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Climate crisis business opportunities

A couple of weeks ago during a business dinner with a banker the topic of climate change came up. Over bottles of red wine we discussed ways of reducing CO2 and methane emissions and realized that it will be virtually impossible to get this done on time. We have about 11 years left until the CO2 level hits 450 ppm, by which time the arctic will melt and huge amounts of methane will be released into the air, causing an unstoppable cycle of increasing temperatures, crop failures and sea level increase.

The problem is that right now the only way not to reach 450 ppm is by severely limiting our CO2 emissions. The longer we wait the more we will need to reduce the emissions. For a while I thought that governments may be able to force us to change our lifestyles, but during the dinner I suddenly realized it will likely be too late for that. People may be able to cut their CO2 emissions by 20-30% (if we are lucky), but we won’t be able to get down by 80% or more, which would be needed. There are simply no substitutes for our lifestyles yet and governments will get voted out if they try to push for more. I am an optimist (otherwise I can’t be an entrepreneur), but I am also a realist.

I don’t believe it’s realistic to force people to give up meat, even though it would be best for the planet. Cows emit large amounts of methane (through burps), so reducing the number of cows on earth would help to stabilize the climate (methane is 30-40 times more dangerous as a greenhouse gas than CO2). Also people won’t stop flying completely within a few years, it’s too much part of (business) culture. It may happen eventually, but not in 11 years and not before there are decent substitutes.

Therefore it’s most important is that we develop alternatives for our lifestyles. We need electric planes and electric boats, but commercially viable solutions won’t be here by 2030. Maybe the hyperloop can be a solution, but whether we will have tunnels below the ocean bottom within the next decade remains to be seen. For sure we will start to travel less when we realize the climate crisis is getting out of hand, but we need better incentives to do so.

For meat, companies like Beyond Meat and Impossible Foods produce decent meat replacements. I regularly grill Beyond Meat burgers and I am surprised how good they are (my son hates them though and I can’t trick him to believe that it’s real meat). But the food additives in Beyond Meat burgers (such canola oil, sodium, and methyl cellulose) may be worse for humans than not eating meat, so I have some doubts about the long term viability of this. That’s why I am looking at companies that create lab-grown meat, but I am also looking at alternatives that will reduce the amount of methane that cows emit (e.g. adding sea weed to cow feed).

But most likely the holy grail will be companies that take greenhouse gasses out of the air. The technology is there, although it has not been done at scale yet. It will be extremely expensive (think in the trillions of dollars), but it’s feasible. The ‘good’ thing is that we can keep on living similar lifestyles to our current ones, until viable alternatives have been developed. In a way this will reward oil companies (they will get a life extension), but I hope we can force them to scale down significantly with taxes: offsetting their carbon emissions with carbon credits. This could lead to a huge cycle of innovation, when companies that develop these carbon reduction innovations can create carbon credits and sell them to oil companies and other bad actors.

I see major business opportunities in this space and I spend a lot of time talking to people, meeting companies and doing research to develop a thesis on what will happen over the next 5 years.

More soon…

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Climate crisis activities

Over the past couple of months I started to look at Climate Crisis projects, next to my work at First Block Capital and crypto-related investments. While sailing last week I was reading the weekly (Dutch) Future Affairs newsletter by journalist Wouter van Noort, in which he mentioned that he was reading The Uninhabitable Earth by David Wallace-Wells.

That was the book that really opened my eyes to what is happening in the world and especially about the fact that time is running out. So I decided to drop Wouter a line about the book and how it changed the focus of my investments (Wouter has interviewed me in the past). I did not intend him to talk about my activities in his latest newsletter, but he did and I really appreciate it. I want to spread the word about the climate crisis and I hope it will inspire people to become active in the space as well.

Because the newsletter is in Dutch, below a rough translation of the paragraph in which he talks about my activities:

This tech millionaire jumps on the climate change bandwagon

Sometimes reactions from readers are worth a separate item. Marc van der Chijs, who made his money as co-founder of the Chinese videosite Youku Tudou and became even richer with cryptocurrencies, is now focusing on technologies to stop climate change. He emailed me that after reading the (also for me relatively shocking book) Uninhabitable Earth, he decided he had to do something.

He sees a lot of potential in Carbon Engineering to take CO2 out of the air. He is also looking to set up a company that will do large scale farming of a specific kind of seaweed that, when mixed with cow feed, will sharply reduce the methane emissions of cows. When I read about this it looks like both technologies are very early stage and it is very much the question whether these innovations will be able to turn the tide. In Nature researchers called technologies to remove CO2 from the air ‘magical thinking’. But maybe we need some magical thinking especially now, and I think it is excellent that people like Marc use their money and brain power to fight climate change.

Thanks for the shout-out Wouter. If anybody has interesting projects I should look at, feel free to share: marcvanderchijs (at) gmail (dot) com . I don’t do a lot of investments yet, but that may change sooner rather than later. And if you want to sign up for the newsletter you can do so here.

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Quantum computing and the risks for Bitcoin

This week I was interviewed on the Cryptocast podcast (sorry, it’s in Dutch) and one of the questions during the one hour program was about Quantum Computing and Bitcoin. I only gave a short answer there, but think it’s an important topic so I decided to go a bit deeper in a blog post.

I have been following Quantum Computing (QC) for years because it’s a fascinating technology with huge implications for cryptography. Even though I I only have a basic understanding of how QC works, I at least try to understand what it could be used for. About 5 years ago I for example looked at using quantum computing for Bitcoin mining, but after discussions with scientists from UBC, QC not only seemed too far off, it also turned out that the machines could not be optimized for mining (meaning there would not be a huge advantage for using QC compared to ‘regular’ chips).

Simple quantum computers have been around for years, but ‘real’ RC was always expected to be here around 2025 at the earliest. Real QC meaning computers with enough qubits to do meaningful computations. It’s hard to explain it here (and like I said, I am no expert at all!), but qubits are similar to bits in a normal computer, but instead of being either 1 or 0, they can be in a 1 or 0 quantum state, basically 2 vectors in a 2D space perpendicular to each other (“a coherent superposition of both” is the term used in QC). When measured the result is either 0 or 1, however, just by measuring it the state gets destroyed and the result can change. There is a ton of information on the Internet if you want to better understand how this works, I won’t even try to do that here.

Interestingly, QC is suddenly developing much faster than anybody had expected. Google has shown some out-of-this-world results: Its quantum processor doesn’t just show exponential change (like in Moore’s Law), but double exponential change! What does that mean? Well, suppose you have 5 iterations of improvements, then in classical computers the computer would be 5 times as fast, with exponential change it would be 2^5=32 times as fast, and in the double exponential change it would be 2^2^5=4.2 million times as fast. That is hard to comprehend for human beings.

To quote from the article: “In December 2018 they were able to reproduce the quantum processor’s computation using a regular laptop. Then in January, they ran the same test on an improved version of the quantum chip. This time they had to use a powerful desktop computer to simulate the result. By February, there were no longer any classical computers in the building that could simulate their quantum counterparts. The researchers had to request time on Google’s enormous server network to do that. Somewhere in February they had to make calls to say, ‘Hey, we need more quota.’ They were running jobs comprised of a million processors.”

If this is true the world will see some radical changes in computing power over the next couple of months already. Real quantum computers will be here this year instead of somewhere in the next decade. It’s quite amazing how fast this is going.

Now keep in mind hat QC is fairly limited in what it can do. What it can do, however, is integer factorization, which determines the security of public key cryptographic systems. Ordinary computers can’t do this for large numbers, say products of 2 multi-hundred digit prime numbers. A quantum computer could efficiently solve this problem using Shor’s algorithm to find its factors. This ability would allow a quantum computer to break many of the cryptographic systems in use today, including potentially Bitcoin wallets.

So when I read the article I immediately thought about the implications for Bitcoin. I had done research on that years ago, but at that point I wasn’t that worried about it, simply because QC seemed at least a decade away. Now that that timeline had moved forward significantly it was time to look at it again.

It turns out that Bitcoin in its current state is not QC proof. However, that does not mean that your coins are at risk right away. What it means is that if you follow the recommended practice of only using your Bitcoin addresses one time, you should be fine. In that case your public key is only ever revealed at the one time that you spend bitcoins sent to each address. A quantum computer would need to be able to break your key in the short time between when your transaction is first sent and when it gets into a block (normally less than 10 minutes, depending on the mining fee you are willing to pay).

However, older addresses are still at risk. For example, Satoshi’s coins are all stored on (old) P2PK addresses instead of (new) P2PKH addresses, meaning that they are immediately vulnerable to a quantum computer attack. So you will have proof that real QC exists once Satoshi’s coins start moving!

The good thing is that a new public-key algorithm can be added to Bitcoin as a softfork. For a Bitcoin user this would mean the creation of a new address type, and everyone would need to send their bitcoins to this new address to achieve quantum security.

Am I worried about QC and Bitcoin? Not really. Even though QC seems to be just around the corner, there are solutions to make Bitcoin QC proof, and as long as you do not use addresses more than once you should be safe. Moreover, there are much better targets than the Bitcoin network for anybody controlling a QC network, Bitcoin will certainly not be on top of the list. Once a government has a functioning network it would want nobody to know that they have it, so using it to hack Bitcoin would probably be the last thing they would want to do. So nothing to worry about for now, but it’s certainly something we should pay close attention to.

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The world of UFOs

In the early 1990s my parents were living in a house on a small hill in the woods in The Netherlands. One night I was visiting them with my girlfriend when we saw some strange lights in the sky. My girlfriend and I decided to check it out and we walked to a moor a few hundred meters from the house where the views were unobstructed by trees. What I saw that night I have never forgotten: there were different coloured objects erratically hovering in the sky. They seemed to move up and down in a random way. I had no idea what I was seeing, but because there was a military base close by I assumed it was some kind of military exercise. However, after a few minutes the lights suddenly flew away at an incredibly high speed. To me it seemed impossible that an airplane could all of a sudden fly this fast after hovering for quite some time.

I found it interesting but did not think about it until the next morning when the paper arrived and I saw an article on the front page about UFO sightings around Amsterdam. Amsterdam was about 100 km from my parents’ house at the time, but this could not be a coincidence. I still thought it was most likely related to the military. So I discounted the news report, but kept an open mind about it.

Fast forward 25 years. I am living in Vancouver and have a hot tub on my roof top terrace where I regularly relax late at night before going to bed. The house overlooks the sea and several islands in the distance. At night it’s quite dark (there is not much light pollution here) so you have an incredible view with thousands of stars above you. While sitting in the hot tub I regularly observe hovering lights above Bowen Island and Keats Island. At first I thought they might be drones, but they appeared almost every night and they moved erratically. They also changed colours sometimes, very similar actually to the lights that I had seen in The Netherlands years ago.

Once again I sort of dismissed it, but then I started paying more attention to it in other locations. I realized I could also see them while sailing and I occasionally even saw them from the marina in Vancouver late at night. Over the years I have seen them in Napa Valley and even on China’s Hainan island earlier this year. I showed them to other people but many thought they must be drones, satellites or distant airplanes. Sometimes they moved away very fast, however, and I was not so sure if any of these things could do that. I was mainly surprised that most people had never seen them. It seems most humans don’t pay a lot of attention to what’s in the skies above us or they just assume it’s something regular.

I started doing some research and found many videos online of similar objects in the sky. Many were shot around Vancouver and interestingly one article even mentioned Keats Island as a ‘nest of UFOs’ (not sure how serious that source is though). People call them UFOs, which to me means a flying object that I can’t explain. I did not necessarily think they would be alien objects, but assumed they would be military equipment using advanced technologies. I guess I am quite rational and have a problem with most conspiracy theories, simply because I want to see proof and do not want to rely on all kinds of (often absurd) assumptions. Like I said, I always keep an open mind and believe that one day it would become clear what these objects are. Maybe that day has come already.

A few weeks ago Netflix added a documentary called Bob Lazar, Area 51 & Flying Saucers. I saw some positive comments about it on social media, but when I watched the trailer I was not too impressed. I decided to put in on my watch list for the future. Then last week I was going through my podcast feed and saw that Joe Rogan had just interviewed Bob Lazar on his podcast. I respect Joe a lot, he is a great personality and a very good interviewer (check out his podcasts with Elon Musk and with Naval Ravikant as well!). So I decided to start listening to the podcast while doing chores around the house. Within minutes I was hooked and almost decided to binge-listen the whole 2.5 hour interview. But because the interview was based on the Netflix documentary I decided to stop listening after 30 minutes and watch that program first.

The documentary is interesting, it tells the story of Bob Lazar who in 1989 works for the US Navy at S4 (an area south of the well known Area 51 in Nevada). There he works on reverse engineering propulsion systems from UFOs until he gets fired for filming flying UFOs at night close to the base and discussing them with others. He is worried and decides to talk to the press as an insurance policy. I had heard this story before and didn’t really believe it, but this documentary started to change my mind a bit.

Seeing Bob speak about it 30 years later and explaining the physics behind the spacecraft makes a lot of sense to me. Not only did he never change his story in 30 years, a lot of things that he talked about in 1989 turned out to be correct (especially Element 115 that was used in the anti-matter reactor and that was only discovered in 2003 or gravitational waves that were only reported in 2016). It’s hard to believe that someone could make up these things and that they suddenly turn out to be true decades later. I won’t go into too much detail, if you are interested in this topic you should watch this documentary and decide for yourself.

After watching the program I went back to the podcast and listened to it. The podcast changed my views on Bob Lazar. He is either a super smart liar who was lucky with some of his predictions or he is for real. I have seen a lot of bullshitters in my (business) life and he does not seem like one. I think I believe him, especially after it turns out that people (the US government?) has been trying to erase his past. Not only did Los Alamos deny that he ever worked there (interestingly the documentary maker found evidence in a personnel directory that Bob indeed worked there), but also Caltech and MIT could not find proof that he studied there anymore, and even his birth certificate disappeared. It could all be a coincidence of course, but at a certain point the odds are that more is going on.

If you believe Bob it suddenly becomes clear what these hovering objects in the sky are. They are most likely not alien spacecraft, but reverse engineered flying objects using technologies that have not been publicized yet. What these UFOs use is a propulsion system based on anti-gravity. Basically a bubble is formed around the spacecraft that lets it move through space using gravity (compare it to 2 magnets that push the other away when you get too close). This could explain the hovering and the very fast movements (gravity could change space time as well, meaning that what you see could happen at a different time) of the objects. Crazy? Maybe. But I believe it could very well be true. I have seen too many of these UFOs to know that there are things out there that we can’t explain based on our current understanding of physics.

The biggest problem I have is the fact that Bob Lazar is the only person who has come forward with this story. That is just very difficult to understand and it is one of the main reasons why I don’t believe most conspiracy theories. For example, if you believe 9/11 is a set up, do you really believe that nobody would ever come forward with the real story? At least a few people must regret what they did and want to come clean, even if only on their death bed. The same with Bob Lazar’s story, there were a lot more people that interacted with the UFOs and that worked on the technology. I understand the secrecy and the fact that you only got very compartmentalized information, meaning you often did not know enough to put one and one together. But more people would know about the 9 UFOs in section S4 and nothing was ever published. Are people worried they would not be taken serious? That’s the main thing I could imagine that would stop people from speaking out. I know from personal experience that many people already find it strange if you mention regularly seeing UFOs, let alone when you should mention that you worked on them. Maybe fear of retribution plays a role as well, but on your death bed that should not be an issue.

If it is true I hope the government(s) that managed to reverse engineer this technology will use it for the good of mankind. Stable anti-matter reactors basically make fossil fuels redundant, meaning that we can go to a zero emissions world in a short period of time. I realize that that is not in the interest of the extremely powerful oil and gas industry, so that may be a reason why we have not heard much of it yet. Or maybe there are other downsides that we don’t understand yet (e.g. radiation and clean nuclear power). Actually, after some research I found that the US Secretary of Navy actually filed a patent for an anti-gravity aircraft in 2016, so who knows.

To me the topic is fascinating. I do believe we don’t know everything and maybe there is a good reason for that. But social media is powerful and if Bob Lazar’s story is indeed true more stories may eventually come out. In 1989 you needed TV programs and newspaper articles to spread the word, now anybody can publish anything and reach a huge audience in a matter of hours. For sure traditional media are more open to talk about it, for example the New York Times had an article about UFO sightings by fighter pilots a few weeks ago. And just last week Vanity Fair reported on US congress wanting to learn more about UFO sightings from the Pentagon. I am certainly looking at the UFOs in Vancouver’s night sky in a different light.

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Can we still avoid a climate crisis?

During the crypto winter from mid 2018 to early this year I spent a lot of time studying other fields that I am interested in. Among others I did some courses in Artificial Intelligence (AI), I looked at how Virtual Reality (VR) will change the world, and I started reading more about the causes and effects of global warming. Both AI and VR will make the world a much better place, even though it can lead to a lot of job losses and general AI could eventually be a threat to humanity (however, I think that general AI is still many decades away, if we ever get there). Global warming, however, will be devastating for mankind if we don’t act right now. I did not realize how close we are to the end of the world if nothing changes within (literally!) the next couple of years. We have only about 11 years left before it will be too late.

I have been thinking about climate change since Al Gore’s An Inconvenient Truth came out about 15 years ago. It did have quite an impact on me and it is one of the reasons why I did not buy a house at sea level in Vancouver. However, looking back my focus was way too much on just sea level rise. That is certainly a big effect of climate change, but there are much worse effects than that. Effects that could literally make humans extinct if we don’t act. Because of that urgency I stopped calling it climate change, but I tend to now mainly call it the Climate Crisis or the Climate Catastrophe.

My biggest worry is actually the general apathy that many people seem to have when it comes to the coming climate catastrophe. They do not ‘believe’ that the climate crisis is real or that it will affect them. Many of them are the same people that believe in conspiracy theories, but even some more intelligent people don’t seem to get what is happening to the world (including some of the smartest people in the Bitcoin community). Part of the reason seems to be social media, where people live in a bubble of like-minded people and only read what they want to read. Another is ‘fake news’ in some traditional media. This news wants to make people believe that temperatures may be rising, but that that is not due to human actions so we don’t need to do anything. Also people have lost trust in their governments and believe that climate change and environmental policies are just reasons to tax them more. For me the evidence is so clear that it’s hard to understand why some peoples still not see why the climate crisis is happening. It is simply impossible that the fast increase in temperatures over the past century is not due to human activity, temperatures have changed a lot in the past but never at this speed.

I do believe that because weather patterns are changing so fast more people will likely change their minds over the next years, but by then it might be too late. Luckily the younger generations seems to understand the risks, but they may not have enough power yet to change the world. The fact is that the world needs to come together to solve this problem. We have all the tools to solve the climate crisis, but there is no political will. And even if there is you get stories in the press about ‘other countries not doing anything, so we don’t need to do anything either’. I find it so short-sighted when I hear people reasoning like that, but it’s simply because people did not get the message or don’t see the urgency yet. That needs to change,

What will happen and when? First of all, we need to make sure that the level of carbon dioxide (CO2) stays below 450 ppm. We are currently at about 415 ppm, a year ago we were at 409 ppm. 450 ppm coincides roughly with a 2 degree Celsius temperature change in the world. That does not mean that all temperatures go up by 2 degrees, but the average temperature will go up 2 degrees. In the polar regions the temperature might go up 7 degrees or more and in other regions the effect might be less. You may think that 2 degrees does not make a lot of difference, but it actually does because this is an average. When temperatures on earth were 4 degrees lower than now Boston and New York were covered by one mile of ice! There will be more extreme variations in temperature which will make some parts of the world unliveable. If things don’t change we will hit 450 ppm by 2030, 11 years from the moment I am writing this article.

If we get over 450 ppm the climate crisis will be almost inevitable, simply because then not only the arctic will melt but also because of the thawing permafrost in northern Canada and Siberia. The problem with the permafrost is that a lot of methane is buried below it, it is a permasink of methane that suddenly becomes a permasource. So once we are above 450 ppm methane will get released into the air, which is a big problem. Methane is dozens of time more powerful as a greenhouse gas than CO2. It will exponentially increase the greenhouses gasses in the air we breathe, leading to an acceleration in the temperature increase, leading to more permafrost thawing etcetera. This so-called clathrate gun hypothesis could take place within our lifetime.

The immediate effect will be sea level change, the most talked about impact of the climate catastrophe. Once we hit 450 ppm and methane gets released we could get several meters of sea level increase. Not just cities like Miami (and most of Florida for that matter) will be under water within the next 20 years, but many of the most important cities in the world. That is a major loss financially of course, but it’s just a small effect of climate change. There are much bigger effects that people do not want to see.

One is that the weather will get a lot more severe. Warmer oceans lead to more and stronger hurricanes, meaning that large parts of the world may get hit yearly by storms that are much worse than the ones we currently see. I would not advise anyone to buy real estate in the Caribbean anymore. Certainly not at sea level, but probably also not higher up on the mountains. You may be in for some unpleasant surprises.

Warmer weather also leads to more forest fires. The fires in California last year were no coincidence and we will likely see them again this year. The same for the fires in British Columbia and Alberta. Vancouver had quite some smog during the summer last year caused by forest fires. That will be an annual occurrence very soon.

But it also means that sailing the seas could become more dangerous. I was listening to a podcast recently in which an ocean sailor was interviewed. He had been racing the world for the past 20 years and he said that the waves and storms in the Southern ocean seem to be getting more dangerous, to the point that it may be impossible to sail there in the future. It was the first time I heard that, but if an experience sailor says that I tend to listen.

Much, much worse however, is an effect of permafrost thawing that you don’t hear about much yet. That is there are many viruses hidden below the ice, viruses for diseases that have been extinct for centuries or millennia. We do not have protection against these diseases because our immune system has not encountered them yet. In 2016 thawing permafrost led to an anthrax outbreak in Siberia, when reindeer carcasses defrosted and the anthrax bacteria in them spread into the water. At least one person died and about twenty got sick. Luckily this was just a local outbreak, but it could be much worse. Scientists already found small pox bacteria and Spanish flu in buried reindeer and they found that some bacteria can survive for tens of thousands of years below the ice. Once these diseases start spreading humans have no protection against them and millions or even billions of people may die. To me that is the most dangerous effect of the climate crisis, simply because we can’t protect us against this.

There are other effects that are overlooked, for example the effects on the food supply. When temperatures go up 2 degrees the areas where grain is grown will not be as fertile anymore. The best place to grow grain would like shift up 500 or more kilometers. But of course there are no grain field there and it will take years to cultivate the land there. This could lead to a global grain shortage. But not just grain, this is true for most staples that we consume. Even fish might suddenly disappear: when the sea gets too acidic or simply too warm many fish species can’t survive and will go extinct. Large parts of the world’s oceans may become completely dead. Famines might become the new normal.

The world will become unliveable in most of what is now the tropics, simply because it will be too hot for humans to survive. Large parts of the world’s coast lines will disappear as well. These people can’t stay there, so there will be a huge migration. Not millions but likely at least a billion people will need to relocate. The current immigration issues in Europe or North America are for the most part caused by the climate crisis already, but many people don’t realize this. It will only get worse, much worse.

There will many more direct and indirect effects, but these are the ones that worry me most. They worry me because we have no time left to change the way we live in order to avoid a catastrophe. Every year that we wait the costs to reverse the climate catastrophe rises exponentially. We have to make radical decisions such as immediately changing to electric cars only and almost completely stopping air travel. We should change to renewable energy as soon as possible (also for Bitcoin mining!) and get rid of the oil and gas industry. Right now that may be hard to imagine, but if we don’t do it the effects will be even harder to imagine. It will be extremely painful, with many people losing their jobs and their financial security. It means we have to change our fossil fuel culture, something nobody wants to do but something we all have to do.

The world has to come together to solve this. I believe we will start reading a lot more about the reality of this crisis soon. I also believe most people will eventually be convinced that they have to act. But by then it might be too late. Change has to happen now. It is much more expensive not to act on climate than to take even the most aggressive action today! We have to do it, we have no choice.

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Hut 8: the best alternative to buying Bitcoin?

Despite Bitcoin becoming more well known to the general public, most investors still don’t own any. A big reason for this is that they do not understand Bitcoin or that they find the asset class too risky or volatile. That’s not surprising, because Bitcoin is not something that you can understand by just reading a few online articles. You need to invest time to read books like “The Bitcoin Standard” or to do a Khan Academy course to really understand why Bitcoin is so important and why it will never go to zero. I have never felt more bullish about Bitcoin than right now, it is as if we are heading for a perfect storm that will benefit Bitcoin in ways most people can’t even imagine.

Next to not understanding Bitcoin, another reason why investors don’t hold Bitcoin is because it is hard to buy and keep safe. It is a new asset class that you can’t hold in your traditional brokerage account yet. And even if you manage to buy it, it is scary to keep it safe yourself. Sure, you can put Bitcoin on an exchange, but most exchanges are a lot less safe than banks. So you need to find other ways to do it, and for most people that is just too technical.

Exactly for that reason Sean and I started the FBC Bitcoin Investment Trust about 2 years ago (we recently sold this trust to 3iQ). It was a great product for investors to get access to Bitcoin without having to buy or hold it themselves. The only downside is that it is a product for accredited investors, so most investors are not eligible to buy units in the trust. Only once an ETF gets launched every investor can get access to this asset class without having to physically hold the coins.

Another product you could buy is the Grayscale Bitcoin Trust that is listed in the US. It is a great product and it’s easy to invest in it for everyone. However, the downside is that the units are traded at a price far above the Net Asset Value of the units. Currently the implied Bitcoin price for these units is about 30-40% above the real price of Bitcoin. That is fine as long as nothing changes in the market structure, but once an ETF gets approved this premium will likely evaporate very quickly.

There are several listed companies that give you access to the digital asset class, but most are either blockchain companies with no direct Bitcoin exposure or companies that focus on altcoins or a combination of Bitcoin and altcoins. If you want exposure to just Bitcoin there is not a lot of choice on the equity markets, and I believe that there is only one credible stock out there: Hut 8 Mining (stock ticker: TSX:HUT.V). Full disclosure, I co-founded Hut 8 Mining and am still a fairly large shareholder, so keep that in mind when you read this. However, I am not an insider anymore (which means I only know as much as the company publicly communicates) and I mainly write this because many investors are not aware of Hut 8 yet.

We started Hut 8 in late 2017 because we saw an opportunity to raise money in public markets for a Bitcoin-only mining play. This turned out to be correct, because we managed to raise quite a lot of money in a matter of weeks and listed the company in early March 2018 on the Venture board of the Toronto Stock Exchange. We were lucky of course that we did this at the end of the bull market of Bitcoin, when everybody wanted to get exposure to crypto assets. In comparison to some of its competitors, Hut 8 has performed quite well during the bear market, and now that a new bull market has started I believe it could outperform almost all other public equities.

Hut 8 provides investors with direct exposure to bitcoin without the complexity of buying bitcoin. Investors avoid the need to create an online wallet, wire money offshore and understand how to safely store their bitcoin. And, you can own Hut 8 in your securities portfolio along with other stocks.

Hut 8 mines Bitcoin and no other cryptocurrencies. It stays away from mining Bitcoin Cash, Bitcoin SV, or other Bitcoin forks. It has an exclusive contract with Bitfury to use their blockboxes (shipping containers filled with bitcoin mining chips) in North America, which gives the company access to the best equipment at the lowest prices.

Hut 8 is the largest Bitcoin mining operation in North America with over 95 MW dedicated. The company mines much more efficient than most other miners, and currently mines at a price of around US$3000-3500 per Bitcoin while prices are more than double that. Per day Hut 8 mines about 25-30 Bitcoin, so after all costs it nets about US$120,000 per day. Because Hut 8 keeps most of the coins it mines the value of Hut 8 goes up (and down) with the Bitcoin price. Therefore, if you are bullish and believe Bitcoin might go back to an all-time high again this year (around US$ 20,000), the value of the coins that Hut 8 now mines every day is not $120,000 but about $500,000 per day. Once Hut 8’s war chest becomes big enough it may actually consider to be the first cryptocurrency company that will pay a dividend to its shareholders.

If you look at Hut 8’s price chart, you will see that the correlation to Bitcoin is pretty high (about 90%). After we took Hut 8 public, Sean and I developed the theory that because there is not a lot of outstanding stock, Hut 8 might go down more than Bitcoin in a bear market, but also go up more than Bitcoin in a bull market. I guess we were proven correct, because Hut 8 went down to $0.80 at the end of the bull market (at the end of March when Bitcoin hovered in the low $5000s), but went up 300% since then while Bitcoin ‘only’ went up about 80%. My belief is that Hut 8 might keep outperforming Bitcoin over the next year, simply because there is not a lot of supply of stock.

This piece is not meant as investment advice, but mainly to help people better understand what alternatives there are to buying Bitcoin outright. I personally believe Hut 8 is the best alternative, but as I mentioned I helped start the company so I may appear to be biased. As always, do your homework before investing and never invest more than you could lose!

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What’s happening with Bitcoin?

I get questions about Bitcoin and crypto almost every day from investors in First Block Capital or from investors in one of our crypto products. The main question is always my view on price, why did Bitcoin go down so much and what will happen in the future? After writing many emails about it and having many conversation on this topic, I decided to put some of my thoughts here as well.

Markets always overshoot, both on the upside and on the downside. Looking back to what happened a year ago when Bitcoin hit all time highs almost every day around this time, it’s now clear that the Bitcoin price went up way too fast and that it overshot it’s “real” value. What was happening is that because price went up so much demand increased fast, but nobody wanted to sell. That led to an even bigger increase in price, which in turn led to even more demand. This whole carousel stopped when the price hit almost $20,000 and some people started taking profits, meaning the supply went up. This caused the price to go down and some of the latest investors started to panic (they had never seen Bitcoin going down) and started to sell. The market stabilized after a couple of months and for many months the price hovered between $6000 and $8000. News reports about Bitcoin being more stable than Twitter stock came out, but they were a bit too fast.

Over the past couple of weeks Bitcoin saw another huge reduction in price. This happened all of a sudden and not many people had expected this (I for sure had not seen this coming). The main reason seems to have been the hard fork in Bitcoin Cash. I have never been a fan of Bitcoin Cash (BCH), mainly because of the scammers and criminals behind it and because of how they have been trying to destroy Bitcoin itself. The group behind BCH got into a disagreement about what the future of the coin should look like and that led to a split (a hard fork that split BCH into 2 different coins). Normally a hard fork pretty quickly has a winner and a loser, but because both parties behind the coins had tons of money they both invested crazy amounts o money in mining these coins to make their coin the winner. I think that what happened is that in order to finance this race, they had to sell their Bitcoin. This led to an increase in supply while demand was very stable, with a huge drop in prices as a result. That caused a panic among people that still held their Bitcoin and believed it would never go below $6000 (“Bitcoin might go to zero!”) so a whole wave of new selling occurred, causing Bitcoin to drop even further.

What we are seeing now is another example of the market overshooting its target, but now on the downside. My gut feeling tells me that Bitcoin would be fairly priced in the $12,000-$15,000 range right now (which would be more in line with prices that most miners could profitably mine at), but in reality the price is in the $3000-4000 range. It’s once again supply and demand: a year ago everybody wanted to buy and not many people wanting to sell, now it’s a lot of people trying to sell their coins while there is not a lot of demand. I believe today’s prices are a great entry point if you are new investor or a good way to get a lower average price of your coins. Sure, Bitcoin could go down even more, especially with people selling for tax purposes (losses that can offset capital gains), but I don’t see it going much lower anymore.

I am actually surprised prices are so low, even though with hindsight I can explain why it happened. But I also know this bear market won’t last forever, simply because too much is happening in the space. Earlier this year I publicly said that I expected the Bitcoin price to be in the $20,000-$30,000 range by the end of 2018. This prediction was based on institutional capital coming into the market. That has not materialized yet, simply because it took much longer to get products and services approved. For example, a Bitcoin ETF has still not been approved by the SEC, despite many reputable companies filing to launch one. It will happen eventually (put February 27, 2019 in your calendar, by then there will be a final decision on the Van Eck ETF, the most promising candidate to be approved), and once it happens it may be a catalyst for a new bull run. But also other institutional products took a lot longer to get to market, for example institutional custodians and institutional exchanges. But that is all changing, with Goldman Sachs investing in BitGo and Fidelity launching a crypto custody product. Also a Bitcoin settled future will have a big impact (BAKKT will launch this in late January 2019), because in order to settle the transaction physical Bitcoins have to be bought (so far all Bitcoin futures were cash settled), meaning increased demand for coins. Once these products are live it will be a matter of time. None of the institutions wants to be first, but once one or two announce that they invest in crypto the others will follow. Nobody wants to be last either, so everybody aims to be a fast follower. When will this happen? Nobody can tell, but given the time frame when these products will be live I think prices a year from now may be significantly higher.

My long term view on Bitcoin has not changed at all. I still believe that Bitcoin might eventually be worth hundred of thousands of dollars per coin. My views on this are even stronger now than a year ago, partly because of new developments in the space (things like Lightning Network that will make Bitcoin a currency with lightning fast transactions at almost zero cost) and partly because I have changed my view on Altcoins significantly. A year ago I still believed we would have a world with hundreds of altcoins that could all be very valuable. Now I believe we will end up with maybe 10-20 valuable altcoins, while the rest may go to zero. Only the altcoins with strong teams and with properties that other coins don’t have will survive. Several of the top 10 coins may not survive, even the number 2 coin (XRP) will likely disappear once the SEC determines it is a security. I am also not that worried about forks anymore. Bitcoin has proven many times that it can survive hard forks, and the current slow death spiral of Bitcoin Cash is another example of this. The increase in Bitcoin dominance (the Bitcoin market cap as a percentage of the total crypto market cap) to over 50% shows this as well.

The current bear market reminds me of the dot com boom and bust in the early 2000s. At that time the media predicted the end of the Internet and that e-commence would never work. But guess what, 18 years later the most valuable companies in the world are the tech companies that nobody believed in anymore. Amazon went down from close to $100 to $6 during the dot com bust, Bitcoin is actually doing relatively well compared to that decline. This year Amazon hit $2000, over 20 times its all time high during the dot com boom and over 300 times the value during the bust. Assuming Bitcoin is the next Amazon a 20X at its all time high would be a price of $400,000 and a 300X based on the current price would be more than $1 million per Bitcoin. Don’t give up on Bitcoin yet!

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The Lightning Network: a huge opportunity to learn and earn money

Now that Bitcoin is in a bear market it’s a good opportunity to work on new business opportunities in the crypto space. Once the next bull run starts the emphasis will be mainly on price again and it will be harder to focus on building out new ideas. One of the things we are focusing on at First Block Capital is the Lightning Network, a second layer solution on top of the Bitcoin blockchain (and several other blockchains) that will lead to super fast and super cheap transactions. Basically Lightning makes Bitcoin the perfect payment method. There are still a lot of hurdles to overcome before we are there but I am confident the teams working on it will get there.

I was relatively late to the Bitcoin game (I first started investing in early 2013), but I was early to the Lightning Network. Last year I invested a small amount in Lightning Labs‘ seed round (through AngelList) and have been closely following the technology since. After the initial beta for developers earlier this year I started looking for business models on top of Lightning (Lightning Apps (Lapps), basically 3rd layer solutions on top of a blockchain) but also realized we needed to set up a Lightning node at First Block.

We did set up a node and quickly became the 6th most connected node on the Lightning Network with over 200 open channels. This sounds easier than it is, the Lightning network is still very user unfriendly and opening up channels is a time consuming manual process. At one point we actually lost half of our channels and our in-house Lightning expert Chang Li had to set them up all over again.

However, the return on investment is huge. By trying and breaking things we learn a lot about Lightning, information that is not available online yet, and I believe we now know more about Lightning than most other companies in the crypto space. But even better, we also make money with it! I had seen theoretical models that predicted that well connected nodes can earn 60-80% per year in Bitcoin on the funds in its channels, but I thought that would only be the case once Lightning would be more mature.

Turns out I was wrong. After many of our channels had crashed Chang added up the money in our node to see if we lost anything and it turned out we had made about $125 in just one week on an investment of $2000 (spread over 200 channels). That is over 5% per week! We paid about $60 in transaction fees to set up all the nodes, so basically we earned that back in 3-4 days and all returns after that are profit (not taking the time to set up the nodes into account nor the cost of the server). We can always close our channels and get our $2000 investment back, plus all the fees we earned.

The ‘problem’ is that we don’t know how we made this money. Lightning is so new that you can’t easily see which (or even how many) transactions went through your node and how much you made per transaction. Our thinking is that Satoshi’s Place (an interesting Lightning ‘game’ based on the million dollar homepage) led to a large number of transactions through our node, but we don’t know for sure. We are now looking at how we can best record the number of transactions and the average fee per transaction (we believe gathering and analyzing Lightning data may be another angle to earn money).

We have a lot more ideas for Lightning that we may work on. My personal opinion is that if Lightning should take off it will change the Internet as we know it. Not only will Bitcoin go sky high, but it will likely change the business model of most of the top Internet companies. I believe the next generation of multi-billion dollar companies may be based on Lightning and now is the time to start thinking about them and build (or fund) them.

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First Block Capital gets first cryptocurrency investment fund license!

Over the past couple of months Sean and I worked extremely hard to become the first fully regulated cryptocurrency investment fund and we pulled it off together with Jason Brooks and his legal team at BLG! The British Columbia Securities Commission granted our company First Block Capital its license and called it a landmark registration in a press release earlier today. Super happy with the result.

This week we will launch the FBC Bitcoin Trust, our first product that we will roll out globally to institutional & accredited investors. Next week our roadshow will start, looking forward to getting the financial world into Bitcoin!

B.C. Securities Commission grants landmark bitcoin investment fund manager registration

VANCOUVER, BRITISH COLUMBIA–(Marketwired – Sept. 6, 2017) – The British Columbia Securities Commission (BCSC) today announced the first registration of an investment fund manager in Canada solely dedicated to cryptocurrency investments. The BCSC has granted First Block Capital Inc. registration as an investment fund manager and an exempt market dealer in order to operate a bitcoin investment fund.

“Cryptocurrency investments are a new and novel form of investing in Canada. We have seen from the market and from investors that there is a strong appetite for access to these kinds of investments,” said Zach Masum, Manager, Legal Services, Capital Markets Regulation, and leader of the BCSC’s Tech Team. “This first registration allows access to bitcoin investments, while providing the BCSC with unique mechanisms to monitor operations in a rapidly developing area.”

Cryptocurrency investments raise risks that are different from traditional asset classes, including the cybersecurity risks inherent in dealing with digital currencies. These risks relate not only to the registrant, but also to the bitcoin fund’s custodian, a third party chosen to facilitate the safekeeping and exchange of bitcoins.

The conditions of registration imposed on First Block Capital were crafted to give flexibility to allow them to operate under the present regulatory framework, and give tools to the BCSC to evaluate the identified risks of this innovative fund type. First Block Capital is also now registered as an investment fund manager and exempt market dealer in Ontario; the BCSC is its principal regulator.

“We strongly encourage other companies in British Columbia, whether they are potential new registrants or existing investment fund managers, to contact the BCSC’s Tech Team if they are considering pursuing cryptocurrency investments in their funds,” said Masum. “The Tech Team can help ensure compliance with securities regulation, which can help save time and potential costs later on.”

The BCSC launched the Tech Team in January 2017 as part of its fintech outreach initiative to help B.C.-based fintech and technology companies understand their securities regulatory requirements. The Tech Team is also actively involved with the Canadian Securities Administrators’ Regulatory Sandbox Initiative, which supports fintech businesses seeking to offer innovative products, services and applications in Canada.

The Tech Team will continue engaging with key stakeholders, and anticipates issuing a publication later this year summarizing results of its outreach and proposing next steps to meet the needs of B.C. financial technology industry participants.

More information on the BCSC’s fintech outreach can be found on the BCSC’s technology webpage. The BCSC’s Tech Team can be reached by email at TechTeam@bcsc.bc.ca.

About the British Columbia Securities Commission (www.bcsc.bc.ca)

The British Columbia Securities Commission is the independent provincial government agency responsible for regulating capital markets in British Columbia through the administration of the Securities Act. Our mission is to protect and promote the public interest by fostering:

  • A securities market that is fair and warrants public confidence
  • A dynamic and competitive securities industry that provides investment opportunities and access to capital