first sponsorship seat was with Justin Moon contributing to Fedimint while working out of the Commons in Austin). 

Through the Ten31 grant program we will continue to support open source development centered around the areas we believe are most in need of support and/or where the impact could be most meaningful. We expect our grants in 2023 will be centered around advancing the federated mining pools idea and supporting development in the nostr ecosystem, and we look forward to providing more details once the 2023 grants are finalized.

Ten31 Tribe

In the spirit of bitcoin’s open monetary network, we created the “Ten31 Tribe” as a network of active Ten31 investors combined with Ten31 portfolio companies and other bitcoin founders/entrepreneurs. The idea was to eliminate the walled gardens that typically exist at traditional funds between a fund’s LPs and the founders and teams behind its underlying investments, and instead offer an open network to encourage relationship building and facilitate potential support and collaboration opportunities. We typically host monthly virtual events and quarterly in-person events, typically with 50%+ of our investors participating regularly. These events have already led to productive relationships, including partnerships and financial investments outside of Ten31’s direct involvement. 

Ten31 Tribe goals.

Thought Leadership

Education is one of the most important ways to drive continued growth in the ecosystem: not just educating consumers and institutions about why bitcoin matters and how to use the tools, but also educating investors and capital allocators about the merits of deploying capital into the space to support development. We strive to consistently produce content to present unique insights from an investor’s perspective, and over time we hope these efforts, combined with attractive investment performance, will drive increased capital into the space. We therefore proactively put our thoughts out in the open. We have written about investing in bitcoin infrastructure, bitcoin corporate finance, open source business models, the expected enhanced utility of bitcoin blockspace, bitcoin and FedNow as settlement networks, and the expected coming intersection of bitcoin and AI, among other topics. We also produce one of the best weekly newsletters in the space, the Ten31 Timestamp.

A drumbeat of Ten31 bitcoin content.

 Reflections on Recent Market Trends 

2022 was the year when those who were once considered the “smartest guys in the room” were exposed, as excess leverage and misinformed “crypto” capital was flushed. We estimate over $100 billion of enterprise value was wiped out last year just from a handful of names which were once considered the darlings of the crypto industry. Just in BlockFi alone, roughly $1.4 billion in previously raised equity capital was wiped out, roughly 10x the amount of capital that had been raised in aggregate across bitcoin-focused VC funds (in just one deal!).

Crypto carnage, exposing fraud, leverage and counterparty risk…

Meanwhile, bitcoin companies were largely unscathed (with many of our portfolio companies recording their best years ever in 2022), as there was (yet again) a clear separation of bitcoin and ‘everything else’. While it is still far too early to declare victory from an investment performance and value creation perspective, we remain optimistic about the health of our portfolio and the ecosystem more broadly, which we suspect looks quite different from your run-of-the-mill crypto funds, most of which will already be littered with write-offs amid the crypto chaos and bloodbath from last year.  

Looking over a multi-year horizon specifically in the bitcoin ecosystem, we have clearly seen an uptick in activity. It is of course not surprising the fundraising environment was relatively quiet from 2018-2020 during the previous bear market and that transaction activity picked up with the market rebound in 2021 (and also coinciding with the entry of new bitcoin focused investors the last couple years). But we do see evidence the uptick in activity is also driven by underlying growth and development in the ecosystem, both in early stage company formation but also in the continued growth and maturation of existing businesses.    

Based on the data we’ve tracked, bitcoin-only funding rounds (i.e. fundraising by companies with an exclusive focus on bitcoin) have been growing in both size and scale, even through the more recent bear market of 2022. In addition, our data suggests more businesses are maturing to the Series A and B stages, while the number of new early-stage companies continues to grow. We expect growth in the ecosystem to continue unabated as the next wave of adoption inevitably approaches. In addition, the total addressable market will expand as companies from outside the bitcoin ecosystem enter the market, as further described below.

Looking forward

Investable Landscape for Bitcoin Infrastructure

The Ten31 thesis is founded on the conviction that bitcoin is going to play an increasingly important role in the global economy over time and will eventually become the world reserve asset and the standard upon which economic, monetary and human activity is coordinated. As a result, we firmly believe every person, every company, and every institution will eventually hold bitcoin, and in order for that to happen they’re going to need not just bitcoin but also infrastructure built around it. 

That is what initially defines the investable landscape for Ten31: the companies focused on delivering products and services that are (or are expected to be) desired and valued by holders of bitcoin (i.e. that bitcoin holders are willing to pay for). This includes many obvious initial categories, such as custody, financial services, payments, security services, business-to-business services, and a whole host of consumer-facing and institutional applications, as well as the energy- and mining-related infrastructure and services underpinning the network.

We expect that everyone will eventually need to plug into the new open monetary network of bitcoin in some capacity and will also require products and services to support their participation. As such, the implication is that investing in the new infrastructure required to support that transition will have an end market of potentially everybody. That is effectively the largest total addressable market that could exist, and therefore offers huge asymmetry to those who are supporting its early buildout. 

By that logic, it also follows that all companies will eventually adopt bitcoin in some way. At Ten31 we like to say that just like after the ‘90s every company eventually became an internet company, every company will also eventually become a bitcoin company. That means that the total investable landscape will expand dramatically as a wave of new entrants from outside the bitcoin ecosystem begin to learn about bitcoin, evaluate its relevance and potential use in their businesses, and eventually use it or leverage the technology in some way. We expect initially this shift will be driven predominantly by technology companies who are more primed to consider it, and we are already seeing early glimpses of this in Ten31’s portfolio (e.g. StatMuse, which is an AI/ML-first business focused on sports/media but an early mover within their field into bitcoin with plans to grow a bitcoin-oriented business within their platform).

We expect $500mm+ will be invested in bitcoin companies in the next two years, and the entrance of other technology companies as I describe above along with founders and entrepreneurs from outside the bitcoin ecosystem could take the investable TAM to $1-2 billion. We believe there will be tremendous value in having specialist bitcoin platforms like Ten31 to help these companies navigate their bitcoin strategy, and with industry valuations still largely depressed from 2022 and the investable landscape on the precipice of significant expansion, there has never been a more attractive time to invest in this space.

Ten31 Future Plans

We are proud of what we have achieved so far at Ten31, but we are just getting started. As our next fund comes online to continue the same strategy we’ve proven out with our last two funds, we will be adding to our team and expect to make an announcement on the team front in the near future. 

In addition, we also plan to share more on a new initiative we have in the works to help incubate new projects in the space, which we are tentatively calling Ten31 Timelock. This won’t be a high volume, formal accelerator model, but will instead focus on leveraging our on-the-ground presence to take a very selective approach to helping launch projects in a few areas we believe are in most need, more akin to an incubator or studio model. We’ve already had heavy involvement doing this with a few of our current portfolio companies, so we view this as a natural extension of what we are already doing and complementary to our existing business. We look forward to sharing more details soon!

Growing Ten31 into the largest bitcoin-only investment platform and partnering with many of the industry's most brilliant and driven founders has only deepened my conviction in the positive change that will be propelled by this industry in the years to come. We are seeing the future being built before our eyes. At Ten31, we see supporting bitcoin companies as both the most exciting investment opportunity in a generation and the best way for us to help move the world to a bitcoin standard, and we look forward to ramping up our commitment even further with our next fund and beyond. 

—----------------------------

¹ Data refer to private financings of bitcoin-exclusive companies that were publicly announced or of which Ten31 was aware, including mining-related and later-stage fundraisings falling within Ten31’s investment mandate. Charts are representative of the most relevant fundraising activity but do not provide a complete accounting of all bitcoin-only deals given the availability of data. 

Settlement Networks - Bitcoin and FedNow

Introduction

In July of this year, the Federal Reserve will launch its long-awaited FedNow service for instant payments between depository institutions, adding a new wrinkle to the fabric of global payments. Therefore in this paper, we explore the rapidly evolving landscape of settlement networks, specifically focusing on bitcoin and FedNow, two systems often perceived in direct conflict primarily as competitors. By examining their historical context, technological underpinnings, and the importance of the underlying assets’ integrity, we argue that these entities actually cater to distinct purposes and audiences and are likely to co-exist more symbiotically than most expect.  While the rise of bitcoin as the world reserve asset may ultimately challenge US settlement networks, in the intervening decades the US dollar will inevitably interact with and leverage the bitcoin network to facilitate the global economic demands of individuals and businesses that want to interact with US dollars (a co-opetition of sorts).  Meanwhile, the financial utility of both systems and the innovative solutions offered by companies leveraging the bitcoin network will provide a superior user experience and potentially counterbalance any attempts by foreign governments or conglomerates to displace the US dollar with a more restrictive monetary asset (e.g. BRICS commodity backed currency or a CBDC).

Settlement Networks through History

Throughout history, settlement networks have played a critical role in the development of civilizations. The ability to exchange goods and services for intermediate units of account (stone money, gold, silver, French francs, Dutch guilders, Euros) has enabled trade, financial transactions, and social interactions across vast distances. Systems have evolved from the ancient Greek agora where officials were responsible to verify the weight and quality of coins through to late-20th century systems of fiat central banking and the emergence in recent years of innovative technologies like bitcoin and FedNow.  The efficiency, reliability and overall utility of these networks have been instrumental in shaping the economic landscape and providing a foundation for the future. When drilling down into the utility of settlement networks, the integrity of and demand for the underlying asset being transferred is incredibly important.  History is littered with examples of settlement networks degrading and societies collapsing because of the gradual and/or sudden  manipulation of the underlying monetary asset and consequent decrease in demand for that settlement asset in trade. Separated by more than a millennium, the whole cloths that were the Roman Empire and the Weimar Republic both unraveled as authorities pulled the common thread of monetary debasement. Indeed, history suggests that the destruction of complex societies is often preceded by or accompanied by diminishing confidence in each society’s settlement network. 

Considering the crucial role settlement networks play across generations and geographies, we can spring forward from history’s lessons as we think critically about how things have evolved in our recent past with legacy 20th century fiat settlement networks, where things stand today with these old approaches and emergent technologies gaining remarkable adoption and traction, and where the next chapter will be written tomorrow. 

Settlement Networks: FedNow and Bitcoin

Two very different approaches characterize our current moment in monetary evolution: FedNow and bitcoin. Both settlement networks can provide near instant transfer of monetary value, but their underlying assets are fundamentally different.  FedNow was developed by the U.S. Federal Reserve to enable real-time settlement of US Dollars between banks and their customers 24/7 through a central processing unit—FedNow Service Reserve Bank. Bitcoin is a neutral digital bearer asset that operates through a decentralized peer-to-peer network, was introduced by a pseudonymous individual or group, and is continuously maintained and improved by a consensus-driven global volunteer initiative. Bitcoin transactions are verified by a network of computers via a proof-of-work blockchain rather than any centralized institution. The underlying assets of the two systems, US Dollars and bitcoin, depart at a right angle to each other with the total supply of US dollars skyrocketing upwards over time while bitcoin supply is fixed, its 21 million supply programmed in the code.  The contrast is stark: US Dollars are infinite and created in a credit based system; bitcoin is finite, with a fixed supply that is infinitely divisible.  When comparing their settlement networks, we see similar divergence. US Dollars payment systems are controlled by the Federal Reserve and other US regulatory bodies who have implemented and likely will continue to implement sanctions and restrictions that prevent market participants–individuals, companies, and other governments–from interacting with its walled-off payment systems. Bitcoin is different: a software program that is open-source, free and permissionless to run, and interacts with anyone globally for storing and transferring value.

Traditional payment systems can take days to process transactions because of intermediaries within correspondent banking. FedNow promises instantaneous transfers, purporting to reduce users’ exposure to chargebacks and fraud while facilitating capital flows. FedNow’s anticipated 24/7 availability will likely prove useful for businesses that operate in multiple time zones or need to process payments outside of local business hours. Notwithstanding these improvements, FedNow is also planned as a closed proprietary system accessible only to banks that are members of the Federal Reserve System. FedNow has not yet operated in an active environment and will begin testing in the coming months.  The fees proposed for using FedNow are currently set at nominal rates, but this could change considering that the Federal Reserve does not expect to achieve long run cost recovery for decades. As such, FedNow is reliant on the continued financial support of the Federal Reserve for the foreseeable future. Because of the dependence and direction of the Federal Reserve, FedNow is likely to suffer from the Innovator's Dilemma as development is subsidized by a parent company focused on their needs rather than market demands.

Assets: US Dollar and Bitcoin

While FedNow may offer some UX improvements for interacting with the Federal Reserve’s settlement network, its underlying asset – the US Dollar – will remain unchanged. The US Dollar is backed by the full faith and credit of the United States Government and operates as an ever expanding credit-based system where the value of the dollar is derived by demand of the debt obligations, both public and private.  The public debt of the United States is currently $31 trillion dollars, with Congress and the President negotiating to raise the debt ceiling by an additional $1.5 trillion dollars in order for the US to avoid nominal default on obligations such as Social Security, Medicare, military salaries, interest on the national debt, tax refunds, and other payments. The debt ceiling has already been raised 78 times since 1960, and this continued regular cadence of increasing the debt ceiling has so far allowed for an insidious inflationary diffusion that has been hard to perceive in real time. 

More recent money expansions in the U.S., like the liquidity injections since March 2020, have had drastic effects similar to those of large money bursts such as that which the French suffered from their monetary expansion and the resulting Mississippi Land Bubble from 1716 through 1720.  France witnessed inflation jumps of +20% during the collapse of the Louisiana Venture while John Law, President of Banque Royale, issued ever more credit and expanded the money supply.  The United States has beat to a steady inflationary rhythm with secular increases in the money supply over the last 60 years, but in 2020 through 2022, the tempo picked up with a 40% increase in base supply, compounding a goods/service supply and demand imbalance that has resulted in inflation not seen in the US since the 70s.

Bitcoin, meanwhile, is a digital bearer asset and decentralized settlement network that has been self-funded from its beginning in 2009 and has gained popularity as an alternative investment and increasingly as a monetary asset by forward leaning technologists. One of the advantages of bitcoin as a bearer asset is that it operates independently of any global financial institution, which can make it an attractive option for individuals who operate in authoritarian regimes or are prohibited from using the banking system based on personal attributes, such as religion, gender, or ethnicity. As then-Fed Chair Janet Yellen told the Senate Banking Committee in 2014,  “Bitcoin is a payment innovation that’s taking place outside the banking industry. To the best of my knowledge there’s no intersection at all, in any way, between bitcoin and banks that the Federal Reserve has the ability to supervise and regulate. So the Fed doesn’t have authority to supervise or regulate bitcoin in any way.”  

Bitcoin has a finite supply and has been regulated as a commodity since 2014 in the United States. A fixed total of bitcoin creates an inelastic supply curve that does not change relative to demand, driving significant appreciation in its purchasing power as more users adopt it. Bitcoin has proven extremely dependable, with 100% uptime over the last 10 years.  There are also limitations to bitcoin as an asset. For example, with rapidly growing adoption and no centralized control, price discovery has been highly volatile, and its value measured in fiat terms can fluctuate rapidly and unexpectedly. Bitcoin payments are also irreversible, which is an important feature of the network’s security and censorship resistance, but can be a concern for some users who do not trust themselves or others with that power or responsibility.  Additionally, bitcoin is not backed by any tangible asset but instead through the network effects of the entire bitcoin system, comprised of miners, node operators, and end users. These attributes have led bitcoin to become a popular and forward looking investment option for individuals, businesses, and governments who are looking for uncorrelated alternatives to both ancient settlement networks (like gold) and twentieth century settlement networks (like fiat currency).  

Bitcoin is free and open source software, with new entrants able to join the market and innovate according to their skills, ambition, and capacity for execution. Increasing services, new tools, and a growing user base are together lowering costs and importing more value into the network. Looked at from any vantage, the bitcoin settlement network is orthogonal to the existing system and to proposed updates to that system like FedNow – it is not so much a significant innovation as it is a step-function change onto the Z-axis. From payments to remittances to digital gold to programmable money to cyberwalls to energy management, bitcoin is a fundamentally different type of network with a fundamentally different underlying monetary asset.

Companies Leveraging Bitcoin

The bitcoin settlement network refers to the technology and infrastructure that allows individuals and businesses to send and receive bitcoin transactions either on the blockchain or additional layers like Lightning. Companies like Strike are building novel infrastructure for providing a seamless way for users to interact with lightning and leverage the incumbent liquidity position of the US dollar with global instantaneous settlement (unlike the FedNow system, which is only focused on US banks interacting with the Federal Reserve). Strike’s innovation has provided solutions that free users from the need to manage channels while avoiding the tax events from selling or transferring bitcoin. Innovators like Strike reduce friction, lower barriers to entry, and build on growing momentum to meet individual and global market demands.  For example, folks in the US or other countries are able to use Strike’s “Send Globally” feature to link their US bank accounts to Strike and instantly transfer monetary value received in local currency to many countries around the world. Global foreign currencies can become interchangeable with USD on bitcoin rails instantly around the world for anyone on their phone. Send Globally users can transfer money to users through their telephone numbers in countries such as Ghana, Nigeria, Philippines or to a US bank account. People and businesses can then utilize those US Dollars to purchase goods and services needed to facilitate commerce locally and globally creating a more connected and fluid world. This is not the future: it is BitcoinNow, an organic, open, consensus-led, protocol-governed, transparent sound money alternative to FedNow. 

The bitcoin settlement network is decentralized, which means that transactions are processed without a central authority or intermediary. This makes bitcoin payments faster, final, and more cost-effective than traditional payment systems, particularly for cross-border transactions. Bitcoin’s decentralized settlement network will put downward pressure on transaction fees as new entrants move into the market and compete to facilitate transactions. Companies like Mempool.Space are helping to facilitate this competition with easily accessible and intuitive tools to explore and audit the bitcoin blockchain, estimate upcoming fees, and more. Unlike the Federal Reserve, the bitcoin network is auditable by anyone with a computer by downloading the bitcoin software as can be seen below. 

Mempool.Space levels the global economic playing field leveraging transparency for all while insights into FedNow will remain a walled garden for the Federal Reserve alone.  The bitcoin network’s decentralization, bolstered by companies like Mempool.Space, helps ensure its high level of security, with transactions verified by a global network of independent computers rather than a centralized institution. By contrast, centralized institutions like FedNow have historically been compromised through control, corruption, or vulnerability, as they provide a single vector for malicious actors to exploit in the digital age.  

These days, direct interaction with the bitcoin technology stack remains obtuse for less technically sophisticated users, but third party service providers like Unchained are filling the gap to manage onramps into bitcoin and provide solutions that make self-custody more convenient and accessible. Unchained is an example of innovation happening at the edge of an emerging system that could not exist in a top-down permissioned FedNow.  There are also limitations to the bitcoin settlement network such as base layer transactions per second, but companies like Fedi are mitigating those limitations with the introduction of chaumian mints to bitcoin.  Fedi provides a federated platform where trust is distributed and funds are pooled.  Fedi users have their interactions with the base layer and lightning abstracted away through a sleek curated platform. The Fedi platform is also being explored for potential use in mining pools, NGOs, and local banking partners. Unlike the Federal Reserve which is vulnerable to political capture, Fedi offers a federated trust model that reduces the potential for arbitrary political censorship. 

Conclusion

FedNow and bitcoin are two different systems that serve different purposes and use different technology. FedNow is a centralized transfer system developed by the Federal Reserve that enables real-time transfers of US Dollars between banks and their customers. It is designed to improve the speed and efficiency of traditional payment systems, particularly for businesses that need to process US dollar payments quickly. Bitcoin, on the other hand, is a neutral digital bearer asset and decentralized settlement network that operates independently of global financial institutions and its underlying asset, bitcoin, is not subject to debasement. Bitcoin payments can be processed instantaneously through a peer-to-peer Lightning network and can be faster and more cost-effective than traditional payment systems, particularly for cross-border transactions. While both FedNow and bitcoin enable faster transactions, they have different target audiences, are not direct competitors, and can and will be used together to meet the needs of individuals and businesses. Furthermore, the combination of a closed currency on top of an open network will help to mitigate foreign competitors or other sovereign conglomerates attempting to replace the US dollar as the world reserve currency with a more restrictive asset in the decades ahead.

FedNow has been primarily designed for businesses that need to process large volumes of US dollar payments quickly within the architecture of late-20th century central banking, while bitcoin is designed for individuals and businesses that want to transfer value without relying on global financial institutions or who prefer to seamlessly convert their goods and services into bitcoin. Bitcoin also offers some features that FedNow does not, such as the potential for pseudo-anonymity and the ability to make cross-border payments without intermediaries and currency exchange. 

Overall, FedNow and Bitcoin are different systems, with different objectives and different rules. Speaking pragmatically, they are both likely to coexist in the payments landscape for the foreseeable future. Speaking prophetically, the question is: which system will benefit the most from the other? 

AI and Bitcoin

The Inevitable Convergence of Two Worldchanging Technologies

“Roses are red, violets are blue,
Bitcoin and AI may help us renew,
As innovation and efficiency accrue,
A better world could emerge from the two.”
   - ChatGPT, optimistically

“Roses are red, violets are blue,
Bitcoin and AI may break what we once knew,
As algorithms govern what we do and pursue,
Our humanity may fade, and our freedoms too.”
   - ChatGPT, pessimistically

Bitcoin and new artificial intelligence (“AI”) applications are both on course to drive a new wave of productivity and efficiency gains for humanity. While more people each day are beginning to appreciate the independent potential of each of these technologies to positively reshape the world (bitcoin: cure the ills of money printing, seigniorage, and financial censorship; AI: unlock significant productive and creative output potential), we believe additional excitement is warranted for the coming intersection of bitcoin and AI. AI will be a powerful force to open up new design spaces and opportunities for bitcoin infrastructure and commodify bitcoin by making it more accessible, supporting the Ten31 thesis that bitcoin’s utility and applications will expand over time and that the TAM for bitcoin infrastructure is far bigger than most realize. In addition, bitcoin will naturally complement the growth of AI, both serving as a payments tool for computational demands and asserting its scarcity to impose real world costs and constraints on any tendency for AI algorithms and AI produced content to replicate to infinity. 

Introduction

Those paying attention have noticed the explosion of new generative AI applications over the last year. Suddenly, social media feeds seem to be flooded with exquisitely rendered art generated with a keystroke or screenshots of natural conversations with digital assistants demonstrating encyclopedic knowledge and better grammar and manners than most real humans.  It seems clear that we are witnessing the early stages of a paradigm shift in the human-computer relationship that will affect every aspect of the way we learn, work, create, and communicate. While there’s undoubtedly a nontrivial amount of noise amid the growing AI hype, we see mounting evidence that this technology and its applications will drive unprecedented improvements in productivity, individual empowerment, and knowledge acquisition that could provide a generational opportunity to those adopting these tools (and also pose an existential threat to those that do not, including the world’s most dominant businesses and institutions). 

To bitcoin enthusiasts, these lofty references to a zero-to-one technical innovation with the potential to transform legacy systems and uplift individual creativity with global implications probably sound very similar to bitcoin itself. As we’ve done our best at Ten31 to drink from the AI firehose over the last year, it has struck us that few recently have sought to explore AI’s many parallels to bitcoin and the potential convergence of these two technologies. Neither bitcoin nor AI have yet managed to pierce the veil of truly mainstream awareness or adoption, but we believe both are on a path to becoming foundational pillars of 21st century society and will become progressively more intertwined and symbiotic over the coming decades. 

At Ten31, our key conviction is that every company will eventually become a “bitcoin company” in some way (just as every company is now effectively an “internet company”), and we increasingly believe the same is true for AI: no company interested in survival will be able to ignore absolutely scarce, programmable, internet-native money (bitcoin) or technology that yields 1,000x productivity gains (generative AI), and those two forces will synergistically shape the coming decades in ways few have yet imagined. 

As with bitcoin, the early adopters of AI tools and technologies will have the opportunity to benefit disproportionately relative to those that come later. Every company should have a bitcoin strategy, and similarly every company (including bitcoin companies) should have an AI strategy – and if you don’t have either of those now, you are already falling behind…

A Brief History and Overview of AI and Recent Developments 

People have been writing about the coming era of AI and the philosophical, moral and existential implications for a long time (e.g. I Robot, 1950; The Moon is a Harsh Mistress, 1966; 2001: A Space Odyssey, 1968). You can even trace related concerns back to Frankenstein (1818), which told the classic story of a scientist who creates a monster and then loses control over it, highlighting the potential consequences of creating something beyond our ability to manage. In these stories, there have clearly been warnings of the unintended consequences and ethical dilemmas as the line blurs between human and robot. Recent interactions with AIs have raised similar concerns – while we can’t address all possible scenarios, we explore below some reasons for optimism about the role that bitcoin could play in mitigating some potential dystopian outcomes. 

AI-powered Frankenstein controlling the digital panopticon

Artificial intelligence generally refers to the idea of machines performing tasks that typically require human intelligence. Machine Learning (ML) is a subset of AI that enables machines to learn and improve from experience without being explicitly programmed; instead, machine learning algorithms are trained on large amounts of data to recognize patterns and use those patterns to make predictions or decisions.

Early AI research focused on symbolic reasoning and rule-based systems, but progress was slow due to limitations in computing power and lack of data. In the back half of the 20th century, the development of neural networks and other machine learning techniques led to renewed interest in AI, but advances in big data, cloud computing, and processing power over the last decade were what finally enabled breakthroughs in areas such as computer vision and natural language processing, among other fields. 

Most notably, in 2017 Google AI researchers introduced “transformers”, which are a type of neural network architecture that can process and analyze large amounts of data, such as text, images, or sound. Transformers work by breaking down the data into small parts and processing each part simultaneously, allowing them to identify patterns and relationships within the data. Transformers can be used for a variety of tasks, such as language translation, image recognition, and speech processing. 

Large Language Models (LLMs) are an application of transformer architecture specifically designed for language tasks such as language generation and understanding, and are often pre-trained on large amounts of text data using unsupervised learning techniques (e.g. the algorithm may be trained by digesting the entire internet). The transformer architecture allows the models to process language by looking at it as a whole, rather than one word at a time in order, enabling the algorithm to understand the context of each word and how it relates to the sentence as a whole, ultimately resulting in the ability to both understand and generate human-like language.  

There have been several transformer- and LLM-based generative AI applications that have recently seen exponential adoption and generated tremendous excitement for the capabilities they may unlock:

• Image generation: deep learning models are trained with a large dataset of images which are used to generate new images from scratch. In some cases, these models can be combined with LLMs to allow image generation with text prompting. Some of the more common deployments include DALL-E, Midjourney, and Stable Diffusion. Tools like this have been estimated to reduce the cost and time of a graphic design from $150 and 5 hours to pennies and seconds. We note all of the images in this essay were generated with AI.

• Text generation: GPT-3 (Generative Pre-trained Transformer 3) is a language model introduced in 2020 and developed by OpenAI, using 175 billion parameters (learnable elements or weights of the model). It is the successor to GPT-1 (2018, 117 million parameters) and GPT-2 (2019, 1.5 billion parameters) and has demonstrated impressive language generation capabilities, including the ability to generate coherent paragraphs of text, answer questions, and even write code (discussed below). This type of model is pre-trained with a significant amount of unlabeled data (self-supervised learning), and then can be fine tuned by adjusting the model’s parameters for the specific task or by other training techniques. The most explosive use of this technology thus far has been the launch of ChatGPT, which is an AI-based digital assistant designed to respond to questions by generating human-like text, and has instantly become the fastest growing consumer application in history, reaching 100 million users after having been launched only 10 weeks ago. While ChatGPT and other generative AI applications are not perfect (and are already raising important questions about bias, censorship, dependence, and copyright, among others), it is clear we have crossed a chasm, and as a result there will now be a clear distinction between the pre- and post- GPT eras. 

• Code generation: given code exists simply as text applied under various programming languages, LLMs have been extended into the realm of code generation. Two such examples are GitHub’s Copilot and Replit’s Ghostwriter. GitHub Copilot (owned by Microsoft, a major OpenAI investor) is an AI system developed by OpenAI in collaboration with Github, designed to provide software creators with AI-assisted code completion suggestions (i.e. autocomplete), and can also suggest code snippets based on natural language descriptions provided by the user. Copilot is powered by OpenAI’s Codex system and trained on a large corpus of open-source code available on GitHub. Impressively, Github boasts a reported 55% increased speed in coding for software creators using Copilot (with Copilot generating 46% of code written), a dramatic improvement in productivity . Similar to Copilot, Replit’s Ghostwriter provides AI-powered code completion and natural language-prompted code generation like Copilot, but also provides additional features such as code transformation (e.g. refactoring code to make it faster or translating to another language) and code explanation in natural language. 

Implications of New Generative AI Tools

It would be an understatement to say the new applications above represent a step change in productivity and output potential for individuals and businesses alike. What will now be possible leveraging these tools would have been unimaginable a few years ago, and the primary limiting factor will only be human creativity, with the underlying technology expected to continue improving significantly over the near- and medium-term (e.g. GPT-4 is speculated to contain 100 trillion parameters, a ~600x increase from GPT-3).

With regards to software development, we believe these new AI-assisted coding tools will be one of the fundamental unlocks of productivity and output of the coming years. We have previously written about the importance and impact of open source software; one of the many powers of open source is being able to leverage the work of others, rather than build from scratch. There are very clear comparisons between AI tools and open source in this way, where huge efficiency gains are possible (e.g. now you can “install” 100 hours of work with AI instead of doing it yourself, just like you would have done using existing open source software). 

We can imagine many implications of the continued adoption of these new tools (some good, some concerning), including but certainly not limited to the below:

• The rise of the 1000x developer. The very best software creators with the capabilities and willingness to embrace these tools can leverage AI assistants to compound their output, with a single person doing the work of hundreds or thousands. 

• Companies will be able to get more done with less. A company may only need a few of the most prolific creators, augmented by a small group of lower level developers also utilizing these tools. Small teams can scale while remaining nimble.

• The landscape for software creators will become more open and inclusive. People who did not know how to program previously will now have the toolkit and capabilities to become engineers, thereby increasing the number of developers by an order of magnitude in the next decade. This should also help alleviate the bottleneck of bitcoin and lightning developers over time.

• Powerful centralized actors (whether nation states or large conglomerates) may look to abuse this tech for their benefit. There are significant concerns that abuses of this tech could be a significant setback for civilization, creating a dystopia and digital panopticon, as well as the previously noted tail risks of hostile/adversarial AIs. 

• The value of proprietary data and compute power will increase. Large, unique data sets used for training AI will become more valuable. Those that have this data could elect to monetize it in a more significant way, or leverage it for training their own proprietary algorithms. This will also highlight the importance of owning your own data and infrastructure to counteract potential centralization risk. Within the bitcoin ecosystem, we could see how data and analytics companies like Mempool.space could be potential  beneficiaries in this regard, as well as lightning infrastructure companies like Strike. 

No matter the potential negative consequences of these technologies, the genie is out of the bottle; the potential benefits have too much upside for these tools to be ignored or stopped. 

The 1000x software creator overseeing an army of AI assistants from a penthouse apartment

The Likely Synergy Between Bitcoin and AI

Whether the long-term net result of AI will look more like C-3PO or HAL-9000 is beyond the scope of what any of us can predict today, but use cases that combine AI with bitcoin applications could help channel this emerging technology to accelerate bitcoin adoption and make it more accessible. What’s more, the pairing of these two technologies will likely emerge organically due to the many complementary characteristics they share:

• Universally relevant: Bitcoin and AI will both become foundational underpinnings of human coordination and productive output and are poised to have an impact on individuals and businesses around the world to a degree that rivals electricity and the internet. 

• Purely data: Both bitcoin and AI are native to and only conceivable in the realm of information. The shared reality of bitcoin is captured entirely by the information on its blockchain (“the map is the territory”), in fundamental contrast to most “blockchain technology” projects. Likewise, generative AI LLMs were trained on a corpus of computer-readable data, and the resulting outputs are essentially interactive, iterative exchanges of yet more data. This fundamental trait makes bitcoin and AI natural bedfellows for new applications (described further below).

• Computationally intensive: A fundamental, non-negotiable component of bitcoin’s architecture is its Proof of Work, which requires miners to expend energy and perform significant computation to successfully append a new block to bitcoin’s blockchain. The self-attention mechanism of generative AI similarly relies on parallel processing performed by graphics processing units (GPUs), which impose a real-world cost on the system. While this cost will likely decline precipitously with further advancements in parallel processing, AI will remain tethered to the constraints of the physical world just as bitcoin is (though the simplicity and asymmetry of bitcoin’s Proof of Work makes it a superior source of truth). 

• Flexibly programmable: Bitcoin and generative AI both offer engineers and creative entrepreneurs powerful primitives on which to build a vast array of complex applications. Bitcoin’s simple design and sound monetary policy minimize attack vectors and align incentives to allow incremental functionality to be layered on top of a durable, robust foundation – such extended functionality includes bespoke transaction scripting, second layers like the lightning network, privacy tools like collaborative transactions, and smart contracts. While the latest AI models are significantly more complex than bitcoin, the volume and diversity of projects developers have already built in the early innings of generative AI, as well as the proliferation of open source models (CodeGen, Stable Diffusion) and frameworks (PyTorch, TensorFlow), are evidence of this technology’s programmability and versatility. 

• Deeply researched: While both technologies are groundbreaking innovations, neither emerged from scratch. Bitcoin is built on decades of prior research and leaps in cryptography applications, including b-money, Hashcash, Merkle Trees, and DigiCash, while modern generative AI stands on the shoulders of early rule-based systems and neural networks. Both technologies are closer to the Model T than the horse and buggy and thus closer to being ready for primetime. 

• Inherently deflationary: Perhaps the most crucial shared feature is the technologies’ tendency to support deflation, or the natural decline in prices resulting from a progressively more productive base of technological and human capital over time. In allowing for potential step-function improvements in human productivity like pivotal technologies before it, generative AI has the potential to enable the production of both more and better goods and services for the same or less input, putting downward pressure on prices to end users and turning luxuries into necessities. Meanwhile, bitcoin’s absolutely finite money supply will allow for the benefits of that exploding productivity to accrue to savers, as the purchasing power of bitcoin’s fixed supply balloons against an expanding basket of goods and services. Progressively more people will gravitate toward using productivity-enhancing AI tools and saving / transacting in productivity-preserving bitcoin, finally allowing the inherently deflationary nature of free markets to fully shine through – a boon for human flourishing, contrary to mainstream dogma.

The earliest image on record of a bitcoin supercomputer on an AI-powered Model T

The latest update of the Model T, leveraging AI transformer version BTC-2140

Thanks to all these shared traits, we expect a powerful symbiosis will form: bitcoin will help support new AI applications, and new AI applications will extend the utility of bitcoin. A couple notable examples of this dynamic are already evident in the Ten31 portfolio. 

Ten31’s Early Entry into Bitcoin-Oriented AI Applications

Ten31 has invested in two companies to date that are relevant to emerging AI trends, Stakwork and StatMuse. 

Stakwork

Stakwork is a cloudsourcing platform that combines the power of humans and AI. Stakwork empowers a globally distributed ecosystem of workers, predominantly in emerging markets and Global South countries, who can opt in to automated microtasks driven by algorithmic tools designed to aggregate the completion of complex, repetitive work on behalf of customers who outsource work to Stakwork. Stakwork’s services range from data annotation to image and video processing, which pair AI-based processing with human oversight as appropriate. The human input from these microtasks feeds into a Reinforcement Learning from Human Feedback (RLHF) mechanism for various machine learning models and toolkits (including Stable Diffusion, OpenAI’s Davinci, and more), helping to train these tools and expand the scope of what’s possible with automation. Anyone can opt in to complete Stakwork’s tasks and can be paid in bitcoin over the lightning network without needing a bank account or even an email address; all that is needed is a mobile phone and connection to the internet. In effect, Stakwork trades digital scarcity (bitcoin) for human scarcity (time), and founder Paul Itoi likes to refer to the potential of this globally available decentralized workforce as a world computer or global brain.

StatMuse

Like Stakwork, StatMuse also has a theme tied back to the human scarcity of time. StatMuse is an AI search and knowledge platform that aims to save time by providing users access to data and intelligence using natural language processing. Leveraging proprietary natural language understanding & generation technology, StatMuse has developed the leading AI platform for discovering and generating sports information and content, and now is expanding into money and bitcoin. StatMuse has been ahead of the curve on conversational search (that is, queries based on natural language, rather than keyword-based search), and since the introduction of transformers, this has clearly been the direction the puck is going for search, knowledge and content creation. We expect human interaction with computers will be increasingly facilitated through natural language, and given the recent developments in AI it is not hard to imagine a future where consumers, creators, and businesses are supported by digital assistants providing personalized knowledge, support and infinite creative leverage to improve productivity and save time (a concept that was described in The Sovereign Individual in 1997). 

StatMuse has deep domain expertise and unmatched data in sports, which is an important influence of culture and where the real-time nature of data is critical. Its expansion into bitcoin will allow StatMuse to serve the most passionate sports fans and bitcoiners directly on its platform worldwide. Money is naturally intertwined with the world of sports, and there is no larger or more important category than money itself, making a sports+money combined platform that much more powerful. StatMuse is also one of the earliest examples of a theme we expect to be more prominent going forward, which is traditional tech companies expanding into bitcoin, becoming bitcoin companies in their own fashion, and gravitating towards thinking in terms of and operating on a bitcoin standard in a world powered by AI.

The Future of the Bitcoin / AI Symbiosis

Both StatMuse and Stakwork are at the vanguard of what we expect to be an oncoming wave of companies leveraging both bitcoin and AI. While we can’t precisely predict every permutation of this megatrend, just a few more potential applications we’re excited about include:

Lightning Applications: The lightning network, bitcoin’s most widespread second layer, offers nearly instant and low cost transactions to dramatically extend bitcoin’s utility for daily, lower-value payments; however, despite significant recent improvements, it still suffers from early-stage UX headaches such as failed payments and the need for active channel management (either by end users themselves or trusted third parties, which present their own vulnerabilities and risks). AI applications for lightning could offer the potential for:

• Improved routing and pathfinding for higher payment success rates and optimal fees. For example, we imagine massive historical transaction data sets could be fed into action transformer models to pave the way for much better lightning transaction reliability and lower fees, while abstracting the underlying routing logic from senders and receivers, further supporting lightning’s adoption as a mass market payments network.

• Automated channel and liquidity management. A key burden shouldered by large routing nodes (and one of the major hurdles for fully self-sovereign use of lightning) is the need to open, close, and rebalance liquidity within payment channels. Blockstream has introduced the ability to automate elements of this multifaceted process with its recently launched CLBOSS system. We expect there will be opportunities for AI applications to perform similar functions by leveraging transaction data sets to help both routing nodes and regular users automatically manage channels and liquidity according to an increasingly granular set of criteria. 

• Privacy improvements. lightning payments can provide some natural privacy benefits relative to on-chain bitcoin transactions, but can still expose users to various privacy vulnerabilities. While clearly there could be concerns that increased use of AI by surveillance companies could infringe upon user privacy, we also speculate that AI tooling and applications could automate privacy best practices and bridge the UX gap that often confronts less technical users even when they understand the importance of privacy, especially as more of these tools are open sourced and can run on local machines (e.g. like Stable Diffusion is with image generation).

Taken together, these automation improvements (alongside ongoing breakneck development in the lightning ecosystem more generally) could be the unlock to make non-custodial, sovereign use of lightning more accessible in the coming years.

Mining Optimization: Innovators like Braiins have already shown early advances in providing special firmware intended to “autotune” bitcoin mining ASICs to automatically optimize for hashrate or power efficiency depending on user specifications. We could envision such solutions taking another leap with transformer-empowered systems dynamically and independently determining when and how much to over- or under-clock, and when to turn on or off based on machine efficiency characteristics, hashprice, power cost, and a host of other factors. Bitcoin mining shares many characteristics with classic commodities businesses where positioning on the cost curve and marginal efficiency gains differentiate winners from losers, so even fringe improvements to operations powered by AI could have meaningful implications for the industry. 

Micropayments for Compute: As discussed, generative AI applications like ChatGPT depend on costly GPU processing to return results for user queries. While these costs should decline over time and AI infrastructure providers will undoubtedly experiment with a variety of revenue models, we believe bitcoin offers a unique potential solution for sustainably monetizing these services in the form of bitcoin micropayments over lightning. 

The enabling of digital bearer micropayments with bitcoin over lightning (which are fundamentally unlike the credit-based transactions that have historically defined online commerce) could be highly relevant as search and knowledge acquisition platforms confront potentially seismic changes in the way queries are monetized. To the extent that generative AI’s ability to provide answers more quickly or directly short-circuits the typical user flow that supports the traditional “Cost Per Click” search advertising model, per-query lightning micropayments could offer an alternative for knowledge platforms to build businesses on top of generative AI search tools, in this case focused on the long tail of individual user demands rather than a monetization of users’ attention. 

We’ve already seen the lightning micropayments use case start to blossom on Stakwork, “value for value” apps like Fountain and WavLake, AI image generators that exchange art for sats, and “zaps” on Nostr. The LSAT protocol* has also provided an interesting proof of concept for metered access to compute based on lightning payments. We could envision similar lightning integrations into AI tools like Replit’s Ghostwriter or Github’s Copilot to enable users to pay sats for those programs on a per-use basis. 

Finally, given that bitcoin mining involves expending computing power in exchange for bitcoin, it seems intuitive to us that bitcoin should naturally be used in exchange for AI computing power (i.e. bitcoin becomes the unit of account for computing power). 

The Bitcoin + Nostr + AI Stack: Those following bitcoin, distributed technology, or social media have noticed the recent parabolic growth of Nostr, a simple protocol to facilitate robust censorship resistant communication and information-sharing. With no marketing budget or support from a centralized entity, the number of Nostr profiles producing content has ballooned to over 2.5 million in just under two months. Bitcoin has clear synergistic potential with Nostr – several clients have already integrated native lightning payments – but we also believe AI could have a notable role to play. A few potential integrations we believe could drive value and form the early beginnings of a Bitcoin + Nostr + AI “tech stack of the future” are:

• Censorship-resistant search and knowledge acquisition. Chatbots or digital assistants leveraging the natural language processing abilities enabled by transformer models and the open nature of Nostr relays could transmit sensitive or censored information in exchange for sats. A model like this might allow populations living under restrictive regimes (or just users dissatisfied with the curated information presented by traditional search functions) to query ChatGPT-like knowledge platforms built without restrictions or biases imposed by governments or corporations, and to receive that information through permissionless relays that are easy to spin up and difficult to fully eradicate. Compute costs for generative AI knowledge platforms still need to come down significantly for this model to scale, but we speculate that all the pieces are in place: AI could provide the content, relays provide the transmission, and bitcoin provides the monetization.

• Discovery mechanisms. Transformer models could be used to periodically digest the corpus of all Nostr notes, after which competing clients could integrate the resulting AI tools to offer end users finely customizable content filters and deeply-informed suggestions for new npubs to follow. An even more interesting iteration of this concept would be one that used sats as the signal for discovery – for example, surfacing new accounts to follow based on the social graph of npubs your account has frequently zapped, or potentially interesting content and accounts based on contextual understanding (not just keyword matching) of posts you’ve zapped. Additionally, there will likely be a need for search tools that can dynamically filter through spam at the client and / or relay levels and better tools for discovery of niche relays, both of which could benefit from lightning-monetized AI capable of understanding and evaluating context. We could envision a variety of other ways that zap-guided AI could help rebuild content discovery for a decentralized paradigm where attention has to be organically earned rather than gamed by a few corporate employees to drive outrage or clicks. 

The world’s first self sovereign Bitcoin + personal AI + Nostr supercomputer

The nation-state AI-enhanced surveillance machine

Rogue AI – Bitcoin Fixes This?

Despite all the productive applications we can envision from bitcoin, AI, and the synergy between the two, we acknowledge that technologists and developers have long worried about the many potential downsides of progressively advanced artificial intelligence. In particular, the concept of a highly advanced AI “going rogue,” self-replicating, and causing some kind of doomsday scenario has received particular scrutiny in recent years given the pace of machine learning advancements we’ve discussed. This is indeed a frightening future to imagine, but as in most other areas of life, bitcoin offers some reasons for optimism.

An AI’s ability to produce complex content in seconds is reminiscent of a central bank’s ability to trivially expand the money supply or a “crypto” developer’s ability to spin up a new altcoin at will – all seem to trend toward an infinite supply with few or no constraints. Ten31 has discussed elsewhere how bitcoin will fix the last two themes, but to the extent that some version of what we’ve discussed in this piece plays out, bitcoin could also become the ultimate constraint on the infinite replication of AI as well. As AI applications improve bitcoin’s UX substantially, they are likely to accelerate its pace of adoption, bringing it closer to becoming the global money of choice and thus progressively more necessary to pay for the (still very expensive) compute underpinning generative AI technologies. This trend will be further reinforced by the digitally native and instantly settled properties that make bitcoin ideally suited for this role. As this virtuous cycle progresses and the two technologies become more intertwined, bitcoin will begin to impose an unforgeable cost on compute power: unlike the fiat money paying for most generative AI today, bitcoin can’t be printed or manipulated, so any use of real-world resources (electricity, GPUs) to power generative AI will first need to either directly or indirectly perform Proof of Work to finance itself. No sats, no compute. In the age of digital infinity, bitcoin’s absolute scarcity will be king.

Conclusions

• Bitcoin and AI are world changing technologies to which all individuals and companies will be forced to adapt. Just as every company will become a bitcoin company (using or integrating bitcoin in some way), every company will also become an AI company. It is inevitable these two fields will eventually overlap. 

• The dramatic upside offered by utilizing new AI technology will drive exponential adoption of these tools, even if these technologies also raise concerns of potential negative consequences. We expect an order of magnitude increase in productivity, as well as significant growth benefits to those who leverage generative AI technology.

• Bitcoin and AI are complementary and synergistic partners. Bitcoin will help support new AI applications as a payments tool, and new AI applications will extend the utility and accessibility of bitcoin. In this way, AI could be a Trojan Horse for accelerated bitcoin adoption and development, with AI-enabled apps and features bringing in new waves of users and software creators to bitcoin. 

• AI has the potential to offer significant UX improvements to the bitcoin / lightning stack, which could provide an unlock to help bitcoin achieve escape velocity among mainstream users. By providing better automation and abstraction, AI-powered tools could drive vast upgrades in user flow to make using bitcoin a 10x+ better experience than legacy systems while enabling entirely new use cases. 

• As the diversity of AI applications proliferate, bitcoin will also be a tool to counteract any centralizing forces which may attempt to abuse the power of AI. The freedom to leverage the capabilities of an AI-algorithm will depend on the ability to pay for its computation with a politically neutral form of money resistant to censorship and debasement, and bitcoin is the only form of money which fits that bill. “If you can’t control the money, you can’t control the algorithm.” In addition, bitcoin may also provide protection from the risk of an AI self-replicating or AI content being produced ad infinitum. 

• The development of new use cases leveraging these tools supports Ten31’s fundamental thesis that the total addressable market of bitcoin infrastructure is much larger than most realize, and new verticals and applications will continue to emerge over time. There are parallel platform shifts happening as a result of both bitcoin and generative AI, and the benefits of such a change  generally accrue disproportionately to those who participate and/or invest the earliest. As such, individuals and businesses utilizing the tools now will be advantaged versus those who aren’t, and capital allocators who are investing in bitcoin infrastructure tied to these priorities in anticipation of the AI-driven tailwinds will be afforded the most asymmetric upside. 

*Several months following the publication of this piece, this protocol was rebranded as the L402 protocol. 

**We want to thank the following people for providing input and influencing our thinking on these topics: Paul Itoi, Elaine Ou, and anonymous.

Bitcoin: Digital Land Rush

Abstract: The introduction of the bitcoin computer program by Satoshi Nakamoto was a fundamental advancement in computer science creating a new frontier, digital land i.e. blockspace, for humanity to explore and develop in the digital age.  Bitcoin’s technological innovation of combining cryptography and computation over time for connecting abstract concepts like value and ownership to the physical world has created a paradigm shift in how humanity interacts in the digital space.  Innovators utilizing the new digital property rights and blockspace are creating the first free and open market that is inclusive and equitable for all participants.  Novel infrastructure is being built for utilizing bitcoin in order to capture value for meeting the demands of users of the bitcoin ecosystem.

The digital land rush started in 2009 when the first plot was recorded after Satoshi Nakamoto sent Hal Finney the first bitcoin transaction thereby initiating the beginning of a network on the bitcoin computer program.  Initially, the usage of this new digital land has mainly been for recording transactions on the distribution.  Now, a ripening of innovation is occurring with new ventures carving out plots of land in the digital world for building novel infrastructure.  This new land rush is possible because Satoshi Nakamoto created digital property rights (contained in UTXOs) and the new digital element, blockspace.  Bitcoin’s introduction of this new digital element and property rights are causing a paradigm shift in how humanity interacts in the digital world by standardizing and consolidating segmented digital spaces.  Bitcoin combines blockspace and UTXOs (containers of rights to blockspace) to create the connection from the abstract world to the physical world in a “system for electronic transactions without relying on trust”.  Trust isn’t required to verify the state of all blockspace because bitcoin is free and open source software and everyone has the ability to access the same new digital world, the bitcoin blockchain (chronological, work-proven ordering of valid blocks made up of blockspace).  The continued adoption of blockspace, with all users operating under the same rules to access and utilize it, increases its density, thereby causing a gravitational pull for more users.  Just like an atom has specific properties allowing it to serve as the basic unit of a chemical element, so does the digital elemental blockspace. These are: finite maximum size, an incorruptible state, and universal accessibility.  The digital rights to access and utilize the blockspace, which are contained in UTXOs, are malleable, transferable, and protected through cryptographic and computational proof, which is to say the rights cannot be transferred without the digital signature of their owners.  Personal and commercial endeavors will continue to create novel approaches for building utility on blockspace, resulting in disproportionate value accrual to the first movers carving out their new digital land.

Blockspace

The state of blockspace is incorruptible because each newly crystallized unit of blockspace utilizes proof-of-work for the infusion of energy to forge the digital element and bind the digital right to blockspace.  Proof-of-work anchors digital space to reality.  Because each new blockspace has a finite maximum size and incorruptible state anyone anywhere in space and time can interact with the same blockspace and build new blockspace for utilizing UTXOs.  Similar to how bitcoin nodes validate the blockchain, all users past, present, and future making up the bitcoin network validate bitcoin by freely choosing to interact with all the products and services at the edges.  This network created around the new digital element (blockspace) and associated digital rights will facilitate new utility creation in the exploration of the digital age.  Utility will come from the anchoring of abstract concepts like money, ownership, contracts, community and truth by way of digital rights to blockspace.  Value can be captured as abstract concepts are given form on the blockspace, and as demand for the utility increases, novel infrastructure, products, and services will be built around blockspace. 

UTXOs and Digital Property Rights

The UTXOs, where digital rights are located, give the owner of the digital signature the ability to confirm the rights’ existence on blockspace.  Bitcoin sets the bound on the base layer for digital rights to ~21,000,000.00000000 BTC or ~2.1 quadrillion sats. The total quantum of digital rights are fixed, but the free and open source nature of bitcoin’s software allows new applications to be built at the edges, providing a mechanism for increasing the utility of the rights and efficiency on accessing those rights.  UTXOs being made up of digital rights do not necessarily have to be uniform in size.  UTXOs can be easily transferred, divided, and combined; but UTXOs are immovable without the specific digital signature.

The rights to interact with blockspace are distributed when new blockspace is created and after being transferred amongst users of the network.  The initial distribution of the right to access the digital land is programmatically disbursed with the creation of blockspace, and will be over 95% completed by the end of the decade.  The right to access the digital land’s utility is open-ended, and the utility of the blockspace is derived from connecting the abstract world to the physical world.  The digital land could be considered like a city block which can be built up and bulldozed down again to facilitate personal and commercial utility.  In every city a business location can be created and monetized, and as time passes innovation yields new kinds of technology to facilitate new businesses to form and capitalize on the wants and needs of current users.  Bitcoin network users encompass past, present, and future participants' wants and needs and have those needs carried forward into the future.  An example of this is when someone first takes possession of bitcoin, i.e. the rights, and then reuses those rights later on to create a lightning channel.  The channel today allows users to send messages back and forth between the two parties in a secure and near frictionless environment that is dependent on where the balance of rights to blockspace reside within the channel. Because the channel was created in the present and then pushed to the past as additional blocks are validated, those rights held within the channel continue to exist into the future within a near frictionless state.  The environment is nearly frictionless because the cost to create the channel was paid upfront to access the blockspace at the time the channel was set up. The channel can be closed at a future date or can remain open indefinitely.  A channel closure could be thought of like a business that is being closed because the usefulness or lack of economic activity creates a drag where the digital land would be better used for something else like a new technology for the owner of the land to capture value. 

Commercial Opportunity

The attributes of blockspace provide a building ground for new commercial utility to be created.  The initial bitcoin businesses were set up for selling digital property rights as forward leaning individuals and institutions realized there was something interesting with bitcoin, and being an early adopter to new technologies is one of the easiest ways to accrue value.  This excitement fueled the digital land rush, and thereby jump started the bitcoin ecosystem.  Businesses began to capture value facilitating the abstract concept of ownership being anchored to the physical world as users took custody by creating digital signatures for the UTXOs.  Self-custody of the digital signature gives the user the sole ability to move the UTXO, because the key can be held where all abstract thought began (the human mind).  Now, new businesses have emerged providing infrastructure for users to utilize blockspace.  Advancement of new technologies paired with the most secure network will continue to pull in new users attracted to value thereby continuously increasing the demand for access to the next blockspace.  As more entrants are pulled into the market, intersecting flywheels are propelled forward from the increased demand.  The new commercial use cases will attract users, and those new users will demand new products and services, thus driving even more new commercial use cases, etc.  More businesses will be created at the edges to fulfill the wants and needs of the continued growth of the network, resulting in the first free and open market in human history for tying abstract concepts to physical reality.

Today’s Businesses

The Ten31 portfolio is full of novel companies capturing value, and here are a few examples of increasing the utility of blockspace and digital property rights.  Unchained Capital is a business providing bitcoin-native financial services.  Unchained provides a model for bitcoin users to custody signatures in a risk limited way.  Unchained leverages the inherent properties of multi-signature addresses to mitigate single points of failure.  The bitcoin protocol permits the use of a quorum of multiple signatures (M/N) to access the blockspace.  Users of multi-signature addresses can help mitigate the risk of losing access to the blockspace because the quorum does not have to be N/N.  Unchained’s multi-signature approach provides the client with at least 1 signature Unchained controls.  Therefore, the client utilizing a 2-of-3 multi-signature and holding two signatures can lose 1 signature and still unlock their blockspace utilizing their 1 remaining signature and Unchained’s 1 signature.  This is a superior model to traditional signature or asset custody as the custodian traditionally has total control over the signature or asset while the user becomes a creditor and is forced to trust the custodian.  Over the course of human history creditors have awoken to the reality of eroded trust and loss from custodial relationships.  Unchained also provides financial services to their clients, including the ability to borrow USD against their bitcoin in over-collateralized loans secured in multi-signature addresses with the borrower still holding a signature which enables the borrower to confirm with absolute certainty the underlying plot of blockspace has not been changed. Unchained is helping provide security and redundancy to digital rights holders of the blockspace, and helping them extract incremental value from their blockspace by providing them financial services tied to the value of the digital rights.

Strike is a business working towards a more connected financial world.  The novel approach taken by Strike is the utilization of multilayer solutions to seamlessly transfer value between users of fiat and bitcoin.  The users are no longer siloed into fiat financial walled gardens like Paypal and Venmo or pigeonholed onto platforms only interacting with bitcoin users.  Now, users for the first time can effectively pay with dollars over the lightning network.  Jack Mallers, founder and CEO of Strike, believes this multi-asset value transfer protocol is the fifth payment rail and will supplant all other payment rails because of the near frictionless environment lightning channels create.  Users can now effectively settle any bitcoin invoice using USD or sats instantaneously without the need for additional intermediaries.  The introduction of the near frictionless state of lightning channels will outcompete antiquated, patched, and tech-debt-ridden closed source technologies for solo-asset value transfer, thereby creating a win-win for the consumer and merchant. By abstracting away any interaction with bitcoin in a secure and open way, Strike enables users to operate solely on the edges and still extract utility from the blockspace.  The barriers to entry for new participants is lowered, thus allowing for new personal and commercial endeavors as the potential for innovating edge case utility is infinite in an open system.  Significant value accretion will occur for companies like Strike who lower the cost of doing business and increase the value extracted from commerce by extending the utility of blockspace.

Mempool.Space is another business innovating around the interaction with blockspace.  Mempool.Space provides a visualization of the blockspace, offering detailed insights into its mempool (pending digital rights transfers), lightning analytics and mining dashboards.  The blockspace explorer allows users to verify transactions and evaluate if the blockspace has changed.  The mempool explorer allows users to see how many transactions are in queue to be added to the coming blocks, how the block is being constructed and the fees users are paying to include their transaction in the next blockspace.  Mempool’s lightning explorer allows users to graphically visualize the lightning network layer and easily navigate through lightning nodes and statistics to better optimize lightning channels.  Other bitcoin companies are able to access Mempool APIs to provide fee estimation insights and evaluate blockspace transactions.  As the user growth of bitcoin continues at an exponential pace the blockspace will become ever more desirable.  Tools like Mempool enabling the more efficient and effective exploration and use of the blockspace will capture a premium value. 

Tomorrow’s Opportunities  

As humanity continues its march into the future the adoption of bitcoin depends only on the imagination of new innovators and entrepreneurs building novel technologies and sought-after products and services for blockspace.  Abstract concepts like contracts, community and truth will be able to be anchored in some fashion to the blockspace in an incorruptible way with easy verification for all.  

• Information can be embedded in a Merkle tree connected to digital signatures tied to blockspace, such as contractual spending conditions. This type of information can be easily and selectively verified to a counterparty enabling a contractual relationship.  This type of innovation is a step function upgrade from the difficulties in centuries old processes of human data manipulations and drag from a non-standardized way for categorizing and cataloging contractual verification.  

• Additional layers tied to blockspace can help offer people greater access to their favorite authors, musicians, performers or other like minded or alternative groups in building digital communities.  Consumers of content would be able to demonstrate long-term, continuous, or intermittent consumption of the arts because of the permanency of blockspace.  Artists and brands would be able to reward loyalty and create communities with exclusive benefits to members who are able to provably demonstrate the requirements.  

• A marketplace for truth could be created allowing users to stake their rights to blockspace on how events actually happened.  A proposed truth connected in some manner to the blockspace could be subject to a binary true or false statement.  Individuals could wager on if the event was true or false and after a quorum of signatures signed to the affirmative or negative winners on the correct side would collect from the losers instantly with the rights to blockspace being transferred.

The digital land rush is here, and everyone has a chance to be part of the exploration of the digital age through the use of blockspace.  As the reality of this paradigm shift diffuses outward an acceleration of adoption will occur.  There will  be a myriad of ways new entrepreneurs and companies utilize blockspace and leverage the capabilities of its digital rights.  We cannot imagine all of them right now, and there are likely to be new ones that could prove incredibly significant that no one has yet to devise.  Therefore, there is likely tremendous upside to carving out a piece of this digital real estate based on the expected increase in its value, driven by the increasing demand for the utility of binding abstract concepts to the physical world for everyone everywhere to access. There is also incredible asymmetric upside from investing in the companies paving the way with new ideas for maximizing the utility, and hence value, of the blockspace, as those are the companies we expect to benefit disproportionately as the value of the blockspace increases (in response to their efforts in giving it more utility).

“It might make sense just to get some in case it catches on. If enough people think the same way, that becomes a self fulfilling prophecy.” -Satoshi Nakamoto

Glossary

Abstract Concept: Having no physical or spatial constraints because they have no direct relationship in the physical world

Bitcoin: the computer program running bitcoin

Bitcoin Blockchain: Valid blocks connected in chronological order

Bitcoin Network: The total of all bitcoin users past, present, and future

Blockspace: Digital space located within each block

Bitcoin Transaction: The act of transferring rights on blockspace

BTC: 100 million sats

Digital Element: Basic unit of digital space

Digital Rights: The rights to access the digital space known as blockspace

Free and Open Source Software: A program where the code is viewable, changeable, and free to run

Proof-of-work: A crystallizing process where energy is required to forge the digital element blockspace and bind the digital rights to blockspace

Sat(s): Smallest unit of expression of the bound total of digital rights

UTXOs: Unspent Transaction Outputs, containers for digital rights.

Strike Raises Series B Led by Ten31

Ten31 is excited to announce the closing of Strike’s Series B capital raise, for which we served as lead investor. Additionally, Ten31 Co-Founder and Managing Partner Grant Gilliam will join the Board of Directors to support Strike’s next phase of growth. Strike is an emerging fintech and payments innovator leveraging the characteristics of bitcoin and the Lightning Network to deliver a superior experience in consumer and merchant financial services. We are proud to scale up our support as a long-term strategic partner to Strike, a company we believe can enable a more efficient, innovative, and inclusive financial experience for all. 

At Ten31, we believe the Bitcoin and Lightning stack is collectively the best monetary and settlement protocol in history. Bitcoin is the first-ever digital bearer instrument resistant to debasement, censorship, and seizure, while Lighting offers a permissionless means for instant, low cost transfers of value between peers anywhere in the world. Over time, more businesses and consumers will gravitate to this superior asset and payments network, and the companies providing the best tools and most value for the next billion users will cement themselves as the most important financial platforms of the coming decades. We believe Strike has the potential to become one such company as it leads the transition to an open, global monetary standard. A key aspect of Strike’s model is that a consumer or merchant using Strike’s infrastructure does not need to understand bitcoin and Lightning to benefit from its attractive properties and can choose to continue operating in their native fiat currency; Strike manages the complex liquidity, legal, and tax implications in the background to deliver a superior payments and financial experience to users, an approach that is unique in the space and which we believe has the power to accelerate bitcoin adoption globally.

Legacy payment systems supporting most commerce today are ripe for disruption. Debit and credit card transactions may seem simple at the point of sale, but they typically involve several layers of intermediaries, including an issuing bank for the customer, payment processors / independent sales providers, a card network (Visa, Mastercard, Amex, or Discover), and an acquiring bank for the merchant. A simple card swipe at a grocery store triggers a variety of relaying messages between these parties to authorize and clear a transaction, but final settlement of value typically will not occur for 2-15 days thereafter. In that sense, a credit obligation is therefore transferred in every swipe, rather than a settlement value with true cash finality. When all is said and done, the relevant financial intermediaries typically end up extracting 3% or more of the payment value through interchange fees, fixed swipe fees and other processing costs (collectively the “Merchant Discount Rate” or MDR). When also factoring in the risk, prevalence and cost of fraud, chargebacks and reversals, the burden on merchants (especially small businesses and businesses with low average transaction sizes) is even more significant and in many cases outright prohibitive, creating a very challenging operating and financial environment that has only become more restrictive over time. 

The growing adoption of bitcoin and the Lightning Network can significantly improve this dynamic. A Lightning transaction transfers value via bitcoin with immediate settlement from one party to another. There is no need for the creation and subsequent settlement of a credit obligation between counterparties – with bitcoin on Lightning, the payment message *is* the settlement. Instead of value being extracted by intermediaries sitting in the middle of payment flows and exploiting regulatory moats and bloated fixed cost structures, consumers and merchants now have a way to directly facilitate cash-final value transfer through an open network protocol not controlled by any third parties, in which anyone can compete. Similar to the early evolution of the internet, where information could flow freely peer-to-peer and the most significant value accrued to those companies providing the best user experiences, the winners in this new payments paradigm will be those providing the best value to consumers on the one end and merchants on the other.

Strike is uniquely pursuing both ends of this payments flow. On the consumer side, Strike is building a suite of differentiated products to become the go-to bitcoin-native fintech platform of the future, including a debit card, an app for P2P payments over Lightning or traditional rails, tailored consumer rewards, international remittance, micropayments, and more. On the merchant side, its offerings are underpinned by the Strike API, which empowers merchants to accept payments over Lightning at lower cost and with superior settlement characteristics. It is increasingly clear that reducing payment friction and fees is a major focal point for merchants around the world, and Strike is positioned to offer merchant solutions to significantly alleviate these problems.

As the world trends toward the superior payments standard of bitcoin and Lightning, legacy players will be challenged with their significant existing fixed costs and the inefficiencies associated with the credit-based model (risk, credit, fraud departments, etc.) and the inertia of incumbency and disruptive risk to their legacy business (innovator’s dilemma). Meanwhile, the early innovators that can offer reliable and scalable solutions to consistently optimize users’ experiences will build a loyal base of consumers, strong relationships with end merchants, and a durable competitive edge. Strike is poised to be one of these early key innovators and thus has the potential to become one of the most important and valuable companies in this next evolution of financial services, the largest market in the world. 

Most importantly, as Strike scales to target consumers and merchants globally, the platform will serve as a catalyst for adoption of bitcoin and Lightning more broadly. As legacy institutional financial barriers give way to open competition and rapid innovation, the resulting backdrop will be a boon for increasing financial inclusion, individual freedoms and ultimately human flourishing. Strike’s Series B thus helps push forward many of the key themes the Ten31 team is most passionate about, and we’re thrilled to help Strike take the next step toward these ambitious and crucial goals.