The Financial Times’ article on Bitcoin is disgracefully misleading

bitcoin monk

The Financial Times is usually a terrific source for financial news. It’s straightforward, unbiased and most of the time, accurate. Unfortunately, the paper fails to live up to that standard on occasions, such as when it published an article  by Dan McCrum yesterday titled “Bitcoin’s place in the long history of pyramid schemes“.

Being an alarmist would be okay, if the facts in the story were straight. But they weren’t.

McCrum started the story off by introducing readers to a social financial network, MMM, run by a convicted fraudster and former Russian parliamentarian.

In order to join MMM, new members must purchase bitcoins, and then write online testimonials describing their improbable profits. Other users will then join, thus pumping the new users’ bitcoins back to the service and those who had praised the service. In other words, a classic Ponzi scheme. While such a scheme is indeed happening, there’s no evidence out there with regards to how MMM and the scheme at large is affecting the bitcoin market. It may be to a minimal, or moderate extent.

No one knows.

In 2013, when the Mt. Gox scandal tanked the bitcoin from its rally-high to just 10% of its former value, it recovered somewhat, after a correction, because people realized that the bitcoins affected in the Mt. Gox scandal were not a huge amount at all. The scandal did not jeopardize the currency. It is, after all, always important to remember that a drop involving rumors or scandalous incidents will always have an outsized influence on the market (more on this below).

When McCrum states conclusively that it is this “fad [that] helped to power an explosion in the bitcoin exchange rate, from less than $200 in September to more than $500 per bitcoin last week,” he is deliberately misleading his readers. The rally could’ve been caused by any number of reasons, including the massive number of trades in China by those wishing to get around capital controls, the increased interest in the underlying blockchain technology by big banks and mainstream investors, the recent positive press surrounding the technology.

The fact is, I don’t know and odds are, neither does McCrum.

Satisfied with crediting the recent bitcoin rally to a single, isolated scandal, McCrum focuses next on the history of the Silk Road — a crowd favorite to invoke whenever someone doesn’t understand the technology behind bitcoins. The Silk Road, in many ways, is perfect for the narrative McCrum wants to focus on: it involves crime, and it involves the downfall of bitcoins. “… the seizure of the Silk Road, a popular website for trading bitcoins for drugs and other frowned on goods and services, prompted a crash in the price to almost $100,” McCrum wrote.


But as Coinbase co-founder Fred Ehrsam pointed out, the cryptocurrency doubled within a month.

bitcoin recovery post silk road

There’s a simple reason for this: people realized that the bitcoins involved in the Silk Road only represented around 5% of the nascent network volume and that the scandal would not hurt any potential long-term usability. As I said before, scandalous incidents will always have an outsized influence on the market.

As those who lived through the 2013 bitcoin bull run remember, one of the unique characteristics about bitcoin is its extreme volatility. Here, McCrum invokes a Nobel Prize winning economist to back him up: “It’s value is so volatile it’s not likely to serve as a medium of exchange,” says Eugene Fama. The reality McCrum turns a blind eye to, however, is the fact that bitcoin’s value has stabilized considerably in recent times. Proof: in the last 30 days, bitcoin’s value has shifted by only 3.53%, with an even lower 2.68% fluctuation rate in the last 60 days (source: Bitcoin Volatility Index).

Bitcoin's volatility compared to the volatility of gold, the Brazilian Real, and Chinese Yuan.
Bitcoin’s volatility compared to the volatility of gold, the Brazilian Real, and Chinese Yuan.

Next, McCrum moves away from the scandals and focuses on the underlying technology of bitcoin: the ledger, more commonly referred to as the blockchain. He describes the blockchain as “just a glorified list of liabilities, keeping track of where the bitcoins are located.” Incredibly myopic does not even begin to describe the statement. Without any network value, of course the blockchain is useless. But it is because of the network value that investors are clamoring to get into the technology, pumping billions in total investment into it.

Why BTC is rallying in one chart
These investment firms aren’t dummies… they’re throwing money that has potential in the future!

To complete an article filled with misleading information and cherry picked facts, McCrum compared bitcoins — a technology so complex most can’t even fully comprehend it yet — to… tulips.

tulips wtf btc

The question is, how did this article get published on the Financial Times?

Be honest with yourself: is your startup actually legit?

startup shot money out of gun 1999

Is Silicon Valley currently in a bubble? Is the party over?

Some very smart people are arguing yes.

Others are saying no.

But what’s clear is this: we’re at the peak of this ~10 year cycle, and every boom comes with a bust. The players in the game (mainly, VCs and startups) have already began bracing for this cycle’s bust by raising as much money as possible and storing it away, drastically reducing funding for risky investments, and negotiating punitive term sheets that would save the VCs in case the startup vaporizes, among other protective measures. Investors like Bill Gurley think we’ll see a couple dead unicorns this year. And he’ll be right.

Once a few of those unicorns implode, panic will set in. Investors will pressure startups to start generating revenue instead of focusing on customer acquisition, and will completely cut funding for businesses that don’t have the potential to bring in high profit margins. As First Round Capital’s Rob Hayes pointed out, a game of musical chairs will begin around this time: employees, suddenly unsure of the prospects of the startup they’re working for, scramble to get their old jobs back at Google or Facebook. Except there won’t be a lot of chairs left.

BUT… if you have a legitimately disruptive startup (one that isn’t a service based simply off the idea “what can’t I get my mom to do for me?”), you shouldn’t worry. Here’s why.

Startups that are disruptive tend to upend the existing model not because they’re necessarily better (although they do get better with more time and cash infusion), but because most of the time, they’re more convenient and less expensive.

Think about Starbucks: the coffees/lattes/mochas served at Starbucks are definitely not better than the ones served by, say, a high quality boutique café somewhere in the city. But what Starbucks brings to the table is convenience (it’s everywhere), affordability (compared to the prices that could vary between individual boutique shops) and consistency (yeah, the drinks they serve may not be as great, but at least you know what you’ll be getting, every single time). Because of that, Starbucks has more or less dominated the coffeehouse industry.

Now, during a downturn, people are looking to save money. They want the cheapest product or service that they know will serve them reliably. Does your startup do that?

Uber does that: Uber X is cheaper than most cab rides. Uber X cars are not only nicer and cleaner than most cabs, but its drivers tend to be more polite too (kudos to the rating system; think about how important this can be during a frustrating time like an economic downturn!), which makes Uber’s value proposition all the more advantageous. does that: the same product offered on Amazon is cheaper on, and by extension, much cheaper than in retail stores.

Airbnb does that: hotels are expensive, and its prices fluctuate wildly during peak seasons. A traveller can potentially save hundreds, if not more, by renting an apartment on Airbnb (also, as an added bonus, most Airbnbs are much bigger than hotel rooms — for the same price, or even less).

Xiaomi does that: people want the best phone, without the price tag. Xiaomi offers just that: the Mi Note, for example, has build quality and specs that rival Samsung’s Galaxy Note at roughy half the price.

Netflix does that too. I recently watched Hitman in theaters; the ticket cost me $12.15. Netflix, in contrast, offers a ton more movie options and unlimited viewing for less than $8 a month.

In all of the examples above, each company focused on driving down one thing — the one critical thing that everyone thinks about during an economic downturn: the price. Most of them did so without reducing the quality of services/products offered. Now that is real disruption.

On the other hand, if your startup does neither of those things, but instead provides a service that’s “nice to have” when money is flush, get ready for winter. Already, we’re starting to see some of these “nice to have” services go under: Homejoy is the one that immediately comes to mind. It’s the quintessential “what can’t I get my mom to do for me?” service. After raising close to $40 million in financing, it imploded because users did not want to pay $85 for the service after its first-time promotional price of $19. The service made cleaning the house more convenient, for sure, but not at a price where users were able to justify the costs. Homejoy targeted the masses, when really, only the ~5% of elites could justify the cost.

There are, of course, still many startups like Homejoy out there. One of them, Instacart, has raised more than $270 million at a $2 billion (!) valuation from several respectable VC firms. That’s great for Instacart… but when crunch time comes, will its current users still want to pay someone to buy their groceries for them when they could do it themselves? What about when Amazon inevitably pours more money into its Fresh project, which offers same-day and early morning deliveries? Will Instacart still be able to retain its users? Now, take this with a few grains of salt, but some investors in Silicon Valley have already begun worrying about Instacart’s finances out loud.

And it’s not just Instacart that may be in deep trouble: GrubHub, Postmates and Seamless’ livelihoods could be threatened after Amazon announced its Flex service just a few days ago. Traditionally, companies either focused on wide-breath but shallow offerings (i.e. Walmart), or short-breath but deep offerings (i.e. Apple). Amazon is the very first company of its kind: it offers a wide-breath of product, but still manages to go deep on every vertical. If Amazon could pull off the development of Fresh and Flex like it did with all of its other projects (and there’s no reason to doubt it), GrubHub, Postmates, Seamless and its ilk of services may, in the best case scenario, be acquired, in the worst case, vaporize. History may not repeat itself, but it sure does rhyme!

(See also: BuzzFeed News’ investigation into WeWork’s shaky finances, where phrases like “profits look less certain when you read the fine print” and “WeLive is expected to supply 21% of the company’s overall revenue by 2018 — even though it has yet to launch” appear way more often than any investor should be comfortable with. The published forecasted revenue and earnings growth is also something to marvel at.)

Of course, there’s still room for optimism: some of the best services which we use today came out of the economic downturn. Facebook, Google (sending Yahoo! into a tailspin), Salesforce (to compete with Oracle), eBay and Netflix (effectively shutting down Blockbuster) all emerged as victors after brutal economic downturns, killing the previously dominant businesses in their industries.

This time around, there will be victors too: products built today that our grandkids may continue to use. But don’t forget how many startups had to die before the smoke cleared, showing a clear picture of the true victors.

To the VCs who are asking for data instead of “anecdotal evidence”:

  1. What’s the point of comparing the data to previous bubbles when pattern matching is almost completely useless and misleading? (More people are online now than before, global economy has changed drastically, etc.) 
  2. Just because it’s not as bad now as it was in 1999/2000 doesn’t mean that it’s not going to be ugly when the bubble bursts. 
  3. There is, however, one pretty big difference between this bubble and the 1999/2000 bubble: the number of investors proportionate to the number of companies. Back in the 1999/2000, the general public who usually doesn’t care about technology are investing because it made sense to. This time around, however, VCs and investors stand to lose the most since the inflation of the bubble is largely contained within those two sectors.
  4. How can one be sure that there’s a bubble? It’s quite easy: when products and services — some without even a path to profitability — are valued astronomically almost on a daily basis (the rate at which startups are inflating and deflating to become unicorns — or not — is almost equal). Or when VCs/investors prop up startups with massive amounts of cash because they fit some sort of profile of companies that previously got acquired. 
  5. Data usually makes a lot more sense… in hindsight. 

Continuing to offer the 16GB iPhone for sale is a brilliant move on Apple’s part

Screen Shot 2015-09-27 at 1.16.59 am

The screenshot above came from TechCrunch Editor-in-Chief Matthew Panzarino’s personal blog, Robot Tuxedo (unfortunately, the blog seems dead). In just a single sentence, Panzarino succinctly explained why Apple charges customers the price they do — in part to fatten their bottom line, in part to offset future R&D costs, in part to please investors.

Recently, there has been a huge outcry over Apple’s decision to continue offering the 16GB version of the iPhone. Even the first person in New York to get an iPhone 6s said she’s “sick” of the 16GB model when reporters asked her for a comment.

If Apple’s decision to offer the choice of a 16GB iPhone is so widely hated (and keeping in mind that Apple is probably one of the most consumer-friendly companies), why does the company continue to do so?

In a word: profits.

After the iPhone 5S, Apple ditched the 32GB version entirely as a choice for customers wanting to buy an iPhone, and instead, switched to the 16GB-64GB-128GB model. Now, if you were a customer who previously wanted a 32GB model, you no longer have that choice since Apple took the option away. Instead, you’re faced with the dilemma: 16GB (which is half of what you’ve planned to get) or the 64GB model. Most, out of an abundance of caution, would pick the 64GB so they don’t run out of storage and get the dreaded window that tells them they’re out of storage space midway through their contract.

By forcing the 32GB customers to pick the 64GB option, Apple was — very conveniently — able to increase the iPhone’s ASP (average selling price) and margins (remember: while each step up the storage tier cost customers $100, it costs Apple only ~$10 in parts).

Apple's BOM (bill of materials) for the iPhone 5S, iPhone 6 and iPhone 6 Plus.
Apple’s BOM (bill of materials) for the iPhone 5S, iPhone 6 and iPhone 6 Plus.

Investors loved this. And this is also why, despite all of Apple’s other innovations, investors still consider the iPhone product line not only Apple’s cash cow, but also a magical product (I dare say that there’s no other consumer technology product in the world that can compete with the iPhone’s profit margins at the scale that Apple is selling it).

Perhaps the easiest way to visualize why Apple has zero incentive to change the storage (and pricing) tiers of the iPhones is using the tables below, which comes courtesy of Above Avalon‘s mid-December 2014 report

 iphone 6s 32gb

Translation: once customers (who originally wanted the 32GB model) get used to the 64GB version, they’re going to buy the 64GB version again the next time they buy an iPhone since they’re already used to that storage allotment and price point.

iphone 6 32gb

Based on the iPhone 6/6 Plus models (not 6S), Apple’s ASP (something Wall St. analysts focus on to justify their recommendations/price targets) for the 16GB/64GB/128GB mix is around $690, compared to just $670 for a theoretical 32GB/64GB/128GB mix.

apple profits from 32gb iphone

If Apple decides to make the baseline iPhone 32GB instead of the current 16GB, they stand to lose around $3 billion.

That’s $3 billion in easy money.

Investors are worrying about GoPro for all the wrong reasons

GoPro shares are taking a hit (down 6% to start the week) after Barron’s magazine published a report stating the company’s stock is likely to fall to $25 a share in the very close future (this would equate to a 29% decline from Friday’s closing price of $35.15).

As some publications have noted, this is a 44% year-to-date decline.

So, what’s keeping all these investors up at night? Competition from Apple, apparently.

From the report…

While analysts are bullish, investors are clearly skittish about the company’s ability to ward off competition, notably from Apple (AAPL). At least twice in the past nine months, GoPro shares have tumbled on Apple-related news. In January, the mere issuance of a camera-related patent to Apple sent GoPro shares down 12%.

Even seemingly positive news from Apple has been overlooked. At the company’s keynote address a few weeks ago, it added GoPro support to its Apple Watch, enabling the watch to serve as a viewfinder for GoPro cameras. But Apple also upgraded the camera in its iPhone to a 12-megapixel sensor capable of producing high-resolution 4K video. GoPro shares tumbled 10% on the news.

From someone who knows GoPro’s products inside out, this fear is completely unfounded.

iPhone cameras, no matter how good, is not and will never be a threat to GoPro’s product offerings. People who have the need to buy a GoPro camera will not use an iPhone camera as a substitute for what they’re going to do with the GoPro.

The two products, quite simply, do not overlap.

I’ve long said that the GoPro is a magical product: it’s one of the very few products in the consumer technology world that markets itself. Whenever someone posts a video of them skydiving or snorkeling, people automatically assume that they used a GoPro to film the video. No one is thinking: oh, he/she must’ve used an iPhone with one of those ugly and chunky waterproof cases!

Truth be told, those who fear that GoPro’s sales are going to sink because of the introduction of another camera (even one made by Apple) should be worried that Canon, Nikon, etc. are also producing cameras. What they fail to understand is that in the camera market, while Apple could be cannibalizing Canon/Nikon/etc.’s marketshare, it’ll be difficult for them to reach GoPro’s niche audience: people who intentionally put their camera in harm’s way and/or routinely use it in rough terrains, trusting that their GoPro will hold up. No one uses their iPhones in those same exact situations knowing 100% that the iPhone is going to hold up perfectly.

While nothing about GoPro’s offerings are exclusive or proprietary to the company, it benefits from FMA (first-mover advantage) and a cult-like following, none of which are easily replicable by other companies seeking to build a competing product to GoPro’s offerings.

But of course, no good story is without a kicker, and here’s Barron’s…

“Saying smartphones will replace [GoPro] is like saying the Army will someday replace tanks with sedans,” tech site Gizmodo argued.

It’s actually a revealing metaphor, when you consider that the family sedan has been replaced by do-everything sport utility vehicles. In that sense, smartphones are following an SUV-like evolution. And GoPro runs the risk of being driven off the road.

True, except most roads don’t just have a single lane. They have multiple, with the ability to accommodate all sorts of vehicles.

And I suspect that GoPro’s investors — especially the ones who truly understand the company — know that.

Looks Like Apple Is Putting All Of Its Eggs In One Basket…

If Apple ever to launches an iPhone that fails to live up to customers’ expectation, the company may be done for.

While Apple, to its credit, has been trying to diversify its product offerings (with the car and Watch projects), it is still very much beholden to its iPhone product line, which generated 63.2% of the company’s reported $49 billion revenue in Q3 of 2015.

To put this in perspective, the iPhone line generated $146.6 billion in revenue for Apple in the last fiscal year — putting it above the combined annual revenues of Google, Facebook and Twitter.

About that car market Apple is planning to enter by 2020?

Yeah, the entire premium car market (including Mercedes-Benz, BMW, Porsche, Audi, etc.) generates about $220 billion in annual revenue — just approximately 34% more than Apple’s most profitable product, according to A16Z’s Benedict Evans.

If you’d like to read more about how much the iPhone means to Apple, read this great article by Apple analyst Neil Cybart.

Apple is scheduled to unveil its next generation line of iPhones on September 9th.

If You Think The Market Mayhem Affected Funding In Startup World, You’d Be Dead Wrong…

With growing concerns over the Asian markets and the Feds, the public markets took a harsh beating coming into September. Investors panicked, and many sold their shares, thus plunging the markets into depths not seen since 2011. But there’s one place that seems to be immune from the mayhem affecting the public markets: the private market.

Private company funding announcements have started off strong in September, and there’s no indication of any slowdown. In fact, with 21 days left in September (excluding the Labor Day holiday), it is projected that the overall market will deploy $5.5 billion this month — making this the second largest quarter of capital deployment of the past 5 years for startup funding.

The three biggest deals that led to this surge, according to Mattermark (a startup that analyzes startup and VC data), were $120 million for Tanium from TPG Capital and IVP, $108 million for Apttus led by Iconiq Capital, and $70 million for Intellia Therapeutics led by OrbiMed HealthCare Fund Management.

The private markets can be a nice shelter… just as long as the storm isn’t too strong. Because it will come.