Breaking Down Bitcoin - Sean Walsh - Los Angeles

Breaking Down Bitcoin
Bubble Or Greatest Invention Since The Internet?
Los Angeles – November 2017
Sean M. Walsh - sean@redwoodcityventures.com - @SeanWalshBTC - www.linkedin.com/in/SeanWalsh

12,000 Years Of Shell Money?!
10,000BC - Paleolithic era shell hoards found from Red Sea to Switzerland
5,000BC - Neolithic era shell money in South Pacific & Asia
1,600BC - Chinese Shang Dynasty, bronze cowrie shell money
1700s - used throughout India, Africa, Asia, Europe, South Pacific
1850 - used as legal tender in West Africa
1920 - Replaced by modern currency in remote parts of Africa
2017 - still used in Solomon Islands and Papua New Guinea

Sean M. Walsh
Background:
• Redwood City Ventures (Bitcoin/Blockchain Focus)
• Advisor, Science Inc. Blockchain in Los Angeles
• China/US Business & Investment Partnerships
• Previously VP at Bertram Capital ($1+B Silicon Valley
Private Equity firm)
• Created several $100 Millions in new Enterprise Value
• Online Product Development + Customer Acquisition
Contact Information:
• sean@RedwoodCityVentures.com
• Twitter: @SeanWalshBTC
• www.linkedin.com/in/SeanWalsh
• WeChat: BigWaveW

Notable Projects
• Advisor, Science Blockchain
• Blockchain Startup Incubator
• ICO Advisor
• Substantial available capital
• Science Inc - $1.4B in exits…
• Largest Blockchain Security Datacenter in North
America (aka mining farm)
• Bitcoin, Ethereum, Zcash, Litecoin, Etc.
• Server sales + leasing + repair + hosting, new
Blockchain proofs of concept

Course Objective
Format: alternate slides for 7-8 min, then 2-3 questions
Objective 1: Cover the most important investment-
related elements of Bitcoin for asset class evaluation.
Objective 2: Provide an inside look at how we at
RWCV analyze and model Bitcoin investment
opportunities.
Objective 3: Describe a couple of specific investment
theses that we are actively pursuing.
sean@redwoodcityventures.com - @SeanWalshBTC - www.linkedin.com/in/SeanWalsh

Important Disclaimer
I’m not a registered investment
advisor, or tax advisor, or attorney.
Do not rely on anything I say as
professional advice.
It’s just my personal opinion.

The Basis Of Our Fascination
Ecommerce
Monetary
Factors
Social
Networking
1. Ecommerce/Online User
Acquisition
2. Social Networking / Viral
Marketing
3. Monetary/Economic Factors
1. Monetary History
2. Asset Design
3. Foreign exchange
4. Global trade

Our Investment Approach
We start by establishing the “First
Principles” of the investment we are
considering.
These are the most essential elements of
our thesis.
Note: If you don’t really know your investment, you
aren’t investing… you’re gambling.

Step 1: First Principles
1. What is Bitcoin? What is money??
2. What is the current market situation?
3. How does Bitcoin work?
4. What transactions can Bitcoin improve? Who uses it?
5. What fundamentals drive the value of Bitcoin anyway?
6. Any evidence to suggest price will continue climbing?
7. What risks are commonly discussed?
8. What is the scaling debate, and Bitcoin Cash?
9. What resources exist to learn more?

Principle #1 – What Is Bitcoin?
• The best form of money ever invented
• But, what is money?
1. Unit of Account
2. Means of Exchange
3. Store of Value
• How to compare different monies? SDDRFT
1. Scarcity
2. Durability
3. Divisibility
4. Reconizability
5. Fungability
6. Transportability

Bitcoin Glossary Terms:
Network
– Blockchain
– Block
– Peer-to-Peer Network
– Centralized Network
– Bitcoin Node(s)
– Segregated Witness
– SegWit1x and 2x
– Hard Fork
– Bitcoin Cash
– Transaction Capacity
User
– Bitcoin Wallet
– Bitcoin Address
– QR Code
– Private Keys
– Bitcoin Exchange
– ICO
– Alt-Coin
– Hardware Wallet
Mining
– Blockchain Security
– Block Size
– Block Time
– Mining Difficulty
– Mining Reward
– Transaction Fees
– Global Network

1. Scarcity: limited, predictable supply
2. Durability: won’t decay
3. Divisibility: easy to subdivide
4. Recognizability:difficult to counterfeit
5. Fungibility: units is exchangeable
6. Transportability:easy to move
They all boil down to trustworthiness of the money.
Principle #1 – “Moneyness”- 6 Characteristics of Money

S
Dur.
Div.
R
F
T
Gold = 18
S
Dur.
Div.
R
F
T
USD = 13
S
Dur.
Div.
R
F
T
Arg Peso = 10
S
Dur.
Div.
R
F
T
Frequent Flier Miles = 5
S
Dur.
Div.
R
F
T
Starbucks Cards = 6
S
Dur.
Div.
R
F
T
Cowrie Shells = 15

0
1
2
3
4
Scarcity
Durability
Divisibility
Recognizability
Fungibility
Transportability
Principle #1 – “Moneyness”
Bitcoin
SDDRFT Score = 22
(out of 24)

0
5
10
15
20
25
Cowry
Shells
Gold USD Arg Peso Frequent
Flier Miles
Starbucks
Cards
Bitcoin
“Moneyness”

What’s The Pitch To Own Bitcoin?
1. Most unique Store of Value ever created. Inconceivably scarce.
2. Non correlated asset (portfolio diversification, target 1%-4%)
3. Most asymmetric return profile in history
4. Mainstream adoption due to SDDRFT – best money ever
5. Value is up over 5,000% in 4 years – 1% allocation 3 years ago
would have doubled entire portfolio
6. Strong evidence to suggest strong continued price appreciation
Note: There are also over 250 Million people around
the world who own Gold as a Store of Value.

The Importance of Moneyness
John Exter
(NY Fed President)

A Note On Recognizability…

-0.144
0.063
0.319
0.877
0.588
0.066
0.487
-0.190
0.289
0.200
0.099
-1.000 -0.800 -0.600 -0.400 -0.200 0.000 0.200 0.400 0.600 0.800 1.000
BTC Price
Gold
S&P 500 Corp
NASDAQ
Shanghai Stock Exchange
10YrUSTr
MSCI EM
Case-Shiller
WTI Oil
USD DXY
Arg Peso
Asset Class Correlation – S&P 500 vs Others, 12-Month

-0.144
-0.411
-0.330
0.001
-0.316
0.054
-0.357
0.154
-0.691
0.496
-0.651
-1.000 -0.800 -0.600 -0.400 -0.200 0.000 0.200 0.400 0.600 0.800 1.000
S&P 500
Gold
S&P 500 Corp
NASDAQ
Shanghai Stock Exchange
10YrUSTr
MSCI EM
Case-Shiller
WTI Oil
USD DXY
Arg Peso
Asset Class Correlation – Bitcoin vs Others, 12-Month

50.00
60.00
70.00
80.00
90.00
100.00
110.00
120.00
130.00
Jan-2015 Feb-2015 Mar-2015 Apr-2015 May-2015 Jun-2015 Jul-2015 Aug-2015 Sep-2015 Oct-2015 Nov-2015 Dec-2015
PriceIndex
Asset Prices #1, Last 12 Months
Arg Peso
USD DXY
10YrUSTr
Gold
Case-Shiller
WTI Oil
BTC Price

50.00
60.00
70.00
80.00
90.00
100.00
110.00
120.00
130.00
140.00
150.00
Jan-2015 Feb-2015 Mar-2015 Apr-2015 May-2015 Jun-2015 Jul-2015 Aug-2015 Sep-2015 Oct-2015 Nov-2015 Dec-2015
PriceIndex
Asset Prices #2, Last 12 Months
S&P 500
NASDAQ
SSE
S&P 500 Corp
MSCI EM
BTC Price

Bitcoin Price - 2016
Graphics courtesy of http://www.visualcapitalist.com/33-signs-that-bitcoin-growth-isnt-slowing-in-2016/

Bitcoin Price - 2015
Graphics courtesy of http://www.visualcapitalist.com/its-official-bitcoin-was-the-top-performing-currency-of-2015/

Bitcoin Price History
Approx Annual Change:
2010: 1,000%+
2011: 100%+
2012: 1,000$+
2013: 5,000%+
2014: -50%
2015: 35%
2016: 125%
2017: 600%+ YTD

Principle #2 – The Current Situation?
• About 650k people with 1+ BTC
To me, these are our “Customers”
• $7,000+ per BTC (and about 50k new BTC per month)
• 300k+ transactions per day
• 1+ Million BTC traded per month on Top 10 exchanges
• Developer turmoil
• Shutdown of Chinese exchanges
• Geopolitical risks increasing

Bitcoin Exchange Volume by Currency
https://www.cryptocompare.com/coins/btc/analysis/USD?type=Currencies

390,290
624,489
-
100,000
200,000
300,000
400,000
500,000
600,000
700,000
July, 2015 September, 2017
1+ BTC Wallets
Avg Monthly Growth
Rate: 1.8%
$277
$3,132
$-
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
July, 2015 September, 2017
BTC Price
Avg Monthly
Growth Rate: 9.8%
Current Situation – Interesting Trend

Bitcoin Network Resilience…
2011.11.23
$2.37
2012.12.24
$13.30
2013.08.08
$93.57
2013.11.06
$433.57
2014.12.16
$325.10

More Bitcoin Network Resilience…
2015.02.15
$217.87
2016.01.14
$429.73
2016.10.12
$635.43
2016.12.08
$771.23
2017.02.24
$1,184.47

More Bitcoin Network Resilience…
2017.06.06
$2,741.29
2017.07.12
$2,410.55
2017.08.17
$4,179.97
2017.09.11
$4,450.15
2017.09.12
$4,367.12

More Bitcoin Network Resilience!
Bitcoin Price = $4,200

Principle #3 – How Does Bitcoin Work?
1. The Blockchain (the database)
2. Bitcoin Network Nodes:
1. Transaction Propagation
2. Propagation + Blockchain Construction
3. Blockchain Security Servers (Bitcoin Miners)
-They get the votes to control network
4. Bitcoin Wallets: many kinds…
1. Hardware
2. Software (local PC)
3. Online/Mobile Service
4. Paper
5. Virtual Unit of Money, a “Bitcoin”
6. Bitcoin Exchanges
Six
Primary
Elements >>

Principle #3 – Benefit of Peer-to-Peer Network

Principle #4 – What Transactions Can Bitcoin
Improve?
Note: there are thousands of use-case archetypes across these Categories.
Consumer
to
Business
Consumer
to
Consumer
Business
to
Business
"Financial
Transcations"

Principle #4 – Transaction Volume
Note: Legacy network is hitting limit of 3 tps.
Bitcoin Cash upgrade increased throughput by 8x

Principle #5 – What fundamentals drives value of Bitcoin?
1. Metcalfe’s Law
2. Transaction Volume / Means of Exchange Use
3. Bitcoin Customer Base Growth
4. Increasing faith in the “moneyness” of Bitcoin
5. P/E Ratio vs. Metcalfe’s Law vs. Price Elasticity

Principle #5 – Robert Metcalfe’s Law (Network Effect)

Principle #5 – Metcalfe’s Law

Principle #5 – Customer Base Growth
Note: 1+ BTC Wallets now 660k, from 619k on 09/12/2017 (25k monthly
growth, vs. 10k historically)

Principle #6 – Will Price Trend Continue?
1. Metcalfe’s Law
2. Bitcoin Customer Base Growth
3. Institutional Money Flow
4. Price Elasticity of Supply
5. Bitcoin Dilution Trend
6. 99.9% Of Capital Is Sitting On Sidelines
7. TAM Of Over 3Billion internet-connected
adults, but just 600k people own 1+ Bitcoins.

Principle #6 – Institutional Money Flow

Bitcoin Futures Markets - US Launch

Economic Theory: Price Elasticity of Supply
Basic Concept:
As price increases
Additional Supply
enters market

Price Elasticity Of Supply - Bitcoin
New Minted Coins
(54k per month)
+
Coins Sold
by Holders
BTC
Supply
=
As price increases, supply
declines, leading to
acceleration.
Bottom
Line:

$8 Billion max on Exchanges
99.9% Of Capital Is On The Sidelines
http://money.visualcapitalist.com/worlds-money-markets-one-visualization-2017/
$70 Trillion – 8,750x
$80.9 Trillion – 10,100x
Bitcoin

Principle #7 - Risks To Success
1. Regulatory Crackdown
2. Renewed attempts at regulatory circumvention (illegal
activities)
1. It’s terrible publicity to our target Users
2. It intensifies regulatory scrutiny and crackdown risk
3. Developer infighting / transaction bottlenecks
4. Dramatic BTC price drop

Regulatory Crackdown, 1 of 3

Principle #8 – Scaling Debate and Bitcoin Cash?
1. Bitcoin Legacy network limit = 3 transactions per second
due to block size.
2. Blockstream has hired many of the “core developers” and
instructed them to prevent blocksize increase to establish
demand for their proprietary product, the Lighting Network.
3. Bitcoin believers launched an upgrade called Bitcoin Cash
on 8/1/2017, allowing 8x transaction volume.
4. Bitcoin Cash, now valued at $600, is more heavily traded in
Korea and other markets, due to belief in the “flippening”
(that it will overtake Bitcoin Legacy price).

Principle #8 – Scaling Debate and Bitcoin Cash?

Principle #8 – Where To Learn More?
Good Resources:
- CoinMarketCap.com
- Twitter: @dan_pantera,
@barrysilbert, @JihanWu,
@ViaBTC, @cnLedger,
@BitcoinCashFans, @jgarzik,
@el33th4xor
- Blockchain.info Charts
- SmartBit.com.au Charts
- CoinDesk.com
- Bitcoin.com News
- Reddit.com/r/BTC/
- BTC.com Stats and Mining Calc.
Dangerous Due To Extreme
Censorship:
- Reddit.com/r/Bitcoin/
(See Reddit.com/r/noncensored_bitcoin/)
- BitcoinTalk.org
- Bitcoin.org

What Investments Are Popular, And Where Are We Focused?
1. [RWCV] Simple Bitcoin Purchase/Ownership
2. [RWCV] Bitcoin Mining (bare metal, or cloud)
3. [RWCV] Bitcoin Datacenter Construction, Operation
4. [RWCV] Datacenter Sale via Private and Public Markets
5. [RWCV] Federated Customer Acquisition Campaign
6. Grayscale Bitcoin Investment Trust
7. CME and CBOE Derivatives Markets
8. [RWCV] ICOs (Initial Coin Offerings)

Blockchain Security (Self-Mining)
Unit Economics, Example:
- Bitmain S9 Server:
- Hashrate: 14 Terrahashes/sec
- Power Consumption: 1,500 Watts
- Unit Cost Cost: $1,350
- Revenue, mo: 0.09867 BTC ($480 on
10/09/17)
- OpEx, mo: Under $50
BTC Mining Pool
Market Share

Bitcoin Mining Distribution
60%15%
15%
• 75% of the Bitcoin network processing power is in China, Russia,
and Eastern Europe…
Sources: blockchain.info, CoinDesk, RWCV estimates
10%

20 MW Datacenter Overview cont…

Federated Customer Acquisition – Our Goal
Reach 1.2 million people who own 1+ BTC within 24
months.
(double today’s total)
Using a traditional online affiliate marketing program.

Campaign Details, 1 of 4
1. Tokyo
2. California
3. Florida
4. New York
5. Seoul
6. Delhi
7. Texas
8. UK
Where:
Who:
1. Investor ($40k+)
2. Online Brokerage
3. Specific Locations
4. Age < 50
Note – the target is ~2.5k customers per region per month

What’s the Outreach Strategy?
1. Affiliate Marketing Campaign in each target market.
2. Affiliate Success = New Customer purchases 1+ BTC on a
participating local exchange.
3. We pay affiliate $50 per new customer.
4. Recruit 500 Affiliates in each market (in partnership with
Exchanges).
5. Affiliates will inspire their respective follower-bases to become
customers (offline activity, online events, etc.)
6. New Customers = 600,000 (avg. 60 per affiliate)

What’s the Budget? Schedule?
1. Affiliate Commission = $50 per new Customer (paid in BTC)
2. Budget = $500k per month
3. New Customers Per Day Per Market = 80
4. % of New Bitcoin Supply Absorbed = Over 20%
5. Campaign Duration = 24 months
This brings us to the Virtuous Cycle…

Consortium Funding Status:
• Funding members include several of the largest
companies in the Bitcoin ecosystem.
Monthly Commitments:
$0 $500k per
Month
Image courtesy of https://cointelegraph.com/images/
$300k per
Month

$0.5M
$12M
$38M
$271M
$50M
$100M
$150M
$200M
$250M
$300M
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
ACQUISITION CAMPAIGN RETURN PROFILE
Total Expense Total Investment Value
TVPI %: 813%
Initial Capital ROI %: 731%
Expenditure ROI %: 1982%

$33M $33M
$79M
$233M
$874M
$200M
$400M
$600M
$800M
$1000M
0.5% 2% 5% 10%
MOM Growth
Investment Return: Four Scenarios
Starting Investment Value Investment Value in 24 Months
TVPI: 2x
Expenditure
ROI = 7,000%
TVPI:
9x
TVPI:
28.2x

Conclusion
1. Bitcoin is wildly attractive to 300+ Million people.
2. Yet, only 600,000 people own one
3. Bitcoin is a profoundly novel invention deserving much attention
and respect.
4. Bitcoin is almost inconceivably scarce.
5. Evidence seems to exist supporting strong long-term growth of
Bitcoin and many crypto-assets.
6. Always start new investments slowly, and develop expertise.
7. Bitcoin, crypto-assets, and ICOs are risky and volatile.

Money Transportability & Scarcity…

Appendix & Old Slides

3600 BTC
1800 BTC
BTC/Day
July 2016
The “Halving”
Current Situation – Interesting Trend, Cont.

Principle #5 – What Transactions Can Bitcoin Improve?
For now…
– forget about scalability
concerns
– focus on Go-To-Market
– focus on financial services
What are the use cases?
1. Non-correlated asset class
for storing value
2. Digital money for retail
discounts
3. Global P2P Money
Transmission

How To Spread Messages?
STEPPS:
1. Social Currency
Koreatown bar’s nightly code word
2. Trigger Moments
Budweiser “wazzap?” campaign
3. Emotional Stimulation Level
Emotion’s polarity is secondary
4. Public Displays
Apple’s white headphones
5. Practical Value
How-to Youtube videos
6. Stories
Fundamental to humanity

We May Achieve Viral Growth
We need to think like so-called “Growth Hackers”
We need K > 1.0

Measure & Optimize GTM Success
1. Create a Closed Feedback Loop
Build >> Measure >> Learn
2. Achieve Validated Learning to
test campaign assumptions
3. Avoid Headline Metrics

Measuring Our GTM Success
Key Monthly Metrics:
1. Affiliate referral volume
2. Growth of 1+ BTC wallets
3. New Customer Acquisition Cost (Campaign Expenditures / New
Customers)
4. BTC price change
5. Transactions per day growth (excluding popular addresses)

Notable Moments in Bitcoin
1983-1998: David Chaum, Cryptographic “blinding formula”, DigiCash
1999-2005: Flooz, Beenz, e-Gold, regulatory crack-down and dot-com bust
1999: X.com becomes PayPal and abandons virtual currency aspirations .
2006: Anshe Chung becomes first millionaire from virtual property on Second Life.
2009: Mysterious figure “Satoshi Nakamoto” launches Bitcoin network, first transaction to Hal Finney.
2010: May 22 – Bitcoin Pizza Day, 10k paid for 2 Pizzas in Florida
2013: December - 5th Bitcoin price peak ($0.08, $1, $32, $266, $1,100)
2013: October – FBI seizes Silk Road
2014: February - Mt. Gox goes out of business
2015: Wall Street embraces Bitcoin/Blockchain

Breaking Down Bitcoin - Sean Walsh - Los Angeles

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