The Global Bitcoin Opportunity: Why Index is Backing Xapo
One of the benefits of being a global venture firm is we see how different countries use technology in very different ways, rather that just observing the US market alone, and we’re convinced Bitcoin is here to stay as a global phenomenon. Like many bold innovations, Bitcoin’s early days are sure to be a bumpy ride. Particularly in the recent past, Bitcoin has seen short-term volatility in the exchange rate with fiat currencies, which has sparked debate over how large a role Bitcoin will play in the global currency system. Introduced in 2009 and gaining traction only in the past two years, Bitcoin is a baby in the financial markets, and it will take time to establish credibility, stability, and ubiquity. But we are convinced Bitcoin will achieve all of these milestones.
A lot of people think of Bitcoin as substitute to fiat currencies, but that is not the right comparison. At its heart, Bitcoin is a public ledger that records financial transactions. It’s a way of keeping track of who owns how much value, and which transactions have created that asset allocation. It’s not likely Bitcoin will become a substitute to fiat currencies, especially in developed economies. Bitcoin will never replace the US Dollar or the Euro, and that’s not its main goal. The more appropriate analogy for Bitcoin is gold – a value system that doesn’t have a political affiliation, yet plays a part in overall monetary policy. Of course, Bitcoin has some significant advantages over gold. Most importantly, Bitcoin is digital, so it’s far easier to track and move funds in real time.
While Bitcoin still faces potential technical and regulatory challenges, we believe it will be able to overcome these obstacles. Why? Because Bitcoin is well on its way to achieve the three pillars of a stable financial ledger system; it’s trusted, accepted, and tested. In just a few years, Bitcoin has already become the most trusted crypto-currency of all time, reaching a “market value” of nearly $10 billion. It is accepted as a reliable means of storing and exchanging monetary value by a great number of users. And, its resiliency has been tested again and again, including the shut-down of the massive Mt. Gox exchange, government restrictions, hacking and security breaches, wild volatility, and even criminal arrests. Despite these challenges over the last 12 months, the value of a Bitcoin has increased by nearly 10x. What other global currency could weather such shocks and continue to operate steadily on the world stage?
For these reasons alone, Index is bullish on Bitcoin, but the value of this crypto-currency is even more apparent when seen from an international perspective. Bitcoin could well become a defacto safe-haven currency for people in countries lacking the benefits of a regulated financial system. In the US, we take insured bank accounts, credit cards, and a stable currency for granted. In countries like Argentina, Syria, Nigeria, Pakistan, or the Ukraine, many consumers don’t trust their governments or banks in the same way they do in the US or UK. Consumers and companies are forced to use a hodgepodge cash-and-barter system and often have limited access to credit or to foreign currencies. Bitcoin could be a credible solution to store, exchange, and invest money for billions of people who don’t have access to a stable financial system.
Obviously, there is huge potential to make money investing in Bitcoin, but simply generating returns is not our main job at Index. We invest in companies that have the potential become billion-dollar global businesses. In the Bitcoin ecosystem, we believe there are three key near-term opportunities, and we’re actively looking to invest in startups in these areas.
- Buying and selling goods with Bitcoin. Bitcoin is the first alternative payment system since PayPal that has the potential to give credit cards and bank transfers a run for their money, so we’re looking to invest in the underlying transactional technologies that facilitate Bitcoin payments. In the near term, we believe that smaller transactions like social tipping, gifting, or gaming might represent the largest opportunities. In May, we made our first investment in Bitcoin when we led a $30 million Series A investment in BitPay, the leading Bitcoin payment processing platform for merchants. BitPay already processes over $1M a day in Bitcoin transactions for over 30,000 online and offline merchants – and that number is growing every day as more merchants worldwide begin to accept Bitcoin for payment. As Bitcoin achieves mainstream acceptance, the infrastructure to enable secure transactions will become increasingly critical – and thus holds unprecedented investment opportunities.
- Bitcoin exchange into other currencies. Bitcoin users want to know they can exchange their Bitcoins for traditional currencies or gold at any time in a fluid, open market. Creating secure, insured exchanges is tantamount to building trust in the Bitcoin system. We haven’t yet made an investment in this area, but have a long history of investing in the currency exchange market with our early investment in Oanda, so we’re on the lookout for promising exchange startups that will bring stability and liquidity to the Bitcoin market.
- Secure Bitcoin storage. If you own Bitcoin, you know you need somewhere safe to store them. Some people prefer their own computers, but, the mainstream need an encrypted, totally secure, and fully insured place to store Bitcoin. They also need a wallet that allow Bitcoin users to purchase goods in stores and online using their smartphones. Soon, people will be able to buy almost anything with Bitcoin, so investing in the “bank accounts” that allow people to store and spend their Bitcoins will yield substantial long-term returns.
Of course, we don’t just invest in companies because they have the most innovative technologies. We back visionary, passionate entrepreneurs who have what it takes to create billion-dollar businesses. And, it’s in that spirit that we are excited to announce a new investment in Xapo, the largest Bitcoin vault and wallet provider in the world. Co-led with Greylock Partners, this $20M Series A-1 round will help Xapo increase the reach of its massive Bitcoin storage vault across the world.
Xapo is Index’s second investment in Bitcoin, following our funding of merchant processing company BitPay in May. Xapo is led by Wences Casares, a luminary entrepreneur and early advocate of Bitcoin. Wences grew up on a sheep farm in Patagonia and taught himself to code at an early age. Xapo is not Wences’ first rodeo. By age 20, he founded Argentina’s first internet service provider, and a few years later, started Patagon, which became Argentina’s largest online brokerage and was acquired by Banco Santander for $750 million in 2000. He also founded Wanako Games, acquired by Activision, and Banco Lemon, a retail bank later acquired by Banco do Brasil. Before founding Xapo, he started Lemon, a digital wallet company that he sold to LifeLock for $43 million in 2013.
But Wences also knows what it’s like to lack access to trusted financial systems. Growing up in Argentina, his family lost their entire savings several times due to confiscation and rampant inflation. An early adopter of Bitcoin, Wences believes the crypto-ledger system can bring newfound financial stability to billions of consumers in countries where banks don’t earn a high level of trust.
We’re excited to back Wences and his team as they continue to build on their global dominance in the Bitcoin vault market. In the months to come, we’ll see a lot of innovation in Bitcoin storage and transactions from Xapo, and we’re thrilled to support the development of the Bitcoin universe.