Everyone is annoyed by the endless comparisons of Bitcoin to everything else, but sometimes it’s so hard to make sense of the subject that you have to discount it. Venture capitalists in the Bitcoin world tend to be demonized for not understanding the value proposition of this cryptocurrency, but on the other hand, how can they understand it if all they are used to evaluating is startup potential? Well, I offer you a frame of reference that I hope can help someone deal with this problem. In this framework, we will look at the evolution of Bitcoin in the context of “funding rounds” coinciding with “reward eras” in the Bitcoin network.
Any organization can be described as “an organized group of people united by a purpose. Bitcoin can then be thought of as running like clockwork as a “nonorganization” – with founders but no CEO, with thousands of volunteers but no employees, and with provably non-dilutive equity stakes available to anyone willing to spend their energy in return.
Pre-seed stage.
The earliest stages of financing a new company occur so early that they are usually not counted in the financing stages at all. “Pre-seed stage” is usually referred to as the period during which the company’s founders are just trying to get the company up and running from scratch. Most often the founders themselves, as well as close friends, family members, and other concerned individuals, provide the funding for the pre-seed stage.
Due to the nature of the incentive mechanism in the Bitcoin network, many of the early “share holders” were interested in investing their time, skills and personal funds to promote or develop the product, and thus increase the value of their shares. Management of the company took place on its own and involved no overhead.
During the first stage of the life of the “company”, the first bugs were caught and fixed as usual, and this iterative process lasted many months. After the project proved its reliability and stability, the market emerged and the first exchanges began to open. The user experience – both in terms of software products and financially – was terrible. Only a PhD was able to understand the intricacies of Bitcoin, and those who were able to figure it out were losing money on exchanges, which were also constantly being hacked. Add to this the insane volatility and level of risk that alienated any outside observer, and it is clear why the survival of The Bitcoin Company was in serious doubt.
During this period, to the good fortune of stockholders, parabolic growth occurred, and many sold some shares to be able to devote all of their working hours to the development of Bitcoin. It’s like raising funding: you have to get a big cash infusion and then spend it mercilessly until the next round. Each funding round saw at least one large inflow of funds and an equally large withdrawal.
During this era, the miners’ reward for processing transactions and finding blocks totaled $13.5 million. Assuming that the cost of mining Bitcoin is on average equal to the market price of BTC, this amount of miners’ reward can be thought of as buying bitcoins for cash. we can take the total income miners received in this round as the amount of money raised. The inflow of money is never even, and even a relatively small inflow is enough to rapidly increase the price and form a “bubble”.
That said, luck favors the bold, and Bitcoin entered the next, seed stage already with a preliminary (pre-investment) valuation of $1 billion (i.e., by the end of the first reward era, Bitcoin’s capitalization was $1 billion).