"The most difficult problem of any cryptocurrency is the empty room problem" - interview w
- First of all, thank you for agreeing on this interview.
- My pleasure.
- Can you tell us in short how the affiliate programs you talked about work and how small and medium size miners can contribute to this affiliate programs?
- I think the best way to start is just by looking at amazon.com which is the biggest online retailer in the world, and there are right now about 300 thousand other web-sites, one of the example would be the one I used in my talk. This web-site is about camping tents. Somebody has a website and it’s all about tents and they write articles about new tents that come out and they have a little advertisement for a tent that you can buy on amazon.com, so somebody, who is interested in tents reads your article, they click through advertisement to amazon, and if they buy, only if they buy, then amazon pays a commission to the web-site that wrote the article and so this is the fundamental transaction cycle for online affiliate marketing. It’s called CPA. Amazon launched theirs in 1996, so it’s very well established, almost every succesfull e-commerce business has an affiliate marketing. I’ve built and run many of them for the last 20 years since the .com bubble, and what I see is a great opportunity to launch an affiliate program for Bitcoin. Forget about each individual company, forget about hyperblock, and Bitmain. Just consider us working for the same company and the name of that company is Bitcoin. We need to contribute money into a pool of fund to pay these affiliate commissions so that people who have web-sites will want to tell about Bitcoin and why it’s so innovative. People need a financial incentive to do that and to promote our product, and based on my decades of experience with affiliate marketing, if you look at Bitcoin, and the size of the market, and the function of the way the exchanges work and the limited supply, you actually don’t need to spend very much on marketing at all. You spend that very small percentage of revenue. Just Bitcoin Core mining is earning over 4 billion dollars a year right now, and the model that we did has a spending six million dollars a year, so it’s one tenth of one percent of the total mining revenue for just Bitcoin Core.
- This brings us to the next question: what do you think constrains mass adoption mostly? When we’re talking about this affiliate programs, let’s say a basic contributor reads the article and follows the link, and tries to buy Bitcoin, but there are lots of restrictions he has to go through some verification processes, he has to wait for five days for account verification, and so on. How do you think this constrains adoption and how do you think we can bypass those challenges?
- I don’t think we should bypass those challenges. The regulatory requirements of ‘know-your-costumer’ and ‘anti-money-laundering’ are strict requirements. We have to obey those regulations. If you want to elicit a desired behavior from your target costumer, you have to elicit the right emotion, and the way you elicit the right emotion is by telling a story at a level that’s low enough that it resonates with a certain part of their brain, that isn’t really thinking very deeply. It has to be kind of like the security of their financial resources, their safety, kind of like self-preservation, not anything philosophical, not anything to do with the Governments. We tell the story at a lower level, and people will have emotional incentive to go through a little more tedious process, but ultimately the conversion rate, which is one of the key metrics that you look at is how many visitors do you send and how many of them actually turn into customers. It’s going to be lower, because it’s paid, and that’s the kind of reality we have to deal with, but it doesn’t matter, because we’re only producing our product. Let’s imagine we have an automated production line, and we have 3 billion people that could buy our product – that’s every internet connected adult in the world, maybe the number’s smaller because a lot of them don’t have enough money to buy Bitcoin, so let’s say it’s eight hundred million people. Only 8 hundred thousand of them have bought even one of our products so far, and we’re only producing an extra 50 thousand of them each month. The supply is tiny relative to our total addressable market and in addition to that, there’s some people that buy the product by the thousands, so the real supply that’s available to this broad mainstream audience is tiny. Maybe it’s ten thousand coins a month, and so we don’t have to get many new customers to start this powerful virtuous cycle of value appreciation of the whole network.
- You were talking about telling the costumers something that is really close to them. Bitcoin was kicked off by economic and social protest in the first place, but to me it looks more stable now then it was during the crisis because the traditional markets have been going up for some time now and having great gains. How do you think that this correlates with mass adoption?
- I don’t think that the political statement has any place in the sales pitch for Bitcoin. I think that’s history at this point. This political stuff is too high, it doesn’t get them to do anything. What gets them to do something is if you talk about how it protects their financial security, and if you can incorporate an opportunity for growth. This is a way to protect your money and actually even get a more valuable investment. That’s something that motivates people. They like to diversify their investment portfolio into new things that creates great opportunities for them. That’s exactly what Bitcoin offers.
- And how do you think other Blockchain projects, the ICOs of the past and present and the future can solicit the mass adoption of cryptocurrencies, Blockchain technology, and of course Bitcoin ?
- That’s a difficult problem. The most difficult problem of any cryptocurrency is the empty room problem. There’s this idea of an empty room problem when you’re launching a new marketplace or new network, where you have to bring buyers and sellers. Or when you own a night club. You want to start a night club and you have an empty room, a great DJ, but you have to have about the same number of guys show up at about the same time as the same number of girls show up or your night club is always going to be empty, and it’s going to fail. That’s the most difficult problem, everything else is truly on comparison. And the ICOs are investing in creating a good technology, but that’s only the half of the puzzle, and in fact, with all respect to the incredible technology, that’s easier relative to actually getting a marketplace and critical mass adoption. It’s like getting the engine started.
- And what would be the best way to solve the empty room problem?
- Well if you look at some examples, Facebook did a great job in solving that problem because it started with a very small target market, they started in one dormitory that had a few hundred people. They figured out a product that would make those few hundred happy, and then they reached out to all the dormitories in Harvard. And it took a couple of years before a non-college guy could even join Facebook and a lot have forgotten about that, because now Facebook is two billion people or something. But bitcoin started with everybody at once so can you imagine this density that Bitcoin uses? It’s so thin. And that makes it so much more remarkable.
- Most new projects concentrate on developing killer apps and a friendly user-interface, what do you think is
the best killer app?
- I’ve done this speech for many times over the last two years and I used to title the speech “Bitcoin’s a killer app,” because it’s true. To me, Bitcoin’s telling the story of what it really has in the right way. People don’t realize how much power Bitcoin really has. If there wouldn’t been such a bottle neck with constraints and the capacity on the Bitcoin Core network in the last year, the network would’ve exploded, but what happened was transaction fee spiked up, delays perpetuated the whole network and new users were instantly turned off, because they didn’t experience the promise the network made, but imagine if Bitcoin Cash were further in line with the adoption curve, who knows where the prices would be.
- How do you think market granularity can accelerate scalability problems and resolve them?
- I think scalability is not a big problem anymore. The block size was the key bottle neck last year, but now if you look at Bitcoin Cash with a 32 megabyte block, it’s no longer the bottle neck. The bottle neck right now is the single threaded process for adding transactions to the manual, and they’re working on making it multi-threaded, but if you look at total Bitcoin transactions volume, Bitcoin Core plus Bitcoin Cash, it’s 200 thousand transactions per day, and the total capacity is almost 14 million transactions per day, with most of it obviously being on the Bitcoin Cash side. We don’t have to worry about the problems that occurred last November-December, because if our marketing takes off, we’ll be able to grow the Network much larger than we were able to last year.
- What’s your thought about the price volatility? How can it restrict, constraint, or solicit mass adoption? Because in last year many people were coming to the network just because of the opportunity of financial profits.
- It’s the volatility extenuates the emotions on both extremes. When the price is going up very rapidly, people get very greedy and very excited more so than they should, and on the down-side, people get more discouraged than they should be. I have a table that shows that despite all the volatility, if you look at the past seven years, the compound annual growth rate of Bitcoin is over 220%, which is absolutely the best investment that you could’ve ever made. And as the means of exchange use, as the transaction volume grows, the velocity of money on the Bitcoin network will also grow, which will require people to hold more Bitcoin on an average basis which is going to naturally decrease the volatility.
- But this is a very good opportunity for experienced investors while the basic contributors don’t even have enough education to make smart investments, so they think that this is some kind of a scam, what about this issue?
- Even in the United States, which is arguably the wealthiest country in the world, people are hurt. They’re disappointed by losses, and I wish people had more moderate story while buying Bitcoin so that they wouldn’t have lost so much money so fast.
- Before we finish up, we want to ask you about Redwood City Ventures, what is the usual investment, what is the portfolio, maybe several great projects you have, and what is the due diligence criteria.
- Redwood City Ventures has been primarily focused on mining, and that’s where Hyperblock came from, the company I took public this year in Canada. But as I’m also very interested in projects that have to do with adoption, whether it’s marketing, whether it’s new use cases, and what have you, because I think it’s the biggest opportunity for the ecosystem to just invest some time and resources into telling the story in the right way and to growing our customer base which is already great. 800 thousand people that own at least one Bitcoin, 2 million that own at least one tenth of a Bitcoin, that’s great, but it can be much larger, because it’s such an interesting product. As for due diligence criteria, I’ve been investing in small and large businesses for a long time, and I like to see a pretty short runway to some revenue, I don’t have enough balance sheet investment capital to put money into projects that are three years away from revenue, I just can’t afford it.
- What’s the ceiling of liquidity time when you can get the cash you invested?
- For me it has to be some sort of cash flow within eighteen months, unfortunately I’m unable to be much more patient than that right now.
- What do you thing about the regulatory environment?
- I think, that setting China aside, which hasn’t been very supportive to new technologies, the regulatory environment is very supportive. Recently people have focused on the ETFs that were rejected and then reopened for discussion, but I don’t think that that represents the regulatory stand towards Bitcoin, that’s not a Bitcoin transaction, that’s not the usage of Bitcoin, that’s not even actual trading of Bitcoin, because it’s a derivative that has a questionable impact on what we’re actually trying to accomplish in establishing the system. But fundamentally, United States, North America, Europe has been very supportive to nurture the ecosystem along.
- Thank you very much for an interesting interview.
- My pleasure, have a great day.