2019 outlook, when a bear market is a good thing There were close to and blockchain billionaire Brock Pierce spoke at many of them. He was there at CoinAgenda Global until late, gathering the faithful around campfire-like tales. He was there at the NASDAQ Crypto Summit, hosted by Justin Wu and Chris Champion, rebutting playboy personality Dan Bilzerian on the merits of Bitcoin. Kicking off 2019, he’s going to be on my panel at CES next week for . 500 crypto conferences in 2018 The Great Crypto Debate He’s been so ubiquitous at the shows, I’ve been starting to feel like Rolling Stone reporter Cameron Crowe’s character in the cult classic, , an embedded journalist following the life and times of a rock star. Almost Famous Just last week, he gave me 71 minutes to ask him anything. Below are highlights from the interview. Founder of firsts So prolific has his career been as both founder and funder, I asked him to describe the role he’s played in the evolution of the industry. A childhood actor (best known for ), Pierce began his adult career in streaming video, then moved into gaming. In 2009, when the Bitcoin network went live, Pierce tinkered with mining and amassed his early wealth in Bitcoin. It wasn’t until October 2013 that he formally invested in the space when he founded Blockchain Capital with Bart and Brad Stephens. The Mighty Ducks “Before Blockchain Capital, I was cranking out startups like an incubator,” Pierce told me, “I started a payments company called GoCoin, an exclusive distributor of top mining equipment called KnCMiner, took over exclusive distribution rights for the first Bitcoin ATM for all of Asia called Robocoin, gave CZ of Binance his first job in crypto, started [Puerto Rico’s] Noble Bank which was the first crypto bank in the world, started Expresscoin. I was one of the founders of Mastercoin and created the first ICO in the summer of 2013, then started Tether which now does $2 trillion a year in transactions, is the second most traded token after Bitcoin, and was the first real world asset to be put on the blockchain.” “Tether was one of the last startups I did before I went full time on the funds side,” Pierce said. “That’s really why Blockchain Capital started. I realized I couldn’t fund 10 to 20 companies simultaneously because I also had eight other businesses outside of crypto. The only way I could scale and get exposure in the ecosystem was by being a full time investor.” “Blockchain Capital was the first dedicated venture fund to invest in crypto and blockchain. I was the main founder and put it together with 15 to 20 friends who co-invested, including Bobby Lee of BTCC China, Charlie Lee of Litecoin, and Matthew Roszak of Tally Capital. There were no fees on the first fund. We weren’t doing it as a business at first, we were just doing it for fun. Then Bart and Brad got very engaged and formalized it.” Birth of the security token Wary of the regulatory risk involved with launching ICOs in the United States, Pierce explained to me how he and his partners knew the timing was right when they launched the first security token during the second quarter of 2017. “We dd the first security token for Blockchain Capital’s third fund, BCAP. The team was Bart, Brad, Jeremy (Gardner, co-founder of Augur), and myself. I was pushing for it. I ran one of the top ten syndicates on AngelList and saw where crowdfunding, equity funding and venture capital were going to converge. I was also an advisor to DSTLD Jeans, the second Reg A offering in the U.S. related to the Jobs Act, and I knew it could be done compliantly.” “Externally, we were supported by Stan Miroshnik and Emma Channing of Argon Group. Emma is one of the great unsung heroes in the space and should get credit for being the first to structure an security token. We were two years ahead of everyone. When you’re a pioneer in a heavily regulated market, this is not an industry where I advise anyone to be a cowboy. Dot your i’s, cross your t’s, cover your bases. This is not traditional entrepreneurship where you just go out there and ask for permission later. Repercussions for messing up in this area can cost you your life.” “Right after BCAP, I stepped down from being managing partner for Blockchain Capital so that I could become a co-founder of Block One. Once you’re managing really large institutional funds, you’re not allowed to be a co-founder of things. So I chose not to run future funds so I could go back to being an entrepreneur. It was the best decision I ever made in my life but very hard to walk away from after spending four years building one of the pre-eminent funds in the space. I’m still involved with Blockchain Capital but not part of the management team. I have no formal role other than having been a co-founder.” Blockchain Capital would go on to raise $150 million for their fourth fund in March 2018, and two months later, Block One raised $4 billion in the biggest ICO in history. Pierce left Block One, developer of , to launch , a community non-profit formed with music artist AKON and other EOS investors to focus on governance issues for the delegated proof of stake network. EOS.IO EOS Alliance Pierce is also chair of the Bitcoin Foundation whose board members include Vinny Lingham, Bobby Lee, Bruce Fenton, Michael Perklin, and Llew Claasen. Impacting a billion Yet Pierce’s lasting legacy might just be his philanthropic work to rebuild Puerto Rico. He moved there following Hurricane Maria in late 2017 after the storm devastated the island. In March 2018, he launched the Restart Foundation to help with recovery efforts. I asked him what progress has been made in the past year since the hurricane hit. “We’ve done a lot of little things in the context of putting solar panels on homes, bringing power to those that don’t have it, and feeding people, but the big ticket item has been encouraging entrepreneurialism. We held the first ever hackathons in Mayaguez and Ponce with Parallel 18, an accelerator that gives government grants of $40,000 per startup for no equity. A wonderful program that gets 500 applicants per cohort and admits up to 40. There are two startups that have raised over a million dollars each in Series A funding. The angels funding these companies are Act 22 people that come from an entrepreneurial background in crypto and blockchain. Act 22 people that come from hedge funds and equity funds don’t fund startups, that’s not in their DNA.” refers to 2012 legislation that provides a tax haven to businesses and high net worth individuals that set up bona fide residence in Puerto Rico. Act 22 “I’ve become a meaningful donor to the University of Puerto Rico, helping them rebuild their library and expand their maker studios. They’re the number 15 engineering school in the U.S and NASA, Google and Facebook have basically full time recruiters there. They’re producing incredibly talented people but they have to move if they want a good job. If you’re an entrepreneur with a dream to build a startup, for the first time, the tools are here. Now you have the right accelerators, incubators, hackathons, coworking facilities, hacker houses, and capital formation. This is how an ecosystem gets started. I’m so incredibly enthusiastic over the long term prospects for Puerto Rico.” “Puerto Rico is similar to Singapore. It’s a market that doesn’t have a population that’s large enough to make it relevant for most investors. The reason why Singapore is interesting is because people view it as a hub and spoke model. When you think of Singapore you think of it as a gateway to Southeast Asia and because it has rule of law. Investors don’t want to incorporate in Indonesia, Malaysia, Vietnam, Laos or Cambodia. They want to know it’s in a Singaporean company focused on those markets because they want their capital to be in a safe jurisdiction.” “Puerto Rico has a similar opportunity as an island of three million people with rule of law. It has all the safety of the United States but without the U.S. tax problems. You can build companies here that can target the Caribbean and Latin America. Venezuela is not stable, Argentina is only slightly better, most of Latin America is not a place many institutional investors are comfortable putting their money. Puerto Rico is Spanish-speaking and geographically situated to serve as a gateway. Basically what Miami has been trying to become,” Pierce added. I asked him if he knew how many Act 22 crypto and blockchain entrepreneurs moved to Puerto Rico in 2018. “These are just estimates but it feels like 500 of the 1,500 who said they’re moving here did.” It’s not clear if people are rethinking their move to Puerto Rico after the 2018 crash in crypto. “We’re trying to more effectively track it,” he explained. “Mostly we’re seeing a one-third drop-off rate because it’s a big commitment to upend their lives, many are coming from California and New York.” Pierce has been trying to raise visibility for Puerto Rico while on the speaker circuit to attract funding for the island. He speaks about trying to make a difference with impact investing. Repeating his mantra, he told me, “A billionaire is someone who can positively impact a billion lives. My KPIs are not about how much money I’ve made. I care about how many people’s lives I’ve positively impacted. That’s the unit of measurement I measure myself by.” How low can it go? I asked Pierce whether he felt the crash in FAANG and crypto back in November were correlated, possibly in anticipation of a recession or trade concerns. “Coincidence more than correlation but there are broader market movements that can be correlated,” he replied. “Yes, there’s probably some overlap. Generally the crypto markets aren’t really correlated to anything else. That’s one of the main benefits of the crypto markets is that they operate independently, but a lot of people that invest in crypto also invest in technology. They’re similar industries in some way. There’s definitely a number of large shareholders in crypto that are also large shareholders in FAANG stocks.” he replied. “What do you think the cause of the sell off was?” I asked. “A necessary market correction. We’ve been through multiple cycles, prices run up, people get excited, a bunch of people rush in. Prices keep going up beyond what was rational and then the market has to go through a correction phase, it’s a good thing. When the price starts running up too fast, a lot of entrepreneurs come into the industry for the wrong reason. Correction creates a purging, a necessary cleanse. Bad actors typically go away, and true believers stick around and build great things.” He continued, “The ICO market in particular was overvalued, people didn’t even have a prototype or working product. They had a white paper and a team of inexperienced people that in most cases never shipped a product and they were raising money at ridiculous valuations without giving up any equity. Things were going up like Internet stocks in 1999. Everyone was buying Ethereum to invest in things that were doubling everyday. The only reason why Ethereum went to $2,000 was because you needed ether to buy ICOs. People weren’t investing in good projects with good traction or real results. It was basically gambling and wasn’t sustainable so everyone started to realize, like in the year 2000, that this is not a rational market. The question in the game of musical chairs is when does the music stop?” “Or who stopped the music?” I asked, “Do you think there might have been market manipulation that triggered the sell off?” “I’m sure absolutely there was some of that. Mostly the guys in New York who work for hedge funds. Most of the real market manipulators are on Wall Street.” replied Pierce. “It’s all good. The price is the primary barometer of sentiment. It doesn’t track fundamentals. It’s driven through emotion, FOMO (fear of missing out), and profit seeking.” “Where do you think the Bitcoin floor is?” I asked. “Some have said it’s where the last run up began, as low as $500.” “My guess is it’s around $3,000, but it could be as low as $1,000. I’d be shocked if it went below $1,000. I’d be surprised if it went below $2,000. There’s so much interest and activity in the space, my intuition, and it’s not my area of expertise, is that the floor is probably around $3,000.” I asked what will drive the next runup. “One of two things: Either major uncertainty in the traditional markets, meaning a catastrophic event with the financial system that causes a crash in the world’s currency, bond, or equity markets, this ecosystem benefits because of its resilliency and decentralized architecture; or we start to see market adoption of use cases.” he replied. I then asked him about the metrics he uses to analyze investments. “Most interesting attribute I look at is community. When you have open source software, you can copy and paste code so the tech doesn’t differentiate. Tech provides a first mover advantage but what sustains your project and delivers long-term success is the quality of the community you build and nurture. I look mostly at the quality of the stewardship. The other thing that matters is developer adoption. How many developers are building on that system. It doesn’t matter how good your chain is if no one is building on it. Ethereum has a huge developer community, they’re number one. EOS is number two. Tron is number three, which I was a little surprised by, but they’ve done a good job at building community, Justin Sun, the founder, being on Twitter, and the tech has caught up. This is how you build community, not by being quiet but by being vocal and people hearing the music and saying I want to dance to that beat.” “Is the next killer dapp gaming?” I asked. “Yes, gaming is going to be a huge part of it. Earliest adopters at scale of crypto were gamers. That’s why Korea and China are so big because these were the markets where people played video games and bought and sold virtual currency for games like Second Life and World of Warcraft. It’s that community of users around the world that have driven the first wave of crypto adoption and so I think there’s a very good chance that gaming in all its forms will be one of the major drivers of success of the ecosystem.” he added, “Messaging and peer-to-peer payments to bank the unbanked as well. Two-thirds of the people on the planet don’t have access to financial services.” RegTech is Red Hot My last question was about his 2019 outlook. “Security tokens are going to be revolutionary, they’re going to give birth to a quadrillion market,” Pierce told me, “that’s because we’re seeing the tokenization of the world’s fiat money, debt market, equities, real estate, art…” He concluded with this thought about the upside of down markets. “We’re going to see big things being built, multiple applications hitting a million users. I love the fact that prices are down. When prices are up, very little gets built because teams don’t stick around. Everyone is getting rich too quick and that de-motivates people. All the best things I’ve seen built in this ecosystem have been built in bear markets.” Posted in on January 2, 2019, by me! The FinTech Times

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What I Learned from 71 Minutes with Brock Pierce [Interview]

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