After an interesting discussion with those in my laboratory, I've decided to apply the forensic analysis team from BoomBustBlog to the privately funded companies in the Bitcoin space. See my post from yesterday for much of the reason why.

As clearly predicted yesterday, the better funded of the payment processors will initiate a pricing blood bath they'd likely kill for...

From PayPal's subsite on Mass Payments:

Paypal Mass Pay Site Screenshot

 As you can see, PayPal has already imbued its service with much of the attributes that are being offered by the Bitcoin payment processors. They also have a material advantage as of right now, a massive installed base.

I also cannot emphasize enough how damaging the all too necessary customer service option is to margins. You see, the problem is most service companies don't put enough into customer service and handholding of the customer. From an optimal perspective, this should actually be part of the marketing and sales process, but it's often either non-existent or implemented as an after thought after enough customers start bitching and complaining, or worse yet (and likely most often the case) leaving!

As a company with mature management, it appears as if PayPal is trying to head this off at the pass as it attempts to change consumer behavior and prod them into adopting its new electronic currency payment system...

Paypal Mass Pay Site Support Screenshot

 Now, let's compare PayPal to the newly funded Bitcoin payment processors...

Bitpay

Funding Rounds (3) - $32.50M

- See more at: http://www.crunchbase.com/organization/bitpay#sthash.yvlqpNtr.dpufBitpay prices

An interesting departure from the per transaction/fee model, Bitpay implemented a subscription system which benefits those customers who perform a large quantity of relatively small transactions moreso than those who process large orders.

I calculate Bitpay's most recent $30 million series A round to have been at around 9.2x sales, valuing the company at $160 million. This is a guestimate, of course, since I do not have access to internal numbers.  

Next we have Coinbase...

Funding Rounds (3) - $31.70M

- See more at: http://www.crunchbase.com/organization/coinbase#sthash.CD8IPTp6.dpufCoinbase 

There's also Circle, founded by Mr. Allaire of Coldfusion fame (sold to Adobe Systems).

Funding Rounds (2) - $26M 

- See more at: http://www.crunchbase.com/organization/nfc-direct#sthash.dd0DaxHc.dpuf

Circle has not publicly launched yet but promises to bring a new level of simplicity and user-friendliness to the bitcoin payment ecosystem, concentrating more on a banking paradigm then the technical bent that bitcoin is known to represent. This is all you need ot know about the Circle business model as it relates to this discussion of impending margin compression...

Circle

Free=Margin Compression!

Let's see how this plays out for customers. The most lucrative segments for this industry is the SME (small and medium business enterprises) who process anywhere between 10 and 1,000 transactions per month. Why? Because there are simply more SMEs than they are big companies in the world. Let's see what the two biggest bitcoin processors look like when stacked up against PayPal's Mass Pay product for the SME market...

image019

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Of course, the Bitcoin transactions are likely a loss leader for additional, value added services for many companies in the not too distant future. As a matter of fact, I feel that the payment space will quickly become commoditized by Bitcoin technology - forcing these companies and many more (I'm talking about you Mastercard, Visa and Western Union) to innovate and offer significantly and materially better value for the buck.

Imagine what this competitive landscape will look like when Mastercard, Visa, American Express, Discover and Western Union jump into the fray. Of course, before that a much greater portion of the VC and private equity community will wake up and realize the opportunity in Bitcoin to pour more cash into it than sugar into a Bubble gum machine (emphasis on "Bubble"). The key is to get in early, and get in right. But how does one do that and where will this tale of uber margin compression end?

Well, the research report from which this info is being prepared will be offered to accredited and instituional investors starting next week, at least those who have an interest in UltraCoin. 

My next article on this topic will explicitly illustrate how UltraCoin can assist ALL players (that's right, including PayPal, Bitpay, Circle, Coinbase, Mastercard, Visa, American Express, Discover and Western Union) as well as their direct customers, in climbing up both the food chain and the value proposition ladder - thus rapidly repairing the margin compression damage they are about to bring upon thier business models.

 image014

 

Published in BoomBustBlog

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Reggie Middleton discussion UltraCoin at the 2014 FinTech conference at Dechert LLP.

Coindesk asks "Do Patent Filings from eBay and Western Union Pose a Threat to Bitcoin?" I feel  the question is in and of itself missing the point. To explain this fully, I have to share a little bit about myself, particularly my weaknesses. I'm the type of person who is very knowledgeable about his strengths and his weaknesses, but sometimes I don't see my strength for what it is, and that is tantamount to a weakness in a highly competitive environment.

Case in point, in discussing whether or not competing patents have been filed for smart contract transacion processes by those who seek to be in my space with my contract engineer (a very skilled software architect and IP attorney), I displayed what I considered a healthy level of paranoid concern. I found it hard to believe that no one bothered to patent the most innovative, disruptive and groundbreaking aspect of this new crop of digital currencies - the ability to program them. As those who follow me know, I've spent a lot of resources developing, designing, refining and patenting advanced smart contracts (see How Reggie Middleton's Start-up Patented The Future of Global Finance!). I actually found it highly unlikely that no one had come up with this idea before me. Matt (my contracts engineer) said, "You know, it actually takes an uncanny amount of vision to have seen the scope of this stuff and act upon it, not to mention to have done so 6 months ago. Not many people are like you." Right then and there, it hit me. People really do not see things the way I do! 

Most know me from my prescient calls in banking, finance, real estate and tech (see Who is Reggie Middleton?). I've demonstrated a knack for seeing future trends and determining when things (such as valuations and opportunities) are out of whack. With that being said, the big media interest in Bitcoin combined with the increasing VC interest in Bitcoin companies (reference BitPay Gets $30 Million in Venture Capital Funding) is a very good thing for the industry, but also illustrates shortsigtedness in both the investment community and many practitioners.

The problem with the processors...

When bitcoin is as easy as PayPal to use then it will be on the path to mass adoption, but to assume that’s the most lucrative path to take in bitcoin company private equity investment begs the wrong question. Here’s the strategic landscape as I see it.

Bitcoin is very inexpensive to use as a transfer agent. A transaction may be safely sent without fees if these conditions are met (this is excerpted directly from the Bitcoin Wiki, verbatum):

  1. It is smaller than 1,000 bytes.
  2. All outputs are 0.01 BTC or larger.
  3. Its priority is large enough

Otherwise, the reference implementation will round up the transaction size to the next thousand bytes and add a fee of 0.1 mBTC (0.0001 BTC) per thousand bytes. Note that a typical transaction is 500 bytes, so the typical transaction fee for low-priority transactions is 0.1 mBTC (0.0001 BTC), regardless of the number of bitcoins sent.

Bitcoin as of 5/18/2014 is $444.74m, thus the fee for this transaction is roughly 4 cents, if not outright free. If a processor is transferring $10,000 on behalf of a customer, whether at one time or 100 times throughout the course of a month, the processor’s fee cost would range from $0 to $4, while the processor would likely charge (as of the date of this writing, $0 to $100). The traditional processors such a Visa or Paypal  would charge hundreds (as in up to 50x more!) for the same deal!

That 25x markup on the high end is significant (even for the Bitcoin companies), and ripe for disintermediation itself (that's right, the disintermediaing agents are poised for disintermediaion). Particularly once the UX of Bitcoin evolves, as email and web browsing did, and users realize how easy and cheap it is to jump onto the blockchain and do this stuff themselves.

Even assuming users don’t follow the historical model of those that left proprietary walled gardens (think AOL) and jumped directly into the open World Wide Web themselves, there are no material barriers to entry to enter into the processing business other than potentially a money transmitter license. The only material barrier, hence the business opportunity, is that Bitcoin is cumbersome to use. As the UI/UX polish increases and the amount of competitors in the space increase, the lower the prices charged - hence the margins - will be.

With such low barriers to entry and potentially humongous markups to exploit, what do you think happens next? The wild, untamed hordes of competitors swoop down upon the masses, and we have a concerted race to zero, and likely negative margin as competitors attempt to make processing a loss leader to draw users into the folds of richer, higher margin services!!!

 The race to marginal zero, then negative, does not make a strong business plan. So, what do these companies such as BitPay, Coinbase, etc. do once that point is reached (rather quickly)? They look to value added (high margin) services on top of their low margin, utility-like payment infrastructures.

Enter smart contracts and the true use of programmability in the crypto-currencies. The easiest and the likely first implementation of such will be multi-sig operations which allow multiple parties to share funds without having to worry about trusting and single party in a transaction. Our ZeroTrust Letters of Credit (patent pending) is just such a product. It allows for multiple parties to tranfer payment for simple and complex transactions contingent upon the mutual agreed upon successful execution of said transactions. This is done without the parties having to:

  1. Know each other
  2. Trust each other
  3. Have any form of proximity to each other;

and can be done using micropayments all the way up to multi-million dollar macro payments. The barriers to this business are much higher. For one, it takes more than just programming code. You have to be able to congeal the legal logic of the conventional law in equity contract into code. You have to be able to congeal the business logic into code, and you have to be able to implement it into the blockchain or whatever other underlying transmission mechanism you choose to utilize.

Once the race to negative zero is in full swing, a few of the wiser companies will wake-up and say "Hey, there has to be a better way, and we think we found it!". It is at that point Reggie Middleton's UltraCoin products and assets will shine. It is not hard to foresee that the entrenched companies (Visa, Mastercard, PayPal, Western Union) may enter a bidding war with the new comers armed with material VC warchests (much more than we're seeing with $30 million investments of today - all over the guys who had the foresight to see the next evolutionary step in plain vanilla payments - smart transactions and self-executing digital contracts and transactions.

We're actively looking for financial and intellectual capital. If you, as an accredited investor, are looking for an opportunity in the higher end of the digital currency space, I think we should talk. In addition, if you are a higher level Java/C++ developer willing to take risk, we need to talk. I'm available at reggie at ultra-coin.com.

 
Published in BoomBustBlog

Bloomberg ran a story earlier this week illustrating the human capital flight out of the Wall Street machine and into tech:

At elite universities, fewer MBA and finance candidates are willing to even consider a life of missed weddings, busted romances and deep-into-the-night deal negotiations. The percentage of Harvard Business School graduates entering investment banking, sales or trading dropped to 5 percent last year from 12 percent in 2006, while those entering technology almost tripled to 18 percent during that period.

At the University of Pennsylvania’s Wharton School, the percentage of MBAs entering investment banking dropped to 13.3 percent last year from 26 percent in 2006, while those entering tech more than doubled to 11.1 percent.

 Those of you who have been following finance from the Wall Street/Bay Street/Canary Wharf perspective realize that this is a cyclical occurence. Basically, Wall Street falls out of favor with MBA whiz kids every ten years of so. But!!!! This time is different. This time around, Wall Street, et. al. is about to succumb to the destructive forces of technology that transformed, revolutionized, disintermediated, gutted and absolutely reinvigorated the media, news and retail industries. 

That's right! The Internet Paradigm Shift has finally hit Global Finance... and it's going to hurt, and hurt a lot!

As many know, the I've poured my time and resources into a start-up by the name of UltraCoin. Many have been clamoring for white papers and details, and I have been purposely secretive about such. The reason? I needed to entrency protection from my competition - the money center banks. How did I do this? Well...

I patented the future of Global Finance!

patent to the Future of finance big

This video illustrates my presentation to both the mainstream and alternative media as I start my capital raising rounds from venture capitalists and strategic investos alike. Check it out!

We're looking for financial and human capital as we prepare to expand globally. Financial capital is self-explanatory. On the human capital side...
We're seeking a full stack contract developer. Must be proficient in: Java or C#; git, bzr, or similar. Must have a solid understanding of: race conditions and how to avoid them; scalable concurrency and data integrity architectural concepts (replication, sharding, etc.); software development processes and best practices. Proficiency in some CRUD technology (*SQL, NoSQL, etc.) as well as and some scripting language (Javascript, PHP, Python, etc.) is highly preferred. Experience with the Bitcoin protocol is a huge plus. Your first interview is to e-mail your resume along with a response to this challenge: https://gist.github.com/mbogosian/28815ae606c663c983c3

Must be willing to sign an NDA. You should be knowledgeable and competent, but we prefer grit to genius. Prima donnas need not apply.

Published in BoomBustBlog

For those who didn't get the memo, I've been toiling away in my lab creating the world's first "investment bank, securities brokerage, asset manager, money transfer agent" in-a-box that allows users to perform all of theses functions themselves on a ZeroTrust (meaning you don't need to trust or even know the other side of the transaction), peer to peer basis.

Well, it appears as quite a few of the big boys and heavy weights have a similar idea and are in the market to make acquisitions. Wouldn't it be ironic if UltraCoin (my iconic venture) was acquired before it gets its seed round???!!!  

 DSC08472

The Financial Times reports:

[Facebook] The social network is only weeks away from obtaining regulatory approval in Ireland for a service that would allow its users to store money on Facebook and use it to pay and exchange money with others, according to several people involved in the process. 

The authorisation from Ireland’s central bank to become an “e-money” institution would allow Facebook to issue units of stored monetary value that represent a claim against the company. This e-money would be valid throughout Europe via a process known as “passporting”.

Facebook has also discussed potential partnerships with at least three London start-ups that offer international money transfer services online and via smartphones: TransferWise, Moni Technologies and Azimo, according to three people involved in the discussions.

In the case of Azimo, Facebook offered to pay the company $10m to recruit one of its co-founders as a director of business development, according to people familiar with the situation.

 Yes, this space is heating up. It makes me feel good! You see, the Visas, Mastercards, Western Unions and Paypals of the world make a lot of money selling a relatively cheap services for a relatively large amount. BUT!!!! The Goldmans and JP Morgans of the world make much more money by selling very deep margined products and services for a lot more while paying a lot less to create them. It is here where UltraCoin has staked its ground. As the competition amongst the big boys starts to heat up, they will want to crawl up the food chain and I already have the ladder built! 

Ultracoin dektop

“Facebook wants to become a utility in the developing world, and remittances are a gateway drug to financial inclusion,” said a person familiar with the company’s strategy. Facebook recently passed 100m users in India, which is its largest national market outside the United States.

My last post on this topic illustrated how UltraCoin will operate in developing markets by allowing currency, stock and financial asset exposure trades of anywhere from $5 dollars to $5 million, as well as sending money to others for just a little more than nothing, as excerpted from "Hardware IS Dead" Thesis Has Now Torn Through All Handset Providers & Now Everyone Can Act On It:

I've created an infrastructure that significantly expands these investment markets by allowing anyone, anywhere with an Internet connection (of almost any speed) to participate in almost any of the world's public financial markets. Taking the subject matter of this article into consideration, we can short Samsung on its own home exchange of Korea for nearly any amount, from $10 million US down to $8 ...

The Family 2095-2097 - Copy

These same young investors can even hedge thier currency translation risk with a Korean Won US dollar forex pair, for 55 basis points!

manage currency risk in Ultracoin while using it to short Samsung

Armed with the information from simply reading my blog posts, your brothers from Haiti or Botstwana can now take short positions in these (margin)doomed hardware manufacturers - taking the other side of the trade from these big name financial institutions that don't seem to read my writings.

These are young brothers from Haiti who sat through an UltraCoin lesson...

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 Back to the FT article:

 

It also comes as other internet groups – in particular, China’s Tencent and Alibaba – race to turn their sites into mobile payment platforms.

Google has reiterated its commitment to expanding its mobile payments and wallet products, which have yet to be widely adopted by consumers. It is registered in the UK to issue electronic money, in a process similar to the authorisation which Facebook is seeking in Ireland.

 

In 2013, the company  [Facebook] facilitated $2.1bn worth of transactions, almost exclusively from games, according to documents filed with the Securities and Exchange Commission.

Vodafone has acquired an e-money licence for the phone company to operate financial services in Europe.

“It’s great news that non-banks are challenging the traditional banking monopoly,” said Simon Deane-Johns, a UK-based lawyer and European payments expert at law firm Keystone Law.

 It will be interesting to see how the potential bidding contest will form as these companies compete to build the next generation financial infrastructure. I believe that I am very well positioned, as excerpted from yesterday's missive:

These are interesting times indeed. For those who are not aware of how far I've come in transforming the way value is traded across geo-political and socio-economic lines, I urge you to view the following video and/or peruse the embedded presentation below it.

 

 

Related BoomBustBlog research

Published in BoomBustBlog

The Turkish government has exercised its censorship chops in banning Twitter in an attempt to quell distribution of anti-government recordings, and in the process has materially popularized the service, to wit: Forbes - Streisand Effect Takes Hold As Turkey Bans Twitter

In an attempt to halt widespread allegations of corruption, Turkish prime minister Recep Tayyip Erdogan has shuttered Twitter – but so ineffectively that the number of tweets sent in the country has remained unaffected.

Last night, Erdogan announced that, following a court order, Twitter was now disabled in the country. “We’ll eradicate Twitter,” he said. “I don’t care what the international community says. Everyone will witness the power of the Turkish Republic.”

The Washington Post reports,Turkey bans Twitter — and Twitter explodes.
Of course, the Islamic leaning Aljazeera.com‎ says "Twitter users ridicule Turkey ban".
Leaked recordings shared on Twitter include one in which Erdogan allegedly instructs his son to dispose of cash [AP]

Turkish and global social media users have mocked moves by Turkey's government to restrict access to Twitter.

The hashtags #TwitterisblockedinTurkey and #Turkey blockedTwitter became the top trending topics globally on Friday, just hours after the Turkish government imposed the ban.

The number of tweets from Turkey reportedly rose by 138 percent as savvy Internet users, including the country's president Abdullah Gul, found it easy to circumvent the shutdown.

"The whole world is laughing at you #ErdoganBlockedTwitter," users tweeted, as dozens of images mocking the ban - including one showing Twitter birds covering Prime Minister Recep Tayyip Erdogan's head in droppings - were shared on the platform.

Another popular tweet shared a poster of the prime minister on a Barack Obama campaign poster with the message, "Yes, we ban".

Erdogan on Thursday night promised to "root out" and wipe out" the social media platform after users published claims of corruption against him.

Leaked recordings shared and linked on Twitter include one in which Erdogan allegedly instructs his son to dispose of large amounts of cash from a residence amid a police corruption probe.

One method of ridicule was to go around the the blocking if the Twitter domain name by using Google's DNS (Domain Name Server) services which allowed anxious and potential Twitter users to find the Twitter website through Google's machinations. So, what does the Turkish government do? They blocked Twitter at the IP level and then went so far as to bank Google's DNS. This means that Turkey is attempting to block out a portion of the Internet, to wit: Turkey Blocks Google DNS as Erdogan Defends Twitter Action 
 
Now here comes a quick education for the old fogey-type folk that declare Bitcoin is a bubble, ponzi scheme currency with no intrinsic value. If you recall my many videos that declare the value of Bitcoin is in the protocol, and not the unit of account that everyone is calling a currency, then you may realize that the Bitcoin technology can literally take the Turkish government down. 
(go to time market 1:10 in the video for the explanation)
Those that know the Bitcoin protocol well know that it is an ideal method of overcoming centralized control in regards to value transfer. Well, it's easily assumable that website data access is value transfer as well. If anybody in Turkey is reading this, then email me and I'll show you how to step around even Erdogan's Google DNS ban using the Bitcoin derivative known as Namecoin - A peer-to-peer, censorship resistant, alternative DNS root and data storage technology. Using that "tulip" technology with "no intrinsic value", Namecoin facilitates cryptographically secure decentralized name and data storage.
 
According toWikipedia: Namecoin (sign: ℕ; code: NMC) is a cryptocurrency which also acts as an alternative, decentralizedDNS, which would avoid domain namecensorship by making a new top level domain outside of ICANN control, and in turn, make internet censorship much more difficult, as well as reduce outages.[3][4][1][2][5][6][7][8]
Now, we all know that Krugman and Roubini and all of the not so technologically inclined macro economists may not believe that Bitcoin, et. al. has any intrinsic value, but if somebody like me led a "Coin" revolt in Turkey, do you think Erdogan would believe the economists or me in regards to the intrinsic value of this technology.
If you think Namecoin can be disruptive to the status quo, you aint't seen nothin' yet. Wait until the launch of UltraCoin, when those little Haitain kids in shacks out trade the Goldman prop desk on that BTC/AU pair trade.
That's right, I'm teaching 3rd world children how to trade using cryptocurrency derivatives and plain old fashioned derivatives. I'm comfortable pitting them against the names that the developed world worships, as long as its using this new tech. Let's see how they fair...
I just love the smell of creative disruption in the air. These pics were taken after some training sessions in Port au Prince, Haiti this weekend.
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Read more...
 
Published in BoomBustBlog

Cryptocurrencies have been on a tear over the last 2 years, both in terms of mindshare and returns. This is particularly true of the last year, in which Bitcoin (the de facto proxy for cryptocurrencies) has heaved from $13 to $950, making a pit stop at $1200 along the way. This 7,308% return looks to be outrageously delectable to many a speculator and has even caught the eye of an institutional fund or two. The problem is, and what many novice investors have a problem conceptualizing, that astute institutional “investment” funds actually have a problem dipping their toes in the wilding appreciative yet hyper-volatile world that is cryptocurrencies.

The reason is because “investment funds” as opposed to beta chasing “trading” or “hedge" funds seek a measured return on investment. The raw returns that you see spouted for Bitcoin and the various alt.coins are actually not what the smart institutional money is looking for.

Put another way, you tend to get what you pay for. Risk is the price of reward, with risk being defined as deviation from expected return. You nearly never get a reward without bearing some risk to attain said reward. On the flip side, you should always demand a commensurate reward for the risk that you take. Measuring reward without taking into consideration the risk paid to attain such reward is akin to jumping out of the top floor of a 50 story building to revel in the exhilaration of the drop without taking into consideration what happens when you reach ground level. All in all, it tends to end ugly.

My clients are told that if you assumed $1 of risk to reap $1 of reward, then you effectively made nothing from an economic, risk adjusted reward perspective. This is difficult for the layperson to understand since those who reaped said dollar are left holding one dollar of nominal returns which looks, smells and spends like a dollar. They don't seem to get it until that third or fourth go around when they get 30 cents back for the dollar they invested (versus an amount over a dollar, hence a negative return). You see, probabilistically, you can reap more than you sow over the short term simply out of dumb luck. Realistically, the law of averages will catch up to you and eventually (and most likely close to immediately) you will reap what you sow, or... you get what you pay for!

Similarly, if bitcoin investors/traders believed they are doing well when bitcoin jumps from $13 to $950, they may be mistaken. The reason? Bitcoin has a modified beta of roughly 673! That means that it is volatile. Very volatile! More volatile than practically any basket of currencies or stocks you can think of. This volatility means that in a short period of time it's just as easy to be on the losing side of the trade of this asset as it is to be on the winning side. So, you're lucky if you bought at $500 and rode it to $950, but you could have just as easily bought at $1,200 and rode it down to $500.

With these concepts in mind, you should always adjust for risk before attempting to measure reward. By doing that you will find that you can compare disparate assets, ventures and opportunities that have different reward propositions and even different horizons by measuring the risk (or the economic cost) of the investments and then adjusting the actual or expected reward desired to compensate for said risk commensurately.

Notice how, if one were to take this approach, one can see the different risk adjusted returns between the top two cryptocurrencies by market value. Bitcoin is the most popular, but Litecoin is the most profitable - even when fully adjusted for risk.

ridk reward

The UltraCoin team has run these calculations, among many other currencies, on every cryptocurrency with a market value over $1 million. In addition, these currencies have been aggregated to form what we have coined as the "UltraCoin Cryptocurrency Composite Index" - a basket of cryptocurrencies upon which our custom UltraCoin derivatives can trade, hedge, invest and speculate.

These indices and calculations (not to mention a bevy of other calculations to assist in trading) are part and parcel of the UltraCoin client.

CryptoCurrencyComposite Index

The graph below depicts the outrageous raw returns had by holders of bitcoin. It also denotes the extreme volatility experienced therein, particularly from late 2013 onward.CryptoCurrencyComposite Index graphIf one were to place a hurdle rate of required return to compensate for said volatility, the return curve will look somewhat different.CryptoCurrencyComposite Index graph - adjusted

As you can see, all that glitters is not necessarily gold! I will be pushing for the beta release of the UltraCoin client quite soon, quite possibly at the Berlin Bicoin conference. In the meantime, for those of you who have not had a chance to play with the software, here are a few screen shots.

currency transalation errortest 

Published in BoomBustBlog

thumb Fortune Front Cover 

A few days ago I was waxing poetic over the abilty of David Z. Morris' ability to grasp rather complex, intangible concepts and loquaciously lay them forth in the written word via the pages of Fortune magazine. After all, what creative destruction advocate wouldn't get all mushy after reading "Reggie Middleton, currently building a client called BTC Swap. Middleton, gravelly voiced, dapper, and businesslike, doesn't fit the stereotype of woolly young bitcoin developers. But he slyly describes himself as "not quite an anarchist," and BTC Swap is a shot directly across the bow of the financial industry"...

Or "Middleton sounds a bit like an 18th-century pirate striking back against the Empire when he declares that "what I'm doing right now is a direct threat to fiat merchant banking." For him, excitement over value fluctuations in the bitcoin currency is missing the point: "It's not a threat as people sit there and ponder whether bitcoin is a bubble or not. But if people go through the protocol and use their imagination, the existing system is threatened."

Alas, nothing lasts forever. Fastforward 72 hours and Fortune publishes... 

thumb Icahn on PayPal

As exerpted:

FORTUNE -- Carl Icahn, the billionaire activist investor, has been interested in technology lately. Wednesday, he made several TV appearances to reiterate his call for tech giant Apple (AAPL) to engage in a massive $150 billion share buyback. As usual, he demonstrated that he was willing to put his money where his mouth was, revealing that he had upped his stake in the company by $500 million to $3 billion, causing Apple's stock to jump 1%.

Well, my subscribers (click here to subscribeknow where I stand on Apple, reference:

Then, after the bell, eBay (EBAY) revealed that Icahn had built up a stake in the online auction retailer and was pushing for some radical changes. But in this case, though, Icahn wasn't interested in buybacks -- he was looking for a breakup. Ebay said Icahn wanted the company to spin off its online payment arm, Paypal, and had requested two seats on eBay's board. eBay rejected both of Mr. Icahn's proposals.

... Paypal has grown from its roots as a small payment processor helping buyers and sellers of Beanie Babies feel safe to do business on eBay, to a full-on payment alternative for thousands of merchants with millions of members. Its advantage in many cases is simply speed and convenience -- how many times have you clicked the Paypal button while checking out of an e-commerce store just because you didn't want to get off the couch to grab your credit card?

Does the author mean like this?

thumb bitpay website

...eBay is also lagging when it comes to valuation. The company as a whole trades on a multiple of nine times next year's enterprise value divided by earnings (or ev/ebitida), which measures a company's return on investment. Meanwhile, the payment operators, like Visa and Mastercard (MA), trade roughly at 15 to 17 times next year's ev/ebitda, or around 40% higher than eBay. E-commerce sites also trump eBay's numbers with Amazon trading at around 33 times next year's ev/ebitida and Groupon (GRPN) trading at around 17 times.

But Visa and Mastercard are about to face the same double whammy that PayPal is staying at. Let me show you with video...

or pretty pictures...

You see, the payment processors are very soon to be subject to...

Disintermediation 

Why? Because P2P solutions such as UltraCoin easily allow for such, and at dramatically lower prices to boot...

  send payment costs 

If we were to look at this graphically, it would be comical to compare...

  send payment costs visual

On the commercial macro payments side...

macropayments

So, what happens when your competitors offer a competitive product for between 1/1000th and 1/3rd the price? 

margin compression

Now, back to the Fortune article and the apparent strawman argument...

... As a part of eBay, Paypal is run by people who know tech and know retail, not by people who necessarily know payment networks. As such, Paypal's growth beyond the web may not be as successful as it could be if it was led by people who worked at a credit card company like American Express (AXP) or a global payment provider like First Data Resources.

Again this seems to ignore the coming wave, alas... I digress...

... eBay's aggressive international expansion is helping to grow PayPal's global presence, especially in countries like Brazil and Russia, where eBay is taking off. If the cord is cut too early the fear is that PayPal's international growth may stall.

Stall or stagnate? 

As my readers recall, I've developed a cross currency swap system that allows holders of BTC to dance around two dozen or so sovereign fiat currencies with ease. Combine this with dramatically lower costs and ease of transmission and I see either a material change in business model or... Margin Compression!!!

 This really makes one think... Is eBay a short play in and of itself? I know Carl Icahn would likely get a large bang for his investment buck backing UltraCoin than he would calling for a PayPal spinoff. Then again, what do I know? Those who wish to discuss the merits of an UltraCoin investment by Icahn can feel free to ping me at reggie at ultra-coin.com. 

Published in BoomBustBlog

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I'm rapidly unveiling what's been brewing in the BoomBust labs over the last few months - UltraCoin an intelligent derivative layer of smart financial contracts that sit on top of the Bitcoin architecture. In short, the recreation of the banking industry in software - without the trust and counterparty risk issues!

For those of you who are still skeptical re: cryptocurrencies, I please read the most excellent article by David Z. Morris, which also happens to grace the front page of Fortune magazine today.

Fortune Front Cover

I'll excerpt some choice snippets:

Some still doubt bitcoin's usefulness and durability, but 2014 may leave skeptics even further behind -- developers and entrepreneurs are already hard at work building features on top of the Bitcoin protocol that will allow for the decentralized execution of financial services, from currency hedging to loans to stock issuance to rental and purchase contracts...

In the long term, peer-to-peer finance threatens to weaken banks and other financial agents just as peer-to-peer file sharing did the music industry -- and some of the architects of this financial Napster seem gleeful about the possibility.

Ya damn skippy!!!

 That means loans without banks, contracts without lawyers, and stocks without brokers, executed and recorded across hundreds of servers at all corners of the earth.

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Independent entrepreneurs are also working to build this infrastructure. One of these is Reggie Middleton, currently building a client called BTC Swap.

This will be marketed as UltraCoin! Wasn't completely ready for the interview, but will be shown live at the North American Bitcoin Conference in Miami Beach this weekend!

Middleton, gravelly voiced, dapper, and businesslike, doesn't fit the stereotype of woolly young bitcoin developers. But he slyly describes himself as "not quite an anarchist," and BTC Swap is a shot directly across the bow of the financial industry.

Believe it!

Still in early development, BTC Swap is planned to facilitate a variety of what Middleton calls "Zero-Trust Digital Contracts," which recreate financial functions in software code by matching offered and desired transactions between parties without the need for intermediary institutions. Because these contracts are automated, instantaneous, and executed with assets already represented in the Bitcoin blockchain, Middleton says they eliminate counterparty risk while also subtracting conventional banking and brokerage fees.

David was correct in that it was in early development when he saw it, but we've been busting our collective asses (analysts, financial engineers, software engineers, programmers, website designers, the whole crew) and we'll not only be demonstrating live but will be trading risk down in Miami, right in front of your eyes!

The most immediate function Middleton envisions for his system is for hedging bitcoin against existing national currencies. With bitcoin's valuation still showing huge volatility, Middleton claims the availability of distributed hedging will both ensure the value of bitcoin for individuals holding the asset and provide systemic stability. (Given persistent skepticism, there should be plenty of takers to short bitcoin against the dollar.) And the entire system relies on decentralization for its security and integrity: "My contracts are peer-to-peer," says Middleton. "If you hack my servers, there's nothing to get." Somebody call Target (TGT).

Somebody? Anybody? Target, drop me a line at reggie.middleton at ultra-coin.com if you want my assistance in getting in on this distributed, peer-to-peer bitcoin thingy. My next post will show how my UltraCoins can add 15% to Overstock.com's bottom line. That's pretty damn good if you ask me! As a matter of fact, it's pretty damn good even if you didn't ask me :-)

Such hedging functions have particularly unique promise because of the extremely low transaction costs of peer-to-peer currency. Bitcoin makes microtransactions ranging down to fractions of a cent viable, but Middleton says that "right now, if you do micropayments, the volatility of bitcoin can really take you out." Because of the low cost of Middleton's swaps, "I can let [payees] manage risk and decrease volatility at the micro-level."

Please pardon me for the heavy excerpts taken from this article, but it is really... just.. that.. good!!! And it gets even better. Check it out:

The functions that advocates say could be automated through the Bitcoin network seem nearly endless, including peer-to-peer investment funds, Kickstarter-like crowdfunding, binding arbitrations, and even non-financial transactions such as naming rights management and encrypted communication.

I actually have much of this stuff oven already. All I need is the funds to help accelerate development becuase "you know who" is likely to get their bonus pool panties in a bunch and start coming after me :-)

And all could be executed without a cut for intermediaries. Bitcoin partisans, from developers down to rank-and-file users, often seem to revel in the idea that they are threatening the control and profits of Wall Street institutions, who they see as rent-seeking fat cats. If it were limited to the loss of fees on payments and transfers, bitcoin's threat to existing financial institutions would still be substantial. But with a full array of commission-free financial services on the horizon, there is even more reason to take heed.

Oh, and I love this part...

Middleton sounds a bit like an 18th-century pirate striking back against the Empire when he declares that "what I'm doing right now is a direct threat to fiat merchant banking." For him, excitement over value fluctuations in the bitcoin currency is missing the point: "It's not a threat as people sit there and ponder whether bitcoin is a bubble or not. But if people go through the protocol and use their imagination, the existing system is threatened."

And here comes the rain on the parade :-(

However, there is a substantial obstacle to this coming revolution. Despite the emergence in 2013 of entities like Coinbase that have drastically streamlined the process, it is still difficult to exchange bitcoin for national currencies in a quick, reliable manner. It's unclear how Middleton's automated dollar-bitcoin hedging will work without a lightning-quick and reliable dollar-bitcoin exchange platform.

UltraCoin was in early beta stage when David saw it. It'll be ready to strut much of its stuff in Miami, making things much clearer.

So, the true "automation" of bitcoin functions that integrate with the economy as a whole may require a reconciliation with existing trading platforms.

Oh, I wouldn't bet the farm on that one.

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Published in BoomBustBlog