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.