Abstract

This report evaluates Giovanni Santostasi’s Bitcoin Power Law Theory (BPLT)¹, a mathematical framework for understanding Bitcoin’s (BTC’s) long-term price dynamics. By emphasising the scale-invariant nature of BTC’s growth, the BPLT model provides insightful predictions that have been validated over a six-year period. We justify the Dynamic Power Cycle (DPC)² model’s hypothesis that BTC’s price data before the first halving event represents an accelerated cycle through a linear scaling transformation that aligns early data with later BPLT trends. Despite some limitations, including the need for further theoretical underpinnings and marginal sensitivity to input data, the BPLT model demonstrates significant descriptive and predictive power. Our findings underscore the model’s viability and highlight areas for future research to enhance its robustness and applicability.

Table of Contents

1. Introduction
2. Bitcoin Power Law Theory (BPLT)
2.1 Theoretical Derivation
2.2 BPLT Results
2.3 Dynamic Power Cycle (DPC) Modification
3. Criticisms and Limitations
4. Conclusion

Appendices
A. Accelerated Cycle Hypothesis — Mathematical Representation of Linear Scaling Transformation
B. DPC-modified BPLT Results
C. Parameter Estimates Table
References

1. Introduction

A power law describes a mathematical relationship where one quantity is proportional to a fixed power of another, expressed as

This relationship is prevalent across a variety of domains, including natural phenomena, social dynamics, and network systems, largely because of iterative self-adjusting processes where the output of one cycle becomes the input for the next, creating a continuous feedback loop.⁴

Power laws are characteristic of systems that are stable and anti-fragile, such as planetary systems, the metabolic rates of animals, and urban infrastructure. These systems have the capacity to return to equilibrium after disturbances, demonstrating robustness and resilience. In contrast, exponential models, which are often associated with rapid growth followed by swift declines, typify scenarios like disease outbreaks, population growth, or the uptake of new technologies, where they exhibit boom-and-bust behaviours.

The identification of a power law within a system provides a robust framework for analysis, offering insights that enable confident predictions. Such systems, governed by power laws, often reveal fundamental properties about their intrinsic nature, allowing for deeper understanding and more accurate forecasting.

BTC Price as a Power Law with Time

Giovanni Santostasi, the creator of the BPLT, asserts that BTC exhibits behaviour consistent with a power law. Since he first introduced the BPLT on Reddit in 2018, the theory has shown remarkable consistency and resilience. Notably, post-2018, the fluctuations in the BTC power law parameters have stabilised significantly, as seen in Figure 2(a), and the coefficient of determination (R²) has improved from 0.92 to 0.95, as seen in Figure 2(b). This enhancement indicates that the model now accounts for over 95% of the variance in the historical data, underscoring its substantial predictive power. The dynamic fit of the model is illustrated in Figure 2(c).

While BTC remains a volatile asset compared to more predictable systems like planetary orbits, it has consistently exhibited power law behaviour across a broad spectrum of magnitudes in the past. The theory emphasises BTC’s scale invariance, suggesting that its growth will likely continue across further magnitudes. Predictions based on BPLT assert that BTC’s price could reach 1 million per unit around the year 2033.

The final model also incorporates the 4-year halving cycles, which is a prevalent industry heuristic. Initially, Giovanni favoured the lengthening cycle theory, which the 2020 bull run disproved. While this addition to the model is based on fitting sparse data points and thus offers less statistical reliability, I aim to demonstrate in this report that it does possess some retrospective predictive capability, especially when considering the first cycle might have been shortened, as postulated by the DPC model.

It is reasonable to consider that the 4-year halving cycles component of the theory might be invalidated in the current cycle. In fact, a key aspect of a scientific theory is its falsifiability. However, this potential invalidation does not undermine the credibility of the broader power law relationship, unless BTC’s price deviates significantly from the power law trend line for an extended period of time.

Based on the 4-year cycle theory and measuring the cycle tops as deviations from the general power law trend in an exponential decaying fashion, Giovanni extrapolates the final peak this cycle to about 210,000 USD. Similar calculations on our data suggest a more modest top at around 160,000 USD for the upcoming bull cycle.

Statistical analysis

The statistical analysis used in this report employed open-source scientific computing libraries for Python, such as SciPy⁵. Curve fitting was conducted using a nonlinear least-squares regression. The goodness-of-fit was evaluated with the coefficient of determination (R²), and the linear correlation between observed data and the model was assessed using the Pearson correlation coefficient and p-value. The associated p-value was computed to test the null hypothesis that there is no linear correlation between the observed and fitted data.

2. Bitcoin Power Law Theory (BPLT)

The BPLT posits that fundamental metrics of BTC exhibit power law relationships, mathematically expressed as follows:

The first two relationships are straightforward:

• The number of active BTC addresses (a proxy for adoption) grows cubically with time.
• BTC’s price increases quadratically with the number of non-zero addresses, in line with Metcalfe’s Law, which posits that the value of a network is proportional to the square of its users.

The third relationship requires more clarification: The quadratic relationship between BTC’s price and hash rate, which represents the total computational power of the BTC network, is primarily driven by the profitability of mining activities. As the price of BTC increases, mining becomes more lucrative, attracting more computational resources from miners seeking to capitalise on higher profits. This influx of mining effort leads to a rise in the hash rate. However, this increase in hash rate is regulated by the network’s difficulty adjustment mechanism. This mechanism is designed to maintain a consistent block discovery time, approximately every 10 minutes, regardless of the fluctuations in computational power. When the hash rate rises, the difficulty of solving the cryptographic puzzles adjusts upwards, making mining more challenging and moderating the profitability of mining over time. In essence when BTC price increases the new miners that arrive to the network set out the following chain reaction:

Additionally, BTC undergoes a process known as “halving” every four years, where the mining reward is cut in half. This halving event reduces the rate at which new BTCs are introduced into circulation, effectively acting as an anti-Moore’s Law or anti-free-lunch measure. While computational power and efficiency may double approximately every four years due to advancements in technology, the halving mechanism ensures that the rewards for mining are simultaneously reduced, balancing the overall economic dynamics of the network.

In summary, the relationship between BTC’s price and hash rate is complex, influenced by market-driven profitability, technological advancements, and inherent protocol adjustments designed to stabilise the network’s operation and supply of new BTCs. Although this is a good starting point, more research needs to be conducted to analyse the fundamental reasons behind BTC’s behaviour.

The in-house reproduction of the mathematical relationships has yielded similar results affirming the general reproducibility of the power law model, as illustrated in figure 3. Notable discrepancies in parameter fits are primarily due to differences in the BTC price data sources used. Despite these variations, the overall power law relationships remain consistent and replicable.

2.1 Theoretical Derivation

In order to derive a theoretical formulation for the full BPLT model it is convenient to view the price change in BTC through the lens of its deviation from the power law trend line, referred to here as Price Multiples (PMs). The logarithm of the PMs can be modelled using a composite function that combines amplitude decay applied on Gaussian peaks modulated by a cosine component. Below is a detailed explanation of the key components and the formulas used in the model.

Decay Function

The decay of the cycle peaks is defined as:

• A: Amplitude of Gaussian peak.
• λ: Rate of decay.

The function d(t, A, λ) models exponential decay when transformed onto a linear scale. It is used to model diminishing returns.

Gaussian Peak Function

The Gaussian peak function is defined as:

• t: Number of days from genesis block.
• t₀: Centre of the Gaussian peak in days.
• σ: Standard deviation (width) of the Gaussian peak.

This function represents a Gaussian distribution centred at t₀ with a normalised peak amplitude and a width controlled by σ and is used to fit a curve to the bull cycle distributions.

Modulating Cosine Component

The cosine component modulates the amplitude of the Gaussian peaks and is defined as:

This function varies periodically with time, modifying the amplitude of each Gaussian peak. It is used to model the 4-year cycles.

Calculation of Peak Centres

The peak centres t₀(i) are determined based on the period T. They are calculated as:

where i is a non-negative integer (i,e, i=0,1,2, …). This means that the peak centres are at [t₀, T+t₀, 2T+t₀, …].

The formula that combines the Gaussian peaks with a modulating cosine component is given by:

Decaying Periodic Gaussian Function

The decaying periodic Gaussian function incorporates all the above formulas and is given by:

• T: Period of the cosine component.
• σ: Standard deviation (width) of the Gaussian peak.
• t₀: Centres of the Gaussian peaks, calculated based on the period T and indexed by i.
• 10ᴮ: Vertical translation to account for data below the power law trend line.

This function contains a parameter B that accounts for the data below the power law trend line, where the gradient of the function is close to zero. Deviations from the non-transient zero gradient indicate a transition towards long-term bullish price action.

Final Model

Finally, BTC’s price is calculated by multiplying PMs by the power law trend line equation as follows:

2.2 BPLT Results

The construction of the full model equation, as outlined in section 2.1, is visualized in figures 4(a), 4(b), and 4(c). The final figure, 4(d), displays the complete BPLT model layered over the BTC price, along with predictions for the next 10 years. Notably, the graph predicts negligible power law trend line fluctuations in the price of BTC after the sixth halving event, around 2032. This contradicts Giovanni’s prediction, as shown in figure 1. The reason for this discrepancy remains unclear.

A possible explanation is that Giovanni’s decay function does not fall below the power law trend line. However, this decay function would go against the data, as seen in figure 4(a). Another possible explanation for the observed discrepancy is that Giovanni ignores the first cycle peak in his decay function calculation, arguing that it does not follow the regular decay pattern. However, based on our observation, it fits the decay pattern quite well. The Pearson correlation coefficient is 0.9963 with a p-value of 0.003651, indicating a very statistically significant strong positive correlation, although based on only four data points.

A valid point raised by Giovanni is that the first BTC cycle peak does not align well with the periodic nature of the BPLT model, as seen in figure 4(d). Both Giovanni’s model and our version predict that a peak should have occurred around the time BTC first started trading. Naturally, since trading was not possible before that point due to lacking infrastructure, a peak could not have physically occurred. Therefore, Giovanni classifies this data as an outlier, similar to the mid-cycle peak in 2019.

However, we can reinterpret this by adopting the assumption made by the DPC model. This model posits that, due to the time and infrastructure constraints mentioned earlier, the first cycle was accelerated but still governed by the BPLT model. To test this hypothesis, we can apply a linear scaling transformation to all data before the first halving event and examine its alignment with the BPLT predictions. The transformed price for the initial cycle simulates its behaviour if trading had begun at the genesis block, while preserving the historically observed power law fluctuations. If the BPLT model can predict this adjustment, then it strengthens the evidence that the model possesses both descriptive and predictive power. The linear scaling transformation is demonstrated in figure 5 and detailed mathematically in appendix A.

2.3 Dynamic Power Cycle (DPC) Modification

The DPC modification addresses the initial anomalies observed in BTC’s price trajectory by applying a linear scaling transformation to the early data, mathematically described in appendix A and visualised in figure 5. This transformation effectively illustrating what the accelerated cycle would have looked like if it had not been accelerated. Figure 6 elucidates this modification and its implications.

After applying this transformation, the first cycle’s peak aligns well with the subsequent cycles, as illustrated in polar coordinates in figure 6(b). In this representation, a full rotation corresponds to a complete halving cycle. Importantly, no non-linearity was introduced in the data modification, except for a break-point at the first halving event, as seen in equation 14. This break-point marks the transition where the scaling transformation ends, and the data continues in its original form. Thus, the overall shape of the price action is preserved with respect to the power law trend line.

This approach serves as a verification of a retrospective prediction made by the BPLT model. The model predicts that BTC adoption happens in periodic waves with the first wave occuring before the first halving event in an accelerated fashion. Figure 6(f) visualizes this verification. The DPC-transformed BTC price data aligns extremely well with the BPLT curve calculated in section 2.2. The results confirm that, when adjusted for early constraints, the first cycle’s behaviour fits the BPLT’s mathematical framework, validating the model’s descriptive power and applicability across BTC’s entire price history.

Furthermore, we can reconstruct the BPLT model using DPC-modified price data to assess the impact on the parameters of the mathematical framework described in section 2.1. The final DPC-modified BPLT model is displayed in appendix B. As shown in figure 7, the model parameters for both BPLT variations align within a 3-sigma margin of error, except for parameter B, which accounts for variations below the trend line. This discrepancy is expected as it reflects price fluctuations not captured by the model. A more detailed analysis of the parameters is available in appendix C. These results confirm that the simple BPLT model can effectively describe the entire history of BTC’s price action, supporting the hypothesis of an accelerated first cycle.

3 Criticisms and Limitations

The BPLT model, despite its promising results, is not without its criticisms and limitations. The following points outline some of the key concerns:

• Lack of thorough theoretical explanation: The BPLT model is still in its early stages of development. Many of the empirical on-chain relationships it describes lack a robust theoretical foundation. While the model effectively captures historical price trends and offers compelling predictive insights, it is largely based on observed data patterns rather than a deep understanding of the underlying economic or technological mechanisms driving BTC’s price. More research in this area has to be conducted.
• Uncertain longevity of the power law: A critical question regarding the BPLT model is its longevity. It remains unclear how long the power law will hold. Several scenarios are speculated:

1. Replacement of the gold standard: If BTC were to replace the gold standard, reaching a market capitalisation of approximately 10 trillion USD, this could take another 10 years. The model’s predictions might remain valid until this milestone.
2. Becoming the global reserve currency: If BTC becomes the global reserve currency, with an estimated market capitalisation of around 100 trillion USD, the applicability of the power law would extend further. However, such a significant economic shift would introduce new variables and uncertainties that the current model may not fully account for.

• Discrepancy in model outputs: There is a notable discrepancy between the results reported by Giovanni’s model and our model. Giovanni predicts a cycle peak of 210,000 USD, while our version suggests a lower peak of 160,000 USD. This difference highlights the sensitivity of the model to input data and assumptions, underscoring the need for careful validation and refinement of the model parameters.

Despite these criticisms, the BPLT model remains a valuable tool for the foreseeable future. It provides crucial insights into BTC’s price dynamics and offers a framework for understanding long-term trends. Notably, the model forecasts that the impact of the 4-year halving cycle on price will become negligible after the sixth halving event, around 2032. If accurate, the model can still be effectively utilised for at least the next eight years in making BTC price predictions.

4 Conclusion

Giovanni Santostasi’s BPLT model offers a compelling framework for understanding BTC’s growth through a mathematical lens. By highlighting the intrinsic and scale-invariant nature of BTC’s expansion, the BPLT model provides valuable insights into the long-term price dynamics of this digital asset.

A cornerstone of any valid scientific theory is its falsifiability, meaning it should make testable predictions. The BPLT model meets this criterion, having been conceptualised in 2018 and tested over the subsequent six years. During this period, the model’s predictive power has been validated, evidenced by a substantial increase in its R²-value.

In this report, we hypothesised that BTC’s price data before the first halving event represented an accelerated halving cycle. This hypothesis was tested by applying a linear scaling transformation to the early data, aligning it with the power law trend line observed in later cycles. The results justified this hypothesis, demonstrating that the early cycle, when adjusted for initial market constraints, adheres to the same BPLT model as subsequent cycles.

While the BPLT model shows significant promise, it is not without its criticisms and limitations. The model is still in its early stages, with many empirical relationships lacking robust theoretical explanations. Questions remain about the longevity of the power law’s applicability, particularly under scenarios where BTC does not replace the gold standard or become the global reserve currency. Additionally, discrepancies in model outputs highlight the sensitivity of the model to input data and assumptions.

Despite these challenges, the BPLT model remains a viable tool for understanding BTC’s price dynamics. Its ability to describe the entire history of BTC’s price action underscores its robustness and potential predictive power. However, more extensive research is necessary to strengthen the theoretical underpinnings of the model, validate it against a broader range of data, and refine its parameters. Furthermore, exploring how this model can be used as a trading indicator presents an intriguing avenue for future investigation, potentially enhancing its practical application in financial markets.

Appendix

Appendix A

Accelerated Cycle Hypothesis — Mathematical Representation of Linear Scaling Transformation

We start with the BPLT model, which predicts that the price of BTC follows a power law relationship over time. This relationship can be mathematically expressed as:

where P(t) represents the price of BTC at time t, A is a constant, and n is a scaling factor.

Due to the initial infrastructure constraints, the first cycle of BTC is assumed to be accelerated. To account for this acceleration, we apply a linear scaling transformation to the time variable for the data before the first halving event.

First, we define the key dates involved in the transformation:

• tₜ: number of days from genesis block to the first trading day.
• tₕ: number of days from genesis block to the date of the first halving event

Let t be the number of days since the genesis block. The transformed time, denoted as t′, after applying linear scaling is given by:

The transformed BTC price is then:

This equation ensures that the actual BTC prices are stretched to align with the transformed time variable t′.

Appendix B

DPC-modified BPLT Results

After applying the linear transformation described in appendix A to the first cycle of BTC’s price data, the results from fitting the DPC-modified BPLT model as described in section 2.1 are shown in figure 8(a). The model fits the PMs almost perfectly. The corresponding DPC-modified BPLT price model is visualised in figure 8(b). Notably it contains a slight extra pertubation after the seventh halving event, which is not present in the simple BPLT model prediction, as seen in figures 4(d), 6(e) and 6(f).

Appendix C

Parameter Estimates Table

The table below compares parameter estimates for the simple and DPC-modified BPLT model. Both models agree to a 3-sigma margin of error with the exception of parameter B, which is responsible for the vertical translation of the curve and reflects the price action during the bear markets.

About the author

Lev Ushakov is a bitcoin researcher at Fulgur Ventures.

[1]: Giovanni Santostasi. (April 16 2017). Bitcoin Power Law Model. https://giovannisantostasi.medium.com/the-bitcoin-power-law-theory-962dfaf99ee9

[2]: x.com/DeFI_initiate. (December 26 2021). Bitcoin Dynamic Power Cycle. https://threadreaderapp.com/thread/1490651062335725573.html

[3]: Giovanni Santostasi. (April 29 2024). A Scientific Approach to estimating the Size of Bitcoin Bubbles. https://giovannisantostasi.medium.com/a-scientific-approach-to-estimating-the-size-of-bitcoin-bubbles-1204a0032739

[4]: Geoffrey West. (July 26 2021). The surprising math of cities and corporations. https://youtu.be/XyCY6mjWOPc

[5]: Virtanen P, Gommers R, Oliphant TE et al (2020) SciPy 1.0: fundamental algorithms for scientific computing in Python. Nat Methods 17:261–272. https://www.nature.com/articles/s41592-019-0686-2

Today, we have the opportunity of speaking with Justin Hilton, the visionary founder of Shocknet, a video infrastructure company powered by the Lightning Network. Justin started to build lightning network applications a few years ago, and with Shocknet he is aiming to provide a platform that changes content distribution and monetization by offering creators a new way to engage their audience while bypassing the limitations of traditional content-sharing platforms. In this interview, we will explore how the Lightning Network and Bitcoin have positioned Shocknet to disrupt the content industry and unlock new possibilities for content creators and their followers.

Justin, you may be considered as a pioneer, merging the Lightning Network and video infrastructure with Shocknet. Can you share your vision behind creating the “Lightning AWS” for video and how you see it reshaping the digital content landscape?

Well, it’s funny where we are now, because we never actually set out to tackle video, or even infrastructure specifically. We wanted to make the decentralized WeChat of Lightning because I think that all commerce will eventually be settled over Lightning as the native money of the web.

But when you go down the rabbit hole of what it takes to make an idea like that reality, a few dependencies stand out as critically important matters of their own. Case in point, what is a decentralized WeChat supposed to use for video? And why are the options today so inadequate? Is this even a big problem?

Well, it turns out, that whether a video *is* the product, or is a tool to draw attention to another product, every application on the web needs that infrastructure. Video for that matter is a service that can’t itself be decentralized for performance reasons because if it doesn’t load quickly people bounce etc… but now, because of Lightning and Micro-Payments, it can be re-incentivized, and that’s what solves what people dislike about the existing video services.

So, Lightning Video is really just the first example of a new generation of applications that go out and buy the data centre resources they need, at a granular level, on-demand, and that finally enables viable alternatives to big-tech platforms. Alternatives that are less prone to constraints of centralized systems, preserve users’ privacy and are more equitable so that users are drawn in by earning more money.

As a technical founder who we know for some time, your depth of knowledge is impressive to us. Can you talk about your unique experiences and insights that led to the creation of Shocknet? How do these shape the technical and strategic decisions at Shocknet?

I became fascinated with technology at an interesting time. I got my first job at a grocery store when I was 14, and this was the late 90s around the time that .com’s were starting to pop up everywhere. It was intuitive to me that the web was going to change everything. The money I saved up from the grocery store, to buy stuff with motors, instead went into buying my first personal computer. That spiraled into buying more parts to upgrade it because of my interest in knowing how things worked and getting the most out of them.

Shortly after that, broadband became available. I remember how downloading an mp3 faster than I could listen to it was mind-blowing, something that’s taken for granted today as streaming.

Eventually, I started making small websites for fun and profit, which evolved into hosting counter-strike and voice servers as a side hustle when I was 16 or 17. My first real tech job after High School was at a software company which was acquired by Microsoft, and I spent some time there. That led to a career building solutions at many companies highly leveraged in technology. The understanding of how layered systems can come together as something much larger than their parts, and how to actually implement them, came from all that experience.

I started Shocknet when I began to see how the Lightning Network presents a whole new design consideration in solving problems on the web.

In the world of content creation, grabbing audience attention is paramount. Could you explain the innovations in Lightning.video that enables creators to not just compete, but excel in this war for attention?

It is really hard to be a creator right now, the internet is a noisy place and social platforms aren’t incentivized to promote quality. Monetizing the audience you’ve managed to build, to make it all sustainable, is even harder.

As with most things, “Bitcoin Fixes This”. Now that we have this value signal that can communicate across any app, creators can now optimize for that, instead of algorithms for ads, to separate themselves.

An example might be: You’d have to make a commodity 10-minute video to monetize optimally on YouTube, but instead, a 2-minute version that gets shared organically is worth more in that war for attention.

Lightning gives us a new heuristic in discovering high-signal content too, value-linked engagements are a private vote on whether something is worth the time to watch it.

Differentiating between your solutions for consumers and businesses, could you break down how Shocknet’s offering changes based on the end-user? What innovative features does your platform offer to businesses looking to optimize their video operations?

If you have business goals for video outside of monetization, the model Lightning has enabled still benefits you - as we can reduce your investment in delivery tools with our infrastructure. We’ve also been able to take advantage of technologies like WebTorrent, which can offer resiliency and portability so you’re not locked-in, and further reduces costs.

Your vision has been instrumental in guiding Shocknet to impressive milestones, for example being selected as one of just 8 lightning network startups selected for the Wolf NYC accelerator program. Can you share a recent technical breakthrough that underscores your team’s capabilities and the innovative nature of your platform?

Solving a lot of challenges consistently over a long period is what it takes to deliver a working product, and that was our ticket into Wolf.

They understood too that, there are several technical challenges solved behind the scenes that make the video site possible, like Lightning Pub. Lightning Pub is our node middleware, which uses nostr to connect WebApps to nodes without complex networking. We’re still iterating on it, but we’re effectively using nostr to implement distributing accounts across nodes and bridging those into WebApps. That’s a more robust feature set that Lightning, even with LNURL, can’t provide on its own.

Lightning Pub and nostr really provide a path toward making the rest of the web work more like Lightning.Video, and we already have a number of peers prepared to implement this as a standard.

In your view, how have Bitcoin and the Lightning Network unleashed new potential for disrupting the tech industry? Can you shed some light on how Shocknet leverages these advancements?

Bitcoin is often described as deflationary because of its monetary policy, but Lightning is deflationary too when you think about how our applications are frictionlessly buying resources with micro-payments.

Instead of applications needing their developers to contract with AWS or Azure, and intermediate the cost of a central vendor, they’re now locked in too, we’re at the edge of ‘All services on the internet are commoditized as a marketplace of APIs where satoshis going in- and data goes out. Without any enrollment friction.’

Big tech cannot possibly move at the rate Bitcoin and Lightning are in rewiring the incentives of the internet, and Bitcoin and Lightning-based services are inevitably going to capture the arbitrage on trillions of dollars in deflation.

Given the size and scope of the issues that Shocknet is addressing, could you describe the technical hurdles involved and how your solution makes a tangible difference?

With Lightning now as a design consideration, there is no off-the-shelf solution we can simply tweak or improve off of. We’re implementing a whole new architecture around flows driven by micro-payments. The result of that is a large technical scope for middleware, delivery infrastructure, management tooling, user interfaces, security and more.

By re-thinking about all of these things we’re able to address the laundry list of common complaints with big tech platforms, in a sustainable way.

Partnerships often define the growth trajectory of a startup. Can you share any recent collaborations that allowed Shocknet to showcase its technical prowess and further its mission?

It’s still the earliest days of our products, but at Wolf and through the open-source community in general, we’ve had many good whiteboard sessions with other teams. I expect you’ll see our solutions powering features, for several notable external projects, in the near future.

With the rapid evolution of digital spaces, what’s on the horizon for Shocknet? What future developments are you most excited about?

We’re learning about new use cases and ways to improve daily by talking to users and prospective partners. I’m really excited to spend time focused on condensing what we do into an SDK. Just looking at our products as parts of an SDK, it’s exciting to see what that enables others to build, and what impacts those projects will have on the web.

How do you envision the future of content creation and monetization, particularly given the advances in technology? How will Shocknet remain at the forefront of these trends?

Now that we have Lightning as a value signal, at a time when there’s a more general maturation of digital content, things will get less noisy and quality will be properly rewarded.

Because we’ve gotten the incentives aligned between the service and users, we now will have the visibility into what’s prudent, and the freedom to execute on it.

Our partnership with Shocknet has been a learning experience for us at Fulgur Ventures. Could you speak about how our collaboration has helped you get where you are now?

Fulgur is really part of the founding team, supporting us from the earliest stages. It’s impossible to put value on the networking, analysis, sounding board, and other professional support they’ve provided. I couldn’t be more grateful for such partners to sit down and have a steak with.

Written by Michele Anastasio

Shocknet is a Fulgur Ventures portfolio company. The information included here is not a financial advice, not an endorsement of the company or technology and not a suggestion to make any investments.

In the ever-evolving world of Bitcoin and the Lightning Network, at Fulgur Ventures we are committed to staying at the forefront of innovation in the space. To that end, we recently organized an exclusive, bitcoin-only event — the Tuscany Summit. This invite-only gathering brought together around 30 of the most promising Bitcoin companies, including the dynamic cashback start-up, Satsback.

In an effort to showcase the incredible talent and groundbreaking ideas that emerged from this summit, we’ve embarked on a series of interviews with founders of our portfolio companies. These interviews aim to highlight not only their achievements but also what makes an investor-founder relationship a winning one and what are the latest exciting trends in Lightning. After sharing an insightful conversation last week with Roy Sheinfeld from Breez, this week we’ll be interviewing Tom Chojnacki, the founder of Satsback. This revolutionary company pays cashback in Bitcoin.

The interview will delve into the highlights of the Tuscany Summit, exploring the collaborative atmosphere that fueled the exchange of cutting-edge ideas. We’ll also discuss the inner workings of Satsback, how the Lightning Network ecosystem plays a role in their business model, and the company’s journey with Fulgur Ventures as a trusted business partner. So, buckle up for an insightful journey into the world of Bitcoin, as we unravel the story of Satsback and the innovations they’re bringing to the table.

Tom, heading into the Tuscany Summit, you must have had certain expectations about the event and the opportunities it presented. Can you share with us some of your key takeaways from the summit and whether your expectations were met or even exceeded during the gathering?

Tom: I have always enjoyed smaller, focused conferences, which tend to have a higher signal-to-noise ratio. At those, it is relatively easy to bump into and chat with other builders and investors in the Bitcoin and Lightning ecosystems. So, when I heard about the Lightning Summit, I immediately knew it was something our team needed to attend. The event exceeded our expectations with the great company of Lightning startup founders and some guests we didn’t know were attending. The location was amazing, with a great vibe, and of course, the food and wine were delicious.

The Tuscany Summit was a hotbed of innovation and a place where the latest trends in the Lightning Network were discussed extensively. Which of these trends stood out to you the most, and how do you believe they might impact the future of Satsback and the broader Bitcoin ecosystem?

Tom: I find the work that Blockstream and Breez are doing with Greenlight extremely interesting and important. While Lightning is a game-changer, it is still a relatively new protocol and self-custodial usage can be challenging for the average person. Since our launch, we have aimed to move completely towards a non-custodial model. These products may help us achieve that goal while maintaining a great user experience.

Given the valuable experiences and connections made at the Tuscany Summit, do you plan on attending the next iteration of the event? How do you envision your participation shaping Satsback’s growth and your ongoing collaboration with other industry leaders?

Tom: We would love to attend the next one. Bitcoin and Lightning are open networks, so companies building on top of them are almost always interoperable by design. It is just a matter of building relationships between founders to come up with amazing collaboration opportunities and ideas. In-person events like the Lightning Summit are where these relationships are best created. We have initiated some great discussions with other participating companies, technical experts and investors. We should see the results of these discussions over the course of the year.

Based on your insights from the Tuscany Summit and your ongoing work in the Lightning Network space, what do you see as the hottest trends or developments in the Lightning ecosystem right now? How do these trends align with the overall growth and adoption of Bitcoin and the Lightning Network?

Tom: I believe it’s important to zoom out a little and appreciate that the Lightning Network is still unknown to most people and companies in the general public. However, this is quickly changing thanks to companies like Microstrategy and Lightspark, who have started onboarding enterprises to the network, and visionaries like Jeff Booth and Michael Saylor, who are busily orange-pilling high-profile executives and investors. I don’t think people have yet realized that we are living through a digital transformation of money, which allows us to move value across the world at the speed of light for fractions of a penny. This is a significant development, and I see the increasing adoption of Lightning as an exciting trend in itself. It was also fascinating to hear from Jeff Booth that there is an increasing number of investors from the legacy finance industries who are starting to understand the disruptive potential of these technologies.

As mentioned earlier, we were very interested to learn more about what Breez is building directly from their team. While Lightning is currently used to transfer satoshis across the world for fractions of a penny, we will soon be able to use it to transfer other assets such as USD or EUR stablecoins, which I think will ignite the next wave of adoption, particularly in developing markets. It was fascinating to speak to the RGB team in person, who were among the first ones to experiment with this concept of tokens for things like ‘stablecoins’ on Lightning.

As you mentioned the standout trends, could you elaborate on the potential impact they may have on Satsback specifically, and more broadly, on the wider cashback industry? How do you envision these trends transforming the way businesses approach cashback incentives and customer engagement in the future?

Tom: Breez’s SDK and LaaS, powered by Blockstream’s Greenlight, are fascinating because they enable developers to provide non-custodial services while maintaining a seamless user experience. This technology could be very useful to us if we decide to build our own Lightning wallet.

Lightning-powered micropayments can unlock value for most industries, including the affiliate marketing industry. At Satsback.com, we use Bitcoin and the Lightning network to provide a better user experience with instant withdrawals and superior savings. However, most of our merchant partners still operate within the restrictions of the 20th-century economy. This leads to unnecessary delays in receiving commission payments and requires our users to practise patience before they can receive their shopping rewards.

Through our partnership with BTCPrague for bitcoin rewards, we have demonstrated that in a Bitcoin world, these inefficiencies disappear. Commission payments and rewards can be delivered almost in real time. As more merchants join the Lightning Network, the performance marketing industry will be significantly transformed. I believe that stablecoins on the Lightning Network, developed using Taproot Assets or RGB or something else, could boost adoption for entities that do not want to or are not ready to hold Bitcoin on their balance sheets.

Our time and attention are more scarce than Bitcoin, yet we often give them away for free. In the future, we could imagine a scenario where consumers are rewarded with sats for checking out merchant’s offerings, regardless of whether they make a purchase. Microstrategy recently announced that they will offer this feature within their new Lightning Platform to large enterprises. It will be interesting to see them progress.

Tom, could you tell us the origin story of Satsback, how the idea for the company was conceived, and how it has evolved to actively contribute to the adoption of Bitcoin and the Lightning Network?

Tom: I’ve always tried to understand how the world works and through my study of Economics and later Austrian Economics, and with time I became aware that our fiat monetary system is broken. After I started to understand Bitcoin better in 2016 I realised that it was the most important innovation of our century. Shortly after that, I decided to dedicate my career to it.

As the saying goes “Ask not what Bitcoin can do for you — ask what you can do for Bitcoin.” Bitcoin changed our lives for the better so we thought what better way to give back than to build products that accelerate its adoption.

Initially, it was scratching our own itch. We wanted an easy way to earn Bitcoin instead of loyalty points, airline miles, or cashback when shopping online for things we needed. We were aware of the fast-growing rewards industry, estimated to be worth >$100b globally. As Bitcoiners, we were convinced that Bitcoin is superior savings technology and the future of online value transfer. We realized that it was only a matter of time before it disrupted the global cashback and loyalty industry.

How does Satsback differentiate itself from both traditional cashback companies and other Bitcoin and Lightning Network competitors that offer cashback and rewards?

Tom: We see leaders in the wider ‘fiat-back’ and loyalty rewards industry as main competitors. There are also a growing number of Bitcoin/crypto reward companies that are taking various approaches. As a Lightning-first company, we recognised that Lightning will drastically improve the value flow in merchant-funded rewards when used end-to-end.

LN unlocks a range of value propositions for the merchant and offers space that has never been possible on fiat rails: real-time billing, real-time redemptions, lower points of friction, more privacy for constituents, and more immediate global reach, among others. I believe that we have a unique product strategy to benefit from this transformation of loyalty rewards by Lightning-powered micropayments and a vision to help 100s of millions of consumers globally to save in Bitcoin while shopping for what they need.

Tom, Satsback has been doing a remarkable job in onboarding people to the Lightning Network. When it comes to your business partners, can you elaborate on the unique value they derive from partnering with Satsback, and how your offerings contribute to creating a mutually beneficial relationship that drives loyalty and engagement in the ecosystem?

Tom: We like to say that we empower consumers with the hardest money discovered by moving advertising budgets straight into people’s Bitcoin wallets while bringing merchants new customers and greater revenues. Affiliate marketing is a multi-billion dollar industry and most marketers are familiar with and working actively with it. Performance marketing is especially useful as the merchant only pays when an affiliate helps them generate a sale — so it’s really cost-effective and low-risk. The unique value that we deliver is that our user base is made up of Bitcoiners who are extremely motivated to stack sats with every purchase and tend to demonstrate higher return rates and higher-than-average order values. Merchants are starting to understand satoshis are the best global loyalty points.

Tom, building a successful Bitcoin company can be a challenging endeavour, yet Satsback has impressively managed to come close to profitability. Could you share some insights into this remarkable journey, including the obstacles and challenges you’ve encountered along the way? How have you addressed these issues to continue growing, evolving, and ultimately, bringing the company to the brink of profitability?

Tom: Thanks, Michele, but I think building any company can be challenging. Perhaps Bitcoin companies are even more so. I think it comes down to perseverance and dedication which would not be possible if we weren’t so passionate about Bitcoin and what we are doing. As a founder of a small and growing startup, you never have enough time to do everything, so you always need to filter and only work on the tasks that will have the largest potential impact on the business. Limited financial resources are always a challenge. At the same time, it’s important to be selective with the investors you bring on — especially in the early stages. Luckily we have been blessed with some amazing ones!

But ultimately I think it’s a good idea to not raise more than you need to validate your hypothesis and get to product-market fit. Finding the right co-founder, early hires and partners is also key. It is also remarkable that other Bitcoiners will go out of their way to help you if they see that you’re also fighting the good fight, helping others understand Bitcoin and the importance of sound money. Coming from an ordinary career in the telco industry, I’m still surprised by how responsive, helpful, and generous with their time other Bitcoiners are. It’s the most rewarding industry to be in because we all understand that we are part of a larger movement than us or our startups.

As Satsback continues to grow and make strides in the Bitcoin and Lightning Network space, what lies ahead for the company in terms of future plans and developments? Additionally, can you provide some updates on your current funding round and how interested investors or partners can get involved in supporting Satsback’s ongoing success?

Bitcoin is for everyone and its adoption is a secular trend. But only a small fraction of the world’s population is able to save money which is made even worse recently with globally rising inflation and cost of living crises. This limits Bitcoin’s addressable market. We’re convinced that Bitcoin rewards powered by Lightning micropayments are extremely powerful as they can help billions of people around the world save sound money for the first time in their lives. We started in Europe but are planning on expanding to other global markets and working on new Lightning-powered products and APIs that will expand Bitcoin’s addressable market by billions of people, especially in the Global South.

We just started raising a seed round so we’d love to hear from any investors that are actively investing at this stage. We’d also love to speak to Bitcoin consumer-facing companies that have a budget for user acquisition to help us test a product that we are working on.

How did partnering with Fulgur Ventures during your fundraising round help your pre-seed/seed stage company, and what specific value-add did Fulgur Ventures bring beyond just providing funding?

Tom: Since Fulgur Ventures is focused on investing in the Bitcoin and Lightning space, they have a wide portfolio of Bitcoin startups and have always been very helpful with proactive introductions to any of them.

Written by Michele Anastasio.

This article is based on the roundtable discussion with Bitcoin’s venture capital experts (VCs): Mike Jarmuz from Lightning Ventures, Max Webster from Hivemind Ventures and Oleg Mikhalsky from Fulgur Ventures. The experts and their host, Johns Beharry from Bolt.Fun and Peak Shift Ltd., talk about insights that could be useful for founders of Bitcoin and Lightning startups. They discussed what kind of founders such VCs look for, what they pay attention to, how they evaluate startups, and many other exciting topics. In the end, there are a few tips right from the VCs you might someday pitch to.

Bitcoin and Lightning VCs

Who they are

In general, VCs are those who will invest in emerging projects aiming to see their growth. Of course, the main reason for them is to have great returns. But a Bitcoin and Lightning VC differs from traditional once. Let’s see how.

There are Bitcoin and Lightning VCs that are in the trenches with founders because they all want not only to see the startup outcomes, but also to see everyone in the world have access to a fair monetary standard. That’s a key difference between Bitcoin VCs and traditional VCs. Bitcoin and Lightning VCs share with theit founders a big mission: to advance Bitcoin as an ecosystem and the Lightning Network as an adoption enabling technology.

Recently there has been an inflow of business-focused founders with prior experience from other industries, as well as non-bitcoin VCs showing interest in Lightning. Traditional VC experience can also be equally important for Bitcoin VCs and startups, as there is much to be learned from the past and from industries that already have mature business models.

VCs look for projects with an outsized future potential. There are those who seek “unicorns”, and those who work with high-potential projects if they show sustainable growth and ability to be agile and adjust to changes.

What they do

Startups look for additional resources such as capital to sustain themselves and grow further. So venture capital can be an amplifier of dreams, vision, and resources. Most VCs provide two core resource: capital and networking. Typically, VCs attend many events and speak to a lot of people outside and inside the community. They also connect projects with others in other parts of the ecosystem and can provide insights into what’s happening in adjacent industries. Bitcoin VCs typically have a reasonably good understanding of the technology behind Bitcoin, what makes it a suitable alternative to the current monetary system, and the role played by the Lightning Network in enabling adoption. In the Bitcoin space, most of the VCs have long time preference and they could be a helpful addition in building for the long term. It’s not just about the capital it’s also about relationships. If you need them, the venture capitalists should be there to assist you which is not often expected from VCs in other spaces, who sometimes invest based on metrics and a broader understanding of how venture capital returns work and sometimes have a higher time preference mandated by their KPIs with resonsibility to manage VC capital for returns.

Now that you know who we are talking with, let’s find out what they are looking for.

Founder Market Fit

This is like a product market fit, but in the VC space. In general, it is an advantage that distinguishes founders from the competition and entices VCs to invest in them.

Down below, we determined 7 main aspects of a project that VCs usually evaluate. What is important for venture capitalists in the Bitcoin and Lightning space?

People. Investors pay attention to whether the company was founded by a solo founder or by several founders and how the came all together. Of course, passion, experience, dedication, and relevant experience are also important. But the main thing is who the founders are and how many there are of them responsible for what aspect of the startup. Some investors have rules, such as if there is only one founder, he must be technical. If there are two cofounders — one is technical and the other one is about doing business. That’s typically a good combination. If you are a technical founder, maybe it would be really useful to find someone who could take the business development position for your project. Working with new technology is very engaging and rewarding so sharing your time with attending sales calls, talking to your bank or accountant may even become a distraction.

Stage of the project. It also matters if the goal is to create something from scratch or not, whether there is an existing prototype or the project will be buildig on available open source. The prototyping stage ideally should not last long as most VCs are not comfortable taking too much technical risk such as whether a product will work at all in reasonable time. So here high speed of iteration and learning can be very helpful. Quite some VCs do not invest in pre-revenue projects. They love seeing revenue charts and want to see something is build and that is already a revenue generator. They usually do not follow-on and invest again unless there is a meaningful progress.

Vision. Outstanding founders have unique insight/vision about the world that no one else understands. Think about Peter Thiel’s secret. Sometimes that secret comes out at the pitch meeting, sometimes founders simply write about it. A great example is Nicolas Burtey, the founder of Galoy. Eraly on he published some articles about how the Lightning Network’s going to scale, to eat up the entire traditional financial payments network. Another example — Roy Sheinfeld from Breez. Reading what he wrote a while ago, we understand that he had a unique vision about how non-custodial Lightning could work. He had something. We could call it a vision. Something that keeps the founders working night and day to achoeve their dreams. A vision in the bitcoin ecosystem is almost impossible without understanding the fundamentals of Bitcoin and the Lightning Network. There neess to be a rationale for being and doing in space beyond just creating a startup with venture capital money but also contributing to or making an impact on society in different aspects.

Skills. VCs often look for founders who understand how to go to market in high uncertainty by making decisions based on trade offs and considering the unknown. They should take into consideration that software now has monetary, geopolitical, and social aspects that are constantly changing. It all has overlaps with the regulations, complexities of cross-border money transfer. Understand what is unknown and how to navigate through the limits of technology which are also unknown is an essential quality. Understanding who to partner with, the value of long term relationships is also very important for VCs to take into account.

Ability to ship and traction. It can be a good strategy ship regularly and frequently, even if it’s not a final product. In order to continue shipping something fast, you should make many micro adjustments (typical for consumer facing products). VCs are interested in regular progress, they want to be sure that founders are constantly going through a feedback loop. A very interesting way of measuring traction is to find out what can be learned almost every week. A high velocity of learning and iterating on any major path of execution that you have, be it a technology upgrade, customer acquisition, or something else, is important to derisk the project and stay agile to changes and signals in the outside market environment.

Metrics. A feedback loop is also a useful source of metrics can vary based on the investor’s approach. In general, investors look at such metrics as customer/user engagement, monetization, and evidence of opportunity to scale. It helps to understand how sustainable the company is and how much value it delivers to users/customers. In theory, a startup should be able to produce metrics that resonate with both Bitcoin and non-Bitcoin VCs to be able to raise capital in the future. But there are also metrics that are simply derivatives of the scale of bitcoin adoption. There may be new metrics fundamental to how the Bitcoin economy works. This is especially true for Lightning Network metrics, but also for onchain projects, mining. Getting a regular VC to understand these metrics can be time consuming.

Metrics are a means to making business decisions, so they should be relevant to the dimension about which decision is being made. Metrics for earlier startups can be less formal and more about the team performance in general, speed of learning, and execution. Metrics for later rounds can be more about scaling and value exchanged with users/customers.

Tips for Bitcoin and Lightning Startups

• Dream big, follow your vision, your passion. But be mindful about what you don’t know and what others around you don’t know, including VCs, customers, partners.

• Never take it personally if some VC is not investing in your project. It’s a relationship that takes time to evolve. Consider it a no for the time being. Send updates to those who said no, because your project matures and can become interesting to those VCs later. Differentiate between VCs saying no explicitly and saying they are waiting on smth and keeping you in the dark.

• Address issues and feedback as soon as possible. You can definitely tell when someone is obsessed with a product and has an itch for execution. Speed and focus of execution is one of the key charachteristics of a team that defines success while many other characteristics such as original product idea can change over time.

• Share your perspective with the world in writing. One of the hardest things for founders to do is communicate the vision. Often times, not many people tend to get it, especially if the space is new and the founder tries to be innovative. Writing is useful not only to persuade a VC, but also to excite the team and your partners and customers. To keep your team, you need not only short-term goals and a roadmap, but you also need to know how to communicate your vision, “sell without overselling”, underpromise and overdeliver.

• Understand how to navigate the uncertainty.

• Focus on what you do best. Figure out what you do best, what drives you. Invite others such as co-founders or mentors to help you in what is an esential part of the startup but is clearly not your passion.

• Learn how to obtain additional resources, either through VCs, capital, or networking. But at the same time how to put this resources to use to achieve progress and scale measure with time and money being spent.

• Do as much as you can for as little money as possible. Be smart with every dollar. Try to seek out from these tons of resources online for things that you can learn about.

• Don’t be afraid to do something completely crazy.

Conclusion

We’ve just summarized some points about Bitcoin and Lightning VCs and what they are looking for in startups. First, they differ from traditional VCs. Second, all of them are unique, but they share one common idea: growth of the Bitcoin and Lightning ecosystem. Third, they may have distinct traits they are looking for in startup founders.

All the best and good luck with your projects. But remember, don’t get distracted too much on how to fundraise when you could be building. It’s like in music. When you write songs, you are mostly writing them, not finding a manager or a record label. Do what you are passionate about, stay with your head down and keep building :-).

Not long ago, we had the pleasure of chatting with Roy, the founder of Breez, about the challenges and opportunities in the Lightning Network ecosystem, our supportive partnership, and what sets their company apart. This conversation happened just before the Tuscany Summit, an exclusive Bitcoin-focused networking event and conference we hosted in Viareggio, Tuscany. Over 30 Bitcoin companies, including Breez, came together to share ideas and insights. Let’s dive into the highlights of our delightful conversation.

In your piece on ‘Lightning as a service’, you envision a world where the lightning network will power several mainstream aspects of our life to the extent that regular internet users will use it without noticing. What are the challenges to bringing the mainstream user experience to the lightning network?

Roy: There are several major challenges we need to tackle to bring the mainstream user experience to the Lightning Network. Firstly, we need to integrate the Lightning Network into user applications, which requires educating users — a significant challenge in itself. Additionally, legal and regulatory barriers to adoption must be addressed. It is essential for the ecosystem to ensure that non-custodial Bitcoin usage is not banned or heavily undermined, and we need to keep an eye on whether self-hosted wallets and nodes will pose long-term issues. Finally, there is still work that needs to be done to get the Lightning Network to mass adoption. For example, asynchronous payments, which are vital for long-term growth, are still not fully implemented.

In previous discussions, you have identified several crucial use cases that could promote widespread adoption. Specifically, regarding the transition from the conventional social media model where users access the platform at no cost, do you anticipate that ordinary users would be inclined to incur expenses for content they previously consumed without charge?

Roy: To an extent, user education will certainly be needed for the transition to take place, but people are gradually realizing that nothing is truly free. We can see this shift in consumer behaviour with platforms like Spotify, Apple, and OnlyFans. In general, users are seeking more honest and fair ways to pay for products and services. However, subscription models, may not be the most equitable solution for light users, who end up ‘subsidising’ the fee paid by heavy users. As a result, I believe users will come to appreciate and embrace the value of pay-as-you-go models, even for the content they once consumed “for free.”

By enabling simpler integration between fiat apps and the Lightning Network through your SDK you are effectively lowering the barriers to entry in the industry and making it cheaper to do business. Do you think this inward shift in the cost curve will allow companies to charge lower fees, eventually eradicating price competition in the space? How will this impact Breez?

Roy: The main idea behind Breez is to unlock new opportunities and business models by facilitating seamless integration between fiat apps and the Lightning Network through our SDK. It’s not just about helping payment providers to lower their fees; it’s about opening doors for businesses and entities that couldn’t charge for their services or products before. By providing a frictionless integration system, we’re enabling the creation of services that would have been impossible otherwise. Drawing a parallel between APIs and websites, we can see that just as the internet would be meaningless without websites, Bitcoin without real-world applications holds little value. Breez’s SDK paves the way for the development of new applications on top of the Lightning Network, fostering the creation of new utility and expanding the ecosystem. Our SDK eliminates the need for developers to either be experts in the Lightning Network or rely on custodial solutions, addressing the challenges that arose from previous approaches and further accelerating innovation in the space.

What were some of the most important things you did to prepare for a successful funding round, and what advice would you give to other founders looking to raise funds at this stage?

Roy: Preparing a funding round is never easy, and there are a lot of things to consider, however, I would say that these are the most important things to allow for comprehensive preparation of the round.

• Start establishing relationships with investors early on, and make sure it’s not just about the investment. Nurture these relationships throughout your company’s life, engaging with them even outside of the funding period.
• Remember that it’s not just about the money. While cash is vital for your company’s growth, seek out smart money from investors who align with your vision. This increases your chances of raising funds successfully.
• Create a sense of FOMO (Fear Of Missing Out) by giving the impression that your round is about to close and generating interest. Continuously announce new features to maintain momentum.
• Be selective about what’s important to you. Be willing to compromise on less critical aspects, but focus on negotiating the things that truly matter to your business.
• Finally, try to raise funds when you don’t urgently need cash. This allows you to carefully choose partners without feeling rushed or pressured.

Can you walk us through your experience of raising funding during the current market conditions? How did you navigate the complex funding environment, and how did you communicate this uniqueness to investors during the fundraising process?

Roy: We closed our funding round in November 2022, having started in Q1 2022. Since we raised funds when it wasn’t an urgent necessity, we didn’t face issues with slowing down due to market conditions.

Our lead investor and the larger followers were all people who had known me for a while and had been following Breez. However, it was crucial to prove our value to the market, not just the investors, in order to trigger and maintain these relationships. To create visibility, we wrote about our vision and product and delivered constant improvements.

Thought leadership played an important role too. Writing about your domain, sharing your knowledge, and creating multiple marketing touchpoints are definitely helpful to engage with potential investors. By doing all of this, we successfully navigated the complex funding environment and communicated our uniqueness to investors during the fundraising process.

How important is it to have a clear and compelling vision for your company when raising funds at the pre-seed/seed stage? How did you develop and communicate your vision to potential investors?

Roy: Having a clear and compelling vision for your company when raising funds at the pre-seed/seed stage is extremely important. In our case, we didn’t use slides during meetings. Instead, we sent slide decks beforehand and used the meetings to state our vision, mission, explain how we were solving the problem, and outline our execution plan. However, it’s still essential to create professional materials, as a casual conversation over Zoom won’t suffice.

A polished data room, sharp pitch, and accurate models are crucial. Professionals want to work with other professionals, not amateurs. For example, a well-prepared data room should include 3-year projections, all terms and contracts, strategic partnership contracts, an Excel sheet with projections, incorporation documents, an org chart, and a strategy document. In short, you need to be prepared for any question that might come up.

When simplifying our vision for non-sector-specific VCs, I focused on the problem being solved and explained the driving vision behind the business. However, establishing a real human connection is paramount in forming a lasting relationship with potential investors.

What are some of the current trends in the Bitcoin and Lightning Network industry that investors are particularly interested in, and how did you position your pre-seed/seed stage company to capitalise on these trends during the fundraising process?

Roy: It’s important to not treat Bitcoin companies as alternative startups, but rather as tech companies. When positioning our pre-seed/seed stage company during the fundraising process, we found it more appropriate to compare ourselves with Silicon Valley companies rather than crypto startups that engage in short-term pump-and-dump games.

Investors are particularly interested in the trends that showcase long-term growth and potential in the Bitcoin and Lightning Network industry. By positioning ourselves as a tech company focused on driving innovation and solving real-world problems, we were able to capitalize on these trends and garner interest from investors who share our vision and goals.

How did partnering with Fulgur Ventures during your fundraising round help your pre-seed/seed stage company, and what specific value-add did Fulgur Ventures bring beyond just providing funding?

Roy: Fulgur Ventures didn’t play a massive role in the fundraising itself, but they were instrumental in supporting our long-term vision and backing our company through the challenging stages. Personally, I’ve benefited greatly from the networking opportunities provided by Oleg at Fulgur Ventures. His warm introductions and mentions in other conversations helped Breez build a strong network and credibility, which ultimately attracted more funds.

Fulgur Ventures is the definition of smart money. Despite their relatively small investment, the connections and value they’ve added to our company made every bit of equity given up more than worth it. Their position in the Lightning Network ecosystem has been essential for our growth and success.

Can you share a specific example of how Fulgur Ventures added value to your company during the fundraising process, and how this support helped position your company for success?

Roy: Oleg from Fulgur Ventures has been an invaluable partner, always available and ready to provide advice as we continue building our company. One specific example of the value-added by Fulgur Ventures is their involvement in events like the Lightning Network Halloween and the Tuscany Summit. These events offer tremendous networking opportunities, as they attract leading figures in the Lightning space. By participating in these gatherings, our company has been able to forge connections and expand our reach in the industry, positioning us for greater success.

Article by Michele Anastasio.

Oleg Mikhalsky, a partner at Fulgur Ventures, joined the podcast by Kevin Rooke to discuss why Fulgur is excited about Lightning and the ways in which the technology can disrupt existing institutions, payment processors, create new markets and enable monetary transfers that were never before possible. Kevin and Oleg also discussed different business models in Lightning, how to get more founders and project ideas in its ecosystem. One of the interesting topics was whether Lightning adoption comes from a top-down approach, like we see from El Salvador’s Bitcoin law or with Square’s Cash, or whether it comes from a bottom-up organic adoption, like we see in Bitcoin Beach or PlebNet.

This is the first part of the series of two articles based on the podcast episode. Here you can quickly grasp the main ideas discussed and find out more about the Bitcoin and Lightning ecosystem and its development in the future. In this part, Kevin and Oleg discuss the development of the Bitcoin and Lightning ecosystem in the past years, differences between Lightning investors and other crypto investors, their role in Lightning startups, and how they evaluate such projects.

Kevin Rooke: Let’s start things off with a little background on your history in Bitcoin and why you decided to start Fulgur Ventures.

Oleg Mikhalsky: I used to do angel investing between my enterprise career stints in software. My enterprise background is mostly software product management and business development. After one of my career tracks, I became an angel investor in a software company that shared a co-working space with Andrey Samokhvalov who at the end of 2017 was working for Lightning Labs as a remote software engineer. And on the other side of this picture, I also had someone who learned about Bitcoin a little bit earlier than I did. When Andrey decided to create his own project we became angel investors in probably one of the first Lightning network startups in early 2018. And I spent most of my time hanging around in conferences and trying to help with product development, strategy and networking. When we became a bit more experienced and connected, we started the VC fund in 2019. (You can learn more about the history of Fulgur Ventures here.)

Kevin Rooke: What do you think about the Lightning Network in the last four years, has it grown as fast as you expected it would back in 2018?

Oleg Mikhalsky: What is really interesting is the cyclicality of the Bitcoin space and going through the ups and downs and volatility. Cyclicality and volatility accelerate learning because learning is facilitated by change and healthy stress. I think we are at the beginning of the next learning cycle after the previous year’s bull run. And there is definitely a lot of momentum in the Lighting ecosystem which we are seeing that wasn’t there before. We know that Twitter is doing work with Lightning, Cash App introduced support for the technology. There are some quite substantial fundraisers happening recently: OpenNodes announced a significant fundraise. The metrics such transaction numbers and volume growth as in the recent research by Arcane and overall ecosystem review in Fulgur research also show progress on the Lightning Network. [The announcement of David Marcus project to build on Lightning came out after the podcast was recorded].

I think the main difference between this year and a couple of years before is that then we had a hypothesis based on a holistic understanding of what innovation in payments means and what micro payments could mean in the future. But now we really have tangible examples, such as Lighting Network applications in the gaming or content industry, like with your podcast, for example, on fountain.fm (disclosure Fulgur is as investor in Fountain). And we’re seeing that some of the metrics are very convincing, they prove the value proposition of the technology stack and specific business models in given domains, such as podcasting or gaming.

Kevin Rooke: Do you think the adoption in Lightning and some of the learnings that companies are going through right now is also tied to that cyclicality of the price of Bitcoin that you mentioned earlier?

Oleg Mikhalsky: The top of the cycle usually creates a somewhat abundance of capital that gets redistributed back into startups. It also creates additional excitement that drives innovation and startup activity in the space. These are two aspects where the cycles overlap. But if we think of Lightning as payment rails, which can eventually be used even to transfer an asset other than Bitcoin itself, that would make Lightning more independent and developing in its own cycle. Bitcoin is more like an asset and with Lighting you can build applications outside of the trading and asset accumulation space. So, it’s a bit of both, but we’re probably going to see more activity on Lightning regardless of the Bitcoin cyclicality. However, there is definitely an overlap.

Kevin Rooke: What is the divide between Lightning investors and broader crypto investors? What are some of the key beliefs or ideas that you have that give you conviction to invest in Lightning companies where other people would rather stick to crypto?

Oleg Mikhalsky: First of all, our thesis is built on ideas which we believe have strong fundamentals behind them. So, we believe in Bitcoin as the monetary system and Lighting as payment rails and enabling technology for innovation in fintech. Next, we also want to be adding value to the early stage startups we invest in and we believe our background in software can create value for such startups by really going into the weeds of how things work and actively engaging and brainstorming about business models, even sometimes about product implementation as well as by finding some synergies between different projects within the ecosystem. Finally, we’re just technically curious people. It’s important for us to learn continuosly to be more helpful to founders and also to make better decisions.

On the other hand, there are definitely generalist funds that invest across multiple domains. I think founders can always look for having the best of the two worlds. It’s important to create synergy between Bitcoin investors and investors from outside of this space. They could bring value in domains where they are experts, for example in content monetization and distribution as for fountain.fm. They could be investors from media industry or with connections to or experience from Spotify, Anchor.fm, Youtube etc. There could also be highly value adding investors for later stages when the project is scaling.

Kevin Rooke: If I’m a founder and I’m looking for capital, how much does it matter that the investors that I’m taking on are also going to help build and help get connections and iterate on the product that I’m building versus just handing me capital and letting me go run and do my thing? Has that changed over time? It seems like capital is not a constraint for a lot of startups right now.

Oleg Mikhalsky: In the past days the VC space has been hyperactive [The article was written right before the general VC slowdown started to show up in May-June 2022]. And we could definitely see an excess of capital in certain sectors of the blockchain space. But I wouldn’t say Bitcoin and Lightning is a capital-rich space as of yet.

If you have capital on the startup captable that just sits passively, you’re basically missing out on the added value that you could have had. And in the worst case, if you have capital with negative value, for example, with people who would say that you should issue a token no matter what, that will distract from being on a mission to build something great based on technology that has a fundamental value proposition. With time, investors will realize that Lighting has a precisely proven technology-product value proposition match. It’s instant, low cost, counterparty risk-free settlement, which helps to address several of the major bottlenecks in any fintech payment system and also enables true innocation by disintermediating payment settlement.

People are never going to refuse to buy things for cheaper. There’s always going to be payments. And by making payments more efficient, a lot of value can be created. Lightning and Bitcoin are exactly the right software stack and the ecosystem to build such things, because they have the technology that in a very simple and efficient way addresses the inefficiencies of payment stack and also creates potential for other applications, like Bitcoin native finance or the Internet of money, payments and transactions for digital content and entertainment and so no.

Kevin Rooke: Which side do you think Lightning is going to be more impactful: in disrupting current intermediaries or creating new markets?

Oleg Mikhalsky: It’s not so easy to disrupt something like fintech, payments, and the financial system because there are a lot of regulatory moats and incumbent inertia. Creating new products and new markets or augmenting existing products and existing markets and gradually improving them may be another area where we can see traction while we’re still working on creating a major disruption. Again, a great example is actually fountain.fm. It can actually change the monetization model for content in podcasts to the benefit of podcasters and their listeners, which is a very fast-growing industry.

But there could potentially be native Lighting or Bitcoin-focused experiences such as trading with options on Lightning or peer-to-peer trading in a non-custodial way. That’s a new market that has not existed before. We will see more examples like this.

Kevin Rooke: Are there any particular Lightning applications or use cases that you think are waiting to be disrupted?

Oleg Mikhalsky: One thing that I’m really excited about is the overlap between Lighting and energy payments. The first time I heard about it was from Nayuta, a company in Japan that is building on Bitcoin and Lightning. I believe that in general Bitcoin can play a great role in renewable energy and building sustainable new energy projects.

The other thing is, of course, digital entertainment and content monetization. Commerce in digital space is almost infinite. You’re not constrained with delivery of physical goods, low speed of cross-border payments, foreign exchange conversion overheads. It would be interesting to see some digital content platform that allows creators, listeners and viewers from all over the world to interact with each other with less friction than current systems and current platforms do.

Kevin Rooke: When you’re thinking about making investing decisions today and you’re looking at businesses, are there any particular business models in Lightning that you know are proven and you can confidently back?

Oleg Mikhalsky: Infrastructure is essential in Lighting and Bitcoin — different wallets and types of nodes and tools to support their operations. These are all the necessary building blocks as well as developer tools to create applications for Bitcoin and Lightning monetary system and payment rails. And then there are many opportunities on the interconnection between better user experience and technology itself for making user experience really smooth and for paving the way from custodial to non-custodial user experience.

Infrastructure and business-to-business services are models that are known to work in Internet projects and software in general. And obviously Lightning is going to have new business models around micropayments and Bitcoin-native financial products that we are yet to see. It’s just important to thoughtfully think about how technology delivers value and how to distribute this value between the user and the provider of a solution. We’re going to see business models around liquidity management. We could see some analogs of banking ecosystem, correspondent bank relationships and moving and reallocating liquidity between Lighting network nodes in a way that leads to creating a more efficient routing ecosystem and a more robust network. So, this is probably an area that will employ business models that have not existed before.

Kevin Rooke: How do you try and predict how much value a startup with a new business model could create and capture for investors?

Oleg Mikhalsky: We believe that for an early stage startup in an emerging industry it’s really important to be cognitive, cognizant of what is actually happening in the real world and to be agile and rational about how the founders view the world and their mission and how they take into account the inputs that are coming along the way. Value creation will follow when thoughful rational decisions are at the foundation of the business and there is a good risk management in place.

In Conclusion

The Lightning Network ecosystem is a new and promising space where you can build many interesting and innovative projects and create a lot of value by solving problems through innovation based on strong business and technical fundamentals. It’s hopefully going to become one of the most interesting topics for investors in the industry, as it provides huge opportunities for creating new business models as well as improving existing ones in the broader space of monetary value transfer. If you are thinking of starting your own project, you can also read more about different ways to funding Bitcoin projects in this article.

The second part of this article can be found here.

In this part we mostly focused on funding and building Lightning projects. You will also find out more about bottom-up and top-down approaches to Bitcoin adoption with such examples as El Salvador and Twitter. In the end, there is a useful tip about how to evaluate the progress of Lightning. A little hint: number of nodes and capacity are not the only metrics for that.

Kevin Rooke: Some other early stage smart contract platforms have 10 times higher valuations than Lightning companies at the same stage. Do you think that Lightning companies are appropriately valued today?

Oleg Mikhalsky: The economics of valuation in most token-based projects works in a very simple way because there are also tokens allocated to investors with a lock-up period. Investors typically can sell a part or all of their tokens after the lock-up expires. They usually sell a part and get back their liquidity with a desirable upside and keep the remainder in tokens. Because of this artificial “early exit” opportunity there is an incentive for investors to get into these overvalued or highly valued startups, because they can quickly get their money returned an even with some upside from their startup investment and at the same time retain a portion of token for some potential future growth. Sometimes also marketing, PR and hype create misallocations of capital. This has happened in the past in software industry already. Because of the sheer abundance of capital, there is a lot of misallocation of capital in the VC space, even outside of the high-tech and blockchain space [This article was written before the cool-off in VC started during May-June 2022].

Valuation is actually a product of supply and demand. The Bitcoin and Lightning space is still not over-invested and it’s reasonably good, because it doesn’t create distortions, unhealthy ecosystems and hypes. I think above all relationships within the players in the ecosystem are valuable. But valuations are just kind of a “product” or a way to execute on a relationship. It’s just important to find the right investors, to have a meaningful conversation about the valuation and come to something that is reasonable. So valuations have reason and there needs to be a meaningful dynamics of valuation growth over the following rounds, so that the startup can continue raising in a reasonable way with other external investors.

Kevin Rooke: Do you think that there are enough founders building on Lightning for you to come in and fund the right ones and build those relationships? If not, how do we get more founders excited about building on Lightning?

Oleg Mikhalsky: We would love to see that more founders start building on Lightning every day and maybe even better if more founders would be coming from different ecosystems with different experiences, for example, from the podcasting ecosystem like Adam Curry. We’re already seeing founders from the gaming industry who are very excited to start building on Bitcoin and Lightning and we are working with a few of them. Founders from a specific industry bring expertise as to how this exact industry works and how to be successful in it. I think it’s important for founders to know what kind of problems exist in specific industries. But also right now we’re still building a lot of infrastructure and it’s critically important to be a founder who is “born into Bitcoin and Lightning”, who really understands the fundamentals and is hands-on with the technology stack.

We welcome both types of founders and expect to see more of them entering the space, especially as Bitcoin and Lighting narrative gets elevated to the enterprises level like in case of Twitter and Cash App and also to generalist venture capitalists, and to particular industries such as payment, gaming and digital content for example. The further a company progresses in its lifespan, the span of attention of each of the original founders shifts, you really focus either on the business side or you dig deeper into the technical side. So, a healthy combination of business focused and technically focused founders is definitely something that can bring a lot of value, diverse experience and opinions to the ecosystem in the times to come.

Kevin Rooke: How do you convince a founder that Lightning is the technology on which they should build a project rather than another cryptocurrency or simply sticking with fiat?

Oleg Mikhalsky: It can be very individual because it just depends on where the person is on the spectrum of all the aspects of the ecosystem. Bitcoin is a multi-disciplinary phenomenon — it has a technology, a monetary system, regulation, geopolitics, innovation and disruption, as well as a social phenomenon. So, I don’t think there is a silver bullet. But the promise of Bitcoin is a decentralized distributed all-inclusive monetary system that is very easy for a person to onboard and transact at low cost without counterparty risk. I think this is really the big promise that no other technology offers in this space. In some of the technology stacks out there , it’s not really clear to me in particular how the marketing claim is actually achieved with technology means. And it’s a dangerous gap. But maybe it’s actually a gap in my understanding, and that’s why we don’t invest in other ecosystems.

To your question, I would really ask the person to explain how they’re going to achieve what they’re claiming to build using that specific blockchain or technology. I bet in most cases the person will not be able to really provide an in-depth technical answer on how that thing is actually going to work there to deliver the promise of what is being built. This is the vector of attack. We don’t need to build everything on Bitcoin. We need to build things that are relevant.

Kevin Rooke: Do you think that Bitcoin and Lightning adoption is going to primarily come from top-down decisions, or will we continue to see more like bottom-up organic growth?

Oleg Mikhalsky: We did research about hyperbitcoinization — mass adoption of Bitcoin. The focus of our research was to try and understand what players and factors can move the needle both in the top-down and bottom-up direction of Bitcoin adoption. In reality, there is movement in both directions. There is now Cash App and Twitter, and there is also El Salvador [Lugano Plan B Project was announced after the podcast was recorded]. But El Salvador started from the Bitcoin Beach project which was almost bottom-up. With a top-down approach, there is some risk or at least sentiment about a risk of centralization. For example, is it a custodial solution or how is it controlled, to what degree is it centralized? But a centralized entity can act and move faster. But what we want to have in the end is a truly decentralized open all-inclusive system where anybody can participate or enter the system and withdraw from it based on their own choice. And this direction of adoption is also happening. But as it’s happening organically, it just happens at its own pace unless there are some black swan events.

Volatility creates pain and it is not only about Bitcoin price fluctuation, it’s also about fiat price which is the reverse of Bitcoin price. A country with a volatile fiat currency can discover Bitcoin’s value proposition after a significant drawdown in the exchange rate. So, as we go through the bitcoin cycles, the bottom-up approach is also going to accelerate because the spikes and drawdowns accelerate learning. And learning is one of the ways to promote bottom-up adoption. In the end it’s probably going to be a combination of both. The top-down approach has a pro that it is faster. But it also has an aspect of centralization. But the other side of the spectrum, bottom-up, is also evolving. There is more education with more meetups and conferences than ever before and also systemic events outside of “crypto twitter” which unfortunately are typically painful events, especially because the money and monetary system is very conservative and changes in it create stress. People are not used to constantly seeking for a new solution in money. Money is one of the things that people don’t want to risk. They don’t want to innovate unless they are hedge fund type of people, traders.

Kevin Rooke: How do you assess the situation in El Salvador today? Is it leaning too far to the top-down approach? Do you see a real bottom-up adoption happening outside of Bitcoin Beach?

Oleg Mikhalsky: Unfortunately, I missed the conference in El Salvador and I’m still collecting data points about what is actually going on. But again, there are fundamentals. A lot of El Salvador’s GDP is formed from remittances. And remittances using the Lightning network make a lot of sense. There are economic incentives for people to adopt it because it brings more inclusivity, reduces overheads and increases the opportunity to participate in the global market (all of these given that user experience, reliability and performance of lightning wallets and applications meet the needs). El Salvador also becomes a tourist attraction in certain ways. When people go there, it may be easier for some of them to just transact using a Lightning wallet than to deal with foreign currency exchange. There is also the volcano mining topic. There is really a lot of innovation going on there which I think creates a huge momentum. I think we’re going to see more interesting results this year, the potential is huge.

Kevin Rooke: Let’s finish this off with a couple of predictions. I want to hear your predictions for 2025 on the number of nodes and the public capacity of the Lightning network.

Oleg Mikhalsky: I guess I will need to make educated guess here which I do not want to! There is a continuous search for killer apps that could drive adoption of Lightning and mass. Next year there may be more research around and more implementations of financial products on Bitcoin and Lightning. We’re probably going to see steady progress, but not exactly flipping the switch yet when everybody is transacting with millions of satoshis every second. On the other hand, with digital content and games theoretically there could be a very popular game because of which a lot of new users will onboard onto Lightning. It may also be some consumer killer app as well. It does not necessarily manifest in millions of nodes being fired up because there is work being done on how to create accounts on nodes in a semi-custodial way. There are also infrastructure capacity and liquidity questions that need to be addressed. But we are not in the space to create a big splash momentarily, we can create sustainable innovation that will deliver value over decades. We don’t need to rush without reason.

Kevin Rooke: Some of the growth on Lightning may not show up in the number of nodes, in the capacity. I think we’re starting to see payments flying through the network faster and faster just out of efficiency improvements. It’s not necessarily because more money is in the network or more nodes are in the network. We’re just getting better at routing money through the network, nodes are learning, improving. So there’s definitely going to be many different ways that growth could present itself. Maybe those two metrics are not necessarily going to be the single rules that you should rely on.

Oleg Mikhalsky: I would be super curious to watch source code development, code-based development, developers, tools for developers, and obviously venture capital as well. We’re going to see more and more developers building on Lightning as more infrastructure, tools and education opportunities become available. I would name these important metrics: developer-founded startups, open source code activity, transaction volumes, numbers of transactions, and monetary volume of transactions can be among of the metrics to follow.

In Conclusion

To assess Bitcoin and Lightning startups properly, it makes sense to focus on fundamentals and find out how exactly the chosen technology stack will be implemented to achieve the intended goals. Though these technologies are very promising for many cases and show steady growth, it is not necessary to build everything on Lightning and Bitcoin. In the future we will probably see killer apps in payment and gaming as for these spaces the Bitcoin and Lightning system has already demonstrated a lot of potential which in turn is justified by fundamental properties of this new monetary system and payment rails.

This was the second part of the article based on the podcast. The first part can be found here.

Introduction

On June 6th, 2021, a group of Bitcoin builders, developers, and enthusiasts alike held a satellite conference called pleb.fi in Miami. The event took place after the Miami Bitcoin 2021 conference as a closing event dedicated to more technical workshops and discussions. Pleb.fi was organized by Jeremy Rubin, an MIT graduate, Bitcoin core developer, and the CEO of Judica, a bitcoin research and development organization. One of the panels of the event was dedicated to investments in bitcoin projects. This article is based on the transcript from this panel, which focused on the topics of funding startups, VCs, Silicon Valley investors and so on.

During the session, Jeremy Rubin and his panelists Benjamin Price (founder of Open Sats, a non-profit supporting contributors to Bitcoin core) and Oleg Mikhalsky (VC partner at Fulgur Ventures) answered a few questions regarding funding bitcoin startups and open source development. The speakers discussed how to choose the right VCs as well as the nuances around working with them, ways to find product market fit, and various combinations of investments and non-dilutive funding types.

The language in the article is adapted from our transcript of the session audio recording that was kindly provided by Jeremy Rubin. We kept most of the free-flow conversational style in here so that you might find it a bit easier to read. We hope you enjoy this conversational style, different from the typical analytical research articles by Fulgur.

Venture Capital as a Funding Source

VC — Founder Relationships

So, what is venture capital? One way to think about venture capital is capital provided to the project for a participation in it. Participation means that now you have a team with a VC as a new team member. And VC has skin in the game because they provided capital to the project. Venture capital is provided with expectation of future returns meaning that the VCs expect the project not to die, to continue over a significantly extended lifetime, to create a big impact, capture value and return value, larger than the initial investment. If you think of yourself as a teamplayer, aim for a big goal and want to build a team and grow relationships within the team, then venture capital can help you.

Relationships with VCs have two aspects. The first one is sustainability. One person can contribute over a long period of time as long as he has motivation, he is still alive and he can make his ends meet. In an extended team you thus have more sustainability. More teammates means that you have each other’s back. Potentially this project can continue as long as there is enough team support, available capital and venture partners to provide more capital. This way you can typically provide more value over the long term, but now there is the team and relationships — it all needs to be managed by you as the founder. Now there is not only a team of engineers, business developers but also a team of venture capitalists with ideas possibly different from yours sometimes.

Once there is sustainability, the other aspect of venture capital is to generate returns. It means there is a path to scalability of the project, creating bigger impact, “the new social network”, “new global payment system”, capturing value and delivering value back to the venture capital industry as well. If you are comfortable with operating a team and have an ambition to not only create a big impact by doing an open source project, but also to be able to capture value and distribute it not only to the users, but the team, shareholders and also to the venture capitalists, then VC makes much more sense for your project.

Challenges of Finding Your VC

VCs often get critique that they are fair-weather friends. They love you at the beginning when they believe in you and the next big thing you are building, but as soon as you are taking the project in a different or questionable direction they could try to replace the leadership to steer the company in a better direction from their point of view. But the original founders mean a lot for a project, they are part of the DNA.

Think about Steve Jobs, who got out of his company and then returned to it. So, how do we find VCs that are good and won’t make you leave the project or exercise too much pressure in turbulent times? How do you find VCs that not only have excitement and commitment in the early stage, when they have you on the hook for providing capital, but allow you to pursue your vision and change course according to your own pathway (providing it is economically reasonable)?

One of the answers is in VC time preference — low time preference means being supportive to your original vision and the big picture ahead of it despite volatility or turbulence on the way. High time preference means focusing on immediate opportunity for liquidity, exit, turning money around.

Bitcoin is a low time preference ecosystem. Unfortunately there are not so many VCs passionate about bitcoin yet. And yet there are not so many pure bitcoin companies that have skyrocketed and made a big impact. Bitcoin startups have to build for a long term and VCs often have short term preference and seek “ultrasound returns”. No surprise most of them are in the “altcoin space”. The wrong VC attitude can screw up the whole project idea.

“That’s the challenge in this industry more than asking for ‘easy’ money (fiat); you’re asking for the ‘hardest’ money (Bitcoin) in the space.” — Ben Price (https://twitter.com/abitcoinperson)

At the same time bringing a product to the market requires certain ambitions. Building a company over a long term and taking it through a volatile environment also needs agility and unfortunately sometimes founders just have to fake it until you make it, and it sometimes does work like this — as long as it remains within socially and ethically accepted boundaries. To build a new business means to identify and overcome risks of the unknown so you usually need to be a bit reckless… but not as reckless as in other spaces outside of Bitcoin, perhaps. That’s not what we are here for and not what Bitcoin savvy VCs are expecting. At the same time a healthy entrepreneurial attitude is not something every bitcoin person has. We often are thoughtful builders rather than risk takers.

“Sometimes you need to do it fast. Get out the door quickly. Get user feedback. It’s different from the purist, maximalist, perfectionist state most of us have.” — Oleg Mikhalsky (https://twitter.com/olegmikh1)

Where Did Silicon Valley VCs Go?

According to Oleg Mikhalsky, the VC model as it still exists in Silicon Valley is a bit stuck in the “dotcom” build cheap scale fast framework. This makes it more difficult to evaluate something like bitcoin. In most investments, there are two main aspects that VCs would want to consider: technical risk (will the tech work?) and marketing risk (will it have enough users to pay). Many of the Silicon Valley investors only work with the marketing risk — they want to quickly understand if the project will make the IPO next week and pump their money. Or, they would just bet on a few fastest horses so that at least one returns much more than 3 times the bet. The underlying technology risk is a bit harder to understand, especially with Bitcoin because it has the monetary aspect and co-depends on geopolitics, regulations, cryptography, etc.

For a long time, this was the preferred way for Silicon Valley to work with local talent. Meanwhile, there are now VCs there too that are understanding bitcoin, getting more comfortable to work with distributed teams, nomadic founders. And Silicon Valley is a powerful network to attract talent and capital for growth.

If you still want to build a big company, especially in North America where there is a big homogeneous target market suitable for scaling, you kind of have to play by Silicon Valley book while carefully choosing VCs that understand the difference between technical and marketing risk and adhere to Bitcoin principles.

On the other hand — and on the other side of the ocean, literally — there are quite a few European private companies that just build projects. It’s worth remembering that even a big company can still grow and remain private. There is no rule of thumb. You just need to find the right partners for what you want to do. If you want to scale quickly and go public, it’s one kind of partner like Silicon Valley VC type. If you want partners who have long term preference and connections to the Bitcoin ecosystem, those are other types of VCs (on both sides of the ocean), and it is good to see these qualities already started to overlap.

Funding Alternatives

“Building a startup accelerator/incubator that can provide knowledge to early stage founders about how to fundraise, how to get a project going can be important for Bitcoin ecosystem.” — Oleg Mikhalsky (https://twitter.com/olegmikh1)

When someone is building open source software for other developers and they use it, fork it and “star” it, eventually there is a community of developers that follow the project and contribute, submit and review pull requests. This is like a product market fit for an open source project with no commercial aspect. The project developers could also go to Patreon, create an account and also monetary contributions from supporters there. This would be like a simple business version of the software — a “product” based on an open source project.

Other opportunities to obtain funding are out there too. Here is one of them: Ben Price launched opensats.org — a platform for funding free open source software projects in bitcoin. People can find interesting projects there and donate or if you’re building a project that is interesting for potential donors you can sort of make some money on the side if the project is not your full time gig. Such platforms as Open Sats, Brink (https://brink.dev/) not only provide financial support but facilitate more people to contribute to the bitcoin ecosystem. Grants, donations and subscriptions can eventually provide a healthy and stable backing for a solo developer or a small free open source project team.

A project with VC backing will likely have more dimensions to be taken care of and these dimensions can bring some ups and downs with them. The whole venture fundraising process can be a bumpy road and difficult to the extent that infrequently teams even get dissolved during the process because they just realize it’s not for them, it’s not the right time or there was no luck and tailwind. What is important in the Bitcoin space is that because of everyone’s high conviction and mission driven mindset even after a few road bumps there is usually still a group of people that has more resources than before, it is creative and can continue to other bitcoin projects. So it is worth trying! Koala Studio and Graaf. One are such examples. All their founders were early in the space and are still there with more experience.

It’s typically less common to obtain funding for an open source project than to seek venture capital for a startup. But at the same time it’s much easier to feel rewarded in an open source project because there is no monetary return expected. In VC it’s much easier to fail and much harder to succeed but at the same time it’s probably easier to get funded. So, both paths to a sustainable project have their own pros and cons and it depends on the amount of stress and ambition one might desire to take on pursuing his own idea. In the long term, one approach does not contradict the other and there may be a transition. For example, NGINX — a web server that runs on about a half of the internet websites. It was launched as an open source project by a group of mostly Russian developers and remained a side project for them. It was hard for VCs to convince them to focus on it full time with VC money and the goal to commercialize. Finally, they decided to do so and kept the open source project alive too. They built a company on top of that years after NGINX became popular, and the company itself did great and had a successful exit event. A brief history of NGINX is here https://www.nginx.com/blog/do-svidaniya-igor-thank-you-for-nginx/ if you are interested.

So, there are many ways to fund a project. Traditional venture capital typically provides the most opportunities to grow into something big. If you want to make a huge impact, serve millions of users, and take over the world in a good way, it is likely that you will need substantial capital in the form of VC.

“There are developers that use many sources of funding at once. There is a symphony between them, it’s not necessarily an imperfect conflict. You have to balance between building what people actually want and something that you’ll make money from.” -Jeremy Rubin (https://twitter.com/JeremyRubin)

Staying Connected with Your Users and Your Supporters

Emotional support from followers means a lot for developers in the Bitcoin space. As Jeremy Rubin says, during the hard times, even 50 sponsors on Github lets him feel like he has a team behind his back. But sometimes even a large number of Github sponsors can’t provide enough money for developing a project.

“That’s a rocking bastion of support. But that’s not paying the bills.” — Jeremy Rubin (https://twitter.com/JeremyRubin)

Connection with users or customers also evolves throughout the project lifetime. It’s important to build a company or project around user experience. But the longer you build a company, the more detached from users you get as you remain the founder in charge of many things (managing a bigger team and VC relationships to name a few). But you literally can’t talk to thousands of users nevertheless. At some point, the company becomes a pure business with a structure.

Many Bitcoin companies are super lean and have a minimum amount of structure which is actually great. In comparison, companies outside of the bitcoin space may look overstaffed (and overfunded). They look like bubbles. If you find it rewarding being really connected with users, it can be difficult to build a bigger company unless you find your personal way to always feel the back of your most supportive users.

In Conclusion

There are multiple opportunities for project funding: grants, Patreon, Github Sponsors, VCs, also angel investors etc. We touched upon some of their common advantages and disadvantages, and we hope it helps you understand how they can align with your vision and ambitions. Dream big for your projects and build!

This article is the second part where we outline the views and predictions made by the Bitcoin community concerning the prospect of hyperbitcoinization. In our analysis, we highlight “transition agents”: main players, groups of players or institutions that could accelerate the transition to a Bitcoin world. For each topic, we base our arguments on the references collected, and if possible, present data that aims to assess the probability of this outcome.

The first article described top-down scenarios initiated by institutional agents or governments whose influence is expected to trickle down to a wider audience. We identified monetary inflation and the rollout of central bank digital currencies (CBDCs) as probable scenarios initiated by central banks, while bitcoin hoarding, a rise in cross-border payments in bitcoin, bitcoin as a legal tender and even the advent of a hash war were identified as scenarios likely to induce government acceptance of Bitcoin. In view of the recent pronouncement by El Salvador, it appears that political agendas in South America are in a state of flux, in particular in countries with national elections scheduled for 2021 and 2022.

This second article aims at understanding of bottom-up type initiatives carried out by businesses, communities and individuals.

Bottom-Up Scenarios

We identified several notable hyperbitcoinization scenarios that emanate from two large groups of actors. The first group represents private-sphere-led initiatives brought together by established firms and startups. The second group is composed of grassroots initiatives mostly impulsed by the Bitcoin community whose main purpose is to educate and help new users to be onboarded. The article begins with a discussion of the initiatives driven by these two groups before turning to an examination of emerging individual behaviors. In this article, we have followed the principle of methodological individualism, well-known in the Austrian school of economics, which consists in explaining large-scale social phenomena based on subjective individual actions and motivations.

Private Sphere

Figure one depicts scenarios initiated by private actors that could — intentionally or unintentionally — set off a chain of events driving to hyperbitcoinization.

Business Adoption

Since inception, Bitcoin has demonstrated that it offers a wide variety of benefits to users. Its value proposition as a safe haven for individuals is without question one of its key enduring narratives. In August 2020, the world was surprised when MicroStrategy (MSTR), a NASDAQ-listed public technology company, announced that it was converting part of its cash reserves into bitcoin. Figure two depicts publicly-traded companies that reported owning bitcoin on their balance sheets or have converted a fraction of their cash reserves to bitcoin over time.

• Quadrant I is composed of early-adopter companies that have held bitcoin for several years. It includes Bitcoin mining companies (GLXY, MARA, RIOT) that, historically, have bet on the long-term appreciation of the asset. As they grow, these companies will naturally move into Quadrant II.
• Quadrant II is territory personified by MicroStrategy, which has suddenly converted a large part of its reserves denominated in USD into bitcoin and keeps on purchasing more bitcoin recurrently. The company value seems to be strongly correlated with its bitcoin holdings (60%).
• Quadrant III contains the innovators: companies like Tesla and Square (now Block) that have converted a relatively small fraction of their reserves into bitcoin and may increase their exposure in future.
• Quadrant IV is probably not reachable for most companies. It would imply large companies with valuation exceeding $100 billion getting more than 50% of their reserve in bitcoin. If it happens, the amount of capital allocated into bitcoin will approximate trillions of dollars.

To date, we can divide this trend into four distinct areas:

Since the MicroStrategy announcement, many other companies have started to display an interest in Bitcoin, and we can expect to see more of these kinds of initiatives appearing over the coming months once decision-makers have weighed their choices.

If hyperbitcoinization comes to fruition, the revenues, costs, profits and valuations of all companies could be accounted for in bitcoin (Mimesis Capital and Burnett), and most valuable companies would be the ones holding the largest chunks of bitcoin on their balance sheet.

Private Coin

When Meta (formerly Facebook) announced in 2019 that it would be launching a new digital currency, Diem (originally called “Libra”), the move caught governments and financial institutions alike off-guard. Diem’s stable value was to be derived from a basket of fiat currencies (U.S. dollar, euro, Japanese yen, British pound and Singaporean dollar) that would allow any Facebook user to send money as easily and intuitively as sending a message.

Although an appealing idea in many ways, concerns were raised in some quarters about trusting a company that feeds on user data. Some feared Diem would embody the worst of monies and data privacy practices. On the other hand, the launch of a private digital currency like diem may serve to familiarize large numbers of users with this emerging technology and thereby act as an on-ramp to broader Bitcoin adoption. As users get acquainted with digital currencies, they will develop an understanding of bitcoin as a scarce, censorship-resistant and decentralized digital money.

10x Factor

Bitcoin is often considered a better form of money because it combines significant improvements in terms of portability, divisibility or fungibility when compared to both past and present forms of monies, along with bringing radical disruption in terms of resistance to censorship and fixed supply. One aspect that remains underexplored is transaction costs on the economy.

Over the centuries, people have cooperated to minimize transaction costs and produce more efficiently what they are unable to produce individually. The theory of the firm by Ronald Coase describes the relationship between internal and external costs.

When a firm’s external transaction costs are higher than its internal transaction costs, the company will grow. If the external transaction costs are lower than the internal transaction costs the company will downsize by outsourcing, for example.

Applying this theory to the banking sector, we can project that the Bitcoin protocol is likely to capture a significant portion of the banking industry value proposition, and it is not hard to imagine that it could probably capture it entirely once the Bitcoin stack becomes a more tangible reality (see figure three). Over time, we can expect the value created on top of the Bitcoin stack to first capture the value of the financial industry, and then surpass it.

If the transaction costs incurred by Bitcoin users are lower than transactions enabled by conventional payments rails, demand will shift to the cheaper channel. Following Brexit, Visa and Mastercard increased their interchange fees by almost 1%, squeezing merchants’ bottom lines even further. This has also occurred in Colombia, where merchants stopped using debit and credit cards to avoid the excessive fees.

Elsewhere, merchants who want to reduce interchange and swipe fees, may also consider other payment options such as the Lightning Network as a means of reducing costs. Payment service providers risk entering a death spiral initiated by a shrinking customer base placing pressure on profit margins and ultimately rendering their services less competitive. In the context of increasing compliance costs in the banking and payment industries, the likelihood of this scenario cannot be ignored.

Transaction costs represent just one of several key aspects in the battle between established companies and Bitcoin-native services. In terms of remittances, in a recent research article, Bitrefill found that convenience and speed were as important — if not more so — than cost for some customer segments. Looking at the sophisticated process of sending remittances in Nigeria, they determined that the entire process would be reduced to 20 to 30 minutes from the several days it typically takes to send conventional cash-based remittances. Even if 30 minutes sounds like a long and painful experience in today’s financial world, it represents a ten-fold gain compared to cash-based remittances.

Even if we could argue that Bitcoin doesn’t exhibit yet the same number of transactions as large payment service providers, the payment infrastructure has grown at a rapid pace to the point of surpassing PayPal in terms of volume of transactions in 2021 and to present a viable alternative to existing payment rails (see figure four).

This adoption is illustrated by the increasing number of Bitcoin transactions observed in Nigeria. According to Bernard Parah, CEO of Bitnob, the transaction volume observed in Nigeria is driven primarily by businesses and commerce. Domestic controls on capital imposed by the Nigerian government considerably limit the capacities of individuals and companies to trade internationally. Lacking access to U.S. dollars, a mechanical company wanting to buy spare parts from China, for example, would not be able to find a seller because no one would accept the naira as a form of payment. The use of Bitcoin — either directly or through a third party who can pay a prospective seller in yuan — creates a credible alternative means of payment that thereby opens access to the global marketplace for our Nigerian mechanical company.

These ten-fold factor examples highlight the role of transaction costs, but this is not to downplay how ecosystem startups also need to pay attention to transaction reliability and to the overall user experience, especially concerning self-custody services that differentiate from custodial services and their onboarding processes dictated by regulation and compliance.

Broader Public Attention

Long seen as the ultimate safe haven in the crypto world, bitcoin is still finding its way as a medium of exchange.

While, in theory, whales and original gangsters (OGs) have had enough time to accumulate significant portions of bitcoin, the purchasing capacity of newcomers is limited by current price. The accumulation of satoshis is therefore the only option for those wishing to become familiar with this new asset class. Programmed regular purchases such as dollar-cost averaging (DCA) or loyalty programs offering cashbacks in satoshis are two options for earning bitcoin that are gaining in popularity.

The progressive integration of Bitcoin services into social networking and e-commerce platforms — or even games for which frequent microtransactions are familiar experience — could have the potential to onboard a large, digitally-savvy customer base in a short period of time.

Big tech companies already offer services to several hundred million or even billions of people worldwide (figure five). If any of these companies were to start accepting bitcoin as a means of payment, this would immediately trigger interest in the technology from a population that had little to no prior exposure to cryptocurrencies. Twitter’s announcement that it had developed a Lightning Network tipping function that would help people send money frictionlessly is illustrative of how large social media firms might leverage the reach of their networks.

E-commerce companies could also play a major role in spreading Bitcoin use. As Tim Draper pointed out, consumers have already been buying products indirectly with cryptocurrencies for years with the purchase of vouchers and gift cards redeemable on e-commerce platforms representing the largest number of payments (figure six).

A Rakuten case offers an analogy of how fast a large e-commerce actor can scale up a new payment technology through its user base. By allowing customers to pay by credit card, and gradually capturing payments made outside of their own platforms, over time Rakuten has become one of the largest credit card issuers in Japan.

Financial World

Over the last decade, Bitcoiners have regularly hypothesized how events initiated within the financial industry might accelerate the visibility of Bitcoin, such as the introduction of exchange-traded funds ( ETFs) in the United States, or how the creation of clearer regulations might attract trillions of dollars from institutional investors. Even though more sophisticated financial products will likely assist in the wider adoption of Bitcoin and increase prices, actions taken by financial actors have not been particularly associated with the prospect of hyperbitcoinization.

Originally published at https://bitcoinmagazine.com on January 14, 2022.

This article is part of a longer series wherein we outline the views and predictions made by the bitcoin community concerning the prospect of hyperbitcoinization. In our analysis we highlight “transition agents”: main players, groups of players, or institutions that could accelerate the transition to a bitcoin world. For each topic, we base our arguments on the references collected, and if possible, present data that aims to verify the probability of this outcome. This first article describes top-down scenarios initiated by institutional agents or governments whose influence is expected to trickle down to a wider audience, while a second article will provide an understanding of bottom-up type initiatives.

The views presented in this article are intended to capture the pulse of the Bitcoin community and remain hypothetical. This is an initial foray into analyzing hypothesized hyperbitcoinization scenarios; we expect that this area will require on-going investigation.

Methodology

The informational resources that most accurately reflect the extent of Bitcoin adoption are often private and/or anonymous, but a significant part of the sentiment is publicly available. The methodology employed in this study can be broken down into four steps: collection, content analysis, validation/extrapolation, and convergence.

Step 1: Collection

With the aim of identifying agents of transition that may initiate a hyperbitcoinization scenario, we conducted online research of articles, blog posts, podcasts, videos, datasets, tweet samples and research papers from July 2013 to July 2021 that either contained the term “hyperbitcoinization” or referenced the rapid adoption of Bitcoin:

Step 2: Analysis

Through analysis of the articles and transcripts of the videos/podcasts we identified recurring themes highlighting the current social, political, and monetary contexts, the agents or events engendering the transition to the Bitcoin world, and only a few projections about the prospect of a hyperbitcoinized world.

Step 3: Validation/extrapolation

Qualitative data collected in step 1 most often came in the form of predictions discussed within the bitcoin community that have yet to be subjected to critical examination by the wider financial and economic communities. In the following section we present a quantitative analysis that critically examines these hypothesized causal pathways by using micro and macroeconomic data from government, institutional, and public databases to extrapolate the feasibility of such scenarios.

Step 4: Convergence

In the last step, we coded each reference to hyperbitcoinization according to a descriptive theme so that we might present a coherent overview of the current discussion within the Bitcoin community. Despite the great diversity of authors, the analysis that follows shows that hyperbitcoinization predictions converge on a limited number of cases where the transition is triggered by four main groups of actors. These four groups who may influence hyperbitcoinization include central banks, governments, the private sphere, and the Bitcoin community.

Top-down scenarios

The financial and economic worlds crystallized in the fiat system for the last several decades, are unable to perceive credible alternatives to their current reality. According to current economic and financial elites, a different monetary system based on the gold standard or the Bitcoin standard would give rise to an anarchic and violent society wherein all concepts of law, economics, or civilization would disappear. Bitcoiners, on the other hand, offer a more optimistic narrative². Inspired by libertarian thought, they see the government as a superfluous or useless element of society whose interventionism in the monetary field prevents the proper functioning of the market. In this view, the advent of Bitcoin would restore monetary stability based on the fixed and transparent production of money. In figure 2, we represented the chain of events triggered by central banks that could lead to hyperbitcoinization.

Central Banks

Inflation of Money Supply

Unsurprisingly, figure 3 shows that a large number of countries from this sample suffer from aggressive interventionism with yearly increases of monetary supply higher than 10 percent. For instance, a 10 percent annual increase of the money supply implies a decrease in purchasing power of 40 percent after only five years. The stability and predictability of Bitcoin supply has the potential to disrupt the vicious cycle of manipulated monies leading to the loss of faith in the manipulated currency, and elicit the interest of the general population in the hardest form of money ever invented.

Central Bank Digital Currencies

The imminent launch of CBDCs (Central Bank Digital Currency) by several countries will undoubtedly impact the crypto industry but it is not completely clear how this intervention will unravel. Initially we can expect central governments to nudge their populations toward CBDCs through large-scale educational campaigns that will likely have a collateral effect on Bitcoin adoption. However, as the limits of centrally-governed monies emerge, we can predict this will push new users into Bitcoin’s arms for at least four of the following reasons:

• The shadow economy is not comprised exclusively of black market trades of illegal substances and trafficking. It encompasses any economic activity or transaction that occurs without being declared to the government. Redman³ predicts that Bitcoin could become an alternative to a cashless society that wants to operate under the radar of institutions.
• The emergence of CBDCs is raising serious concerns in many democratic countries. A survey⁴ conducted by the European Central Bank (ECB) highlighted that, for European citizens and merchants, the privacy of transactions was seen as the most important feature of digital currencies. Even if central banks defend themselves from surveillance, identity management based on “loosely coupled account links, can keep track of necessary data to implement prudent regulation and crack down on money laundering and other criminal offenses, as well as easing the workload for commercial banks”⁵.
• Several central banks have already announced the development of their coins on public blockchains (South Korea on Klaytn, and the ECB most likely on either Ethereum or Tezos) or on state-controlled blockchain (e.g., the digital Yuan). Even if Ethereum is a blockchain with one of the largest ecosystems, its security and decentralization is questionable in comparison to the Bitcoin network. An upcoming shift from the proof-of-work to proof-of-stake consensus algorithm also involves several existential risks that should not be associated with the creation of a currency imposed upon a population.
• The superiority of Bitcoin over other currencies has long been argued by the Bitcoin community. Recently, several CBDC projects carried out by central banks confirmed this superiority and recalled the importance of a fixed monetary supply, a censorship resistant protocol, or of pseudonymous transactions. The most advanced experiences in the field suggest that the notion of programmable money has already been tested in several forms. By issuing coupons whose use is limited to certain sectors, the local government of Chengdu (China) encourages its population to favor public transport. Even if at first glance this type of initiative seems laudable, it quickly gives a glimpse of the kinds of abuses that such a system could generate. In addition, another initiative deserving of attention allows the central government to increase money velocity by issuing e-CNYs whose validity is limited in time. Even if this feature seems to have been deployed only as a pilot project, it raises several questions about currency fungibility and, most importantly, on the immense controlling power that any central bank could have by despoiling the population.

Governments

One of the most common hyperbitcoinization hypotheses is the adoption of Bitcoin initiated by governments. Figure 4 describes several prospective scenarios hypothesized by the Bitcoin community that have yet to occur.

State Hoarding of Bitcoin Scenario

In this scenario, the transition toward a Bitcoin standard unfolds in distinct ways whether we look at it from the angle of individuals or governments. In Layered Money, Nik Bhatia⁶ predicts that governments will progressively build a healthier monetary system on top of the hardest money ever created: Bitcoin.

Several countries have reported possession of Bitcoins after seizing them from criminal activities, but no country has announced a specific strategy for hoarding digital assets as a reserve currency. In this context, El Salvador is an outlier in adopting Bitcoin. The acceptance of Bitcoin as a legal tender in El Salvador could be interpreted as an isolated political decision, but the successive announcements by the government to first implement a national mining policy with BitBlock DataCenter and subsequently to hoard BTC, confirm the execution of a broader Bitcoin strategy for the country.

“Sputnik” Trade Scenario

For decades, the dollar’s status as a global reserve currency has given the U.S. the privilege to impose sanctions on a global scale (figure 6).

Predictions about the demise of the hegemonic dollar are not new, but recently new narratives have appeared speculating on how the adoption of Bitcoin could contribute to the decline of the U.S. dollar¹. If two countries suffering under U.S. sanctions start using Bitcoin as a settlement layer to circumvent these sanctions, doing so may provide the same kind of rude awakening for world governments as Sputnik had for U.S. space policy in the 1960s. From that point, it could set an alternative path for other countries to replicate. Iran, whose economy has been under embargo since 1979, sits on a large reserve of fossil fuel energy that could either be exported against a payment in Bitcoins or by selling hashrate. The Iranian currency could become one of the most sought after global currencies and reposition the country on the pedestal of sound money².

El Salvador Case

The announcement made by the president of El Salvador to accept Bitcoin as legal tender was greeted as a consecration by the Bitcoin community in the world. El Salvador, whose economy has been hit hard by the Covid-19 pandemic, has long dealt with high crime rates linked to drug trafficking. The country’s dependence on the U.S. is high both in terms of exports and expatriate remittances (figure 7).

The bill proposed by President Nayib Bukele to the Legislative Assembly aims to position the country on the rails of prosperity by creating job opportunities, driving more inclusion, and boosting the economy. Even if this bill created a lot of excitement among bitcoiners, forced money law — in this case Bitcoin as a legal tender — might be seen as a divergence from the Bitcoin community’s central values of freedom, voluntarism, and free competition⁷.

This initiative provoked mixed reactions from global financial institutions. As expected, the IMF expressed serious concern about the adoption of Bitcoin as legal tender by the central American country and pronounced that the bill presented a number of macroeconomic, financial, and legal risks. The Central American Bank for Economic Integration (CABEI), whose mission is to promote the economic integration and social development of the Central American region, took a more constructive and pragmatic approach. They offered technical assistance to the country to help with the implementation of the new system.

Since the announcement of the bill, then, officials from Paraguay, Panama, and Mexico have expressed their intentions to present crypto-related bills in the coming months to duplicate the process initiated by President Bukele.

If the experience in El Salvador, whose dependence on remittances is estimated at 24 percent of GDP, translates into an improvement in macroeconomic conditions, many countries beyond Central America could be incentivized to follow the same path as shown on the following map.

On an exploratory basis, we estimated the impact on countries’ GDP if current remittance solutions are replaced by Lightning Network (LN) payments. As part of this estimate, we assumed a zero cost LN transaction and remittance cost equivalent to the average observed for transactions of US $200 in each country. Figure 9 shows that the economic impact would be particularly beneficial for countries whose dependence on foreign capital inflows is greater than 20 percent.

Conclusion

This study synthesized hyperbitcoinization scenarios and identified key agents that may initiate this transition. We categorized these scenarios into two groups: (1) top-down initiatives stemming from institutional actors such as central banks and governments, and (2) bottom-up initiatives emerging from the private sphere and Bitcoin communities. This first article presented an exhaustive analysis of the “top-down” scenarios, however the current state of adoption of Bitcoin technology does not permit drawing definitive conclusions about the influence of a particular agent. Rather this article serves as a foundational framework to continue our analysis of these prospective scenarios over time. The decentralized nature of Bitcoin is often in tension with the priorities of governments and financial organizations which are centralized, but this study shows how these institutions may play a major role — intentionally or unintentionally — in a mass adoption of Bitcoin.

In a second article, we will present bottom-up scenarios driven by private and individual actors as a comparison to the top-down pathways.

About the author

Alexandre Bussutil is a senior consultant and entrepreneur focused on business applications of Bitcoin and Lightning Network.

[1] Clemente, William, III. 2021. “Hyperbitcoinization. The Path to Becoming the World’s Dominant Form of Money.” Bitrawr. January 24, 2021. https://www.bitrawr.com/hyperbitcoinization.

[2] Keiser, Max and Lina Seiche. 2021. “MCCVR 2020: Max Keiser & Lina Seiche — Hyperbitcoinization: Maximalist Utopia or Inevitable Endgame?” Magical Crypto Friends, 31:18. January 8, 2020. https://www.youtube.com/watch?v=kese9tMFgvc.

[3] Redman, Jamie. 2020. “Hyperbitcoinization: Visions of Bitcoin Fueling the Post Covid-19 Shadow Economy.” Bitcoin.com. April 6, 2020. https://news.bitcoin.com/hyperbitcoinization-post-covid-19-shadow-economy/.

[4] Review of Eurosystem Report on the Public Consultation on a Digital Euro. 2021. https://www.ecb.europa.eu. European Central Bank. https://www.ecb.europa.eu/pub/pdf/other/Eurosystem_report_on_the_public_consultation_on_a_digital_euro~539fa8cd8d.en.pdf, Page 11, Chart 4.

[5] Fan, Y. (2020, Apr 1). Some thoughts on CBDC operations in China. Central Banking. https://www.centralbanking.com/fintech/cbdc/7511376/some-thoughts-on-cbdc-operations-in-china

[6] Nik Bhatia. 2021. Layered Money : From Gold and Dollars to Bitcoin and Central Bank Digital Currencies. Nik Bhatia.

[7] Koning, J. (2021, Jun 16). Hyperbitcoinization: By Choice or by Force? American Research for Economic Research. https://www.aier.org/article/hyperbitcoinization-by-choice-or-by-force/