Cryptocurrency Data 101: Market Landscape of the Bitcoin & Crypto Data and Analytics Sector

It has been said that the next wave of $1B+ companies in the cryptocurrency sector will be data and analytics firms.

Within this market, I wanted to have a better understanding of all of the data providers within the Bitcoin and crypto sector. Most importantly to better understand all of the various sources people consume data regarding the crypto market.

Unlike the traditional financial markets, most of the underlying data is public within the Bitcoin and cryptocurrency ecosystem. This leads to a unique development where there is a large and growing consumer & institutional demand for data within the cryptocurrency market.

Below is a quick primer on crypto data and an overall landscape into the data & analytics space today. 

Primer on Crypto Data

One of the most interesting things about the crypto space, is the overwhelming majority of data is public. For example, on the Bitcoin network, every single transaction from the beginning of time (genesis block) until now, is recorded on the Bitcoin blockchain.

This includes every transfer between people, between exchanges, to service providers, and to merchants. Any amount of value that has moved from one address to another is recorded for all time on the Bitcoin blockchain. The same is true for most other blockchain networks out there as well: Ethereum, Litecoin, XRP, etc.

Because all data is recorded on the blockchain, this creates an interesting dynamic where all of the most valuable economic data for the $250B cryptocurrency industry, is hiding in plain sight. Unlike the traditional finance system, if you have a question about Bitcoin, you can most likely find the data to answer your question.

Companies within the data and analytics market aim to pull together all of this public data to help participants (consumers, funds, exchanges, miners, etc) make sense of the crypto market. 

Data Sources

Mohamed Fouda lays out that the majority of data about crypto comes from three primary sources:

  1. Exchange Data (Spot markets, derivative markets, OTC)

  2. Blockchain Network Data (block explorers, hashrate, supply schedules, etc.)

  3. Off-Chain Data (github, nodes, clients, community channels)

All of this data is largely public, especially anything recorded on the various Blockchains. The few sources that are not inherently public are:

  • Over the Counter (OTC) trading information

  • Exchanges (spot and derivatives) - Prices, order books, volume information, etc. are largely public however anything to do with user, demographic, or geographic data is more difficult to derive.

  • Off-Chain data is not necessarily public; however, most of the underlying sources are for the most part easy to pull (github, reddit, twitter, telegram, etc.).


Who consumes blockchain data?

Everyone in the crypto ecosystem consumes some form of blockchain data, including but not limited to:

  • Consumers - To check prices of Bitcoin and various cryptocurrencies.

  • Traders - Pulling data to build trading models.

  • Consumers - To confirm transfers via block explorers.

  • Exchanges - Reconciling & tracking the flow of funds.

  • Hedge funds - Pulling data for arbitrage, etc.

  • Institutional investors - Reconciling pricing data for bookkeeping.

  • Miners - Monitoring hashrate & profitability.

  • Regulators - Monitoring suspicious activity.

  • Journalists - Researching the source of truth. 

  • DApp developers - Monitoring app usage and statistics .

Because blockchain data is inherently public, all kinds of participants can now see and utilize the underlying financial & network data within the crypto ecosystem. 

Market Ecosystem Map

Below is an ecosystem map of the data and analytic providers within the whole crypto ecosystem. I also attempted to categorize all of the companies based on the core activities they provide (some of these companies provide many services all in one). 

Please tweet at me @mccannatron if:

  • I missed any major sources of information (particularly regional providers)

  • If you feel I have have mis-categorized any company in particular.

  • If there are any other companies we should consider adding.

The visual market map has a truncated list of companies, with the full listings of all the companies within each category below:

Crypto Data and Analytics Ecosystem Map - Market Cap Providers, Portfolio, DApp, Defi, Insitutional data.png
Crypto Data and Analytics Ecosystem Map - Mining, block explorers, blockchain analytics, media.png

Price & Market Cap Information Providers

Price and market cap providers, provide - you guessed it - price and market cap data of Bitcoin and other cryptocurrencies. 

These services are typically free and public and also expose other surrounding data including volume, supply, charts, exchange data, etc. Since most of these services are public, in my opinion, it’s fair to stack rank them based on the monthly web traffic each service provides. 

Using this metric, the top 5 price & market cap information providers are: CoinMarketCap, TradingView (price & charting), CoinGecko, CryptoCompare, and WorldCoinIndex. See below for the full ranking: 

Bitcoin and Crypto Data Analytics Firms - Coin Market Cap Information Providers Companies.png

Data and Analytic Tools

This is the broad category of providers that seek to pull together basic price/market/network data into more meaningful insights. I further break this broad category into a few specific sub-sectors which I grouped together below. 

Again the majority of these services (except for the institutional centric data services) are primarily public so I am using website traffic to stack rank each company in order.

General Data and Analytic Tools

Here are a few of the companies in this category: 

  • Cryptowat.ch - All in one tool including: market data, exchange API's, monitoring,  portfolio tools, etc. 

  • BitInfoCharts - One of the original analytic services providing many charts and graphs of Bitcoin and all the major cryptocurrencies.

  • Coin360 - Infographics and charts looking at different tokens and exchanges.

  • Cryptoslate - A crunchbase like services highlighting various people, companies, products, and more. 

  • Blockchair - Accumulation of network & market data with charts & API's.

Bitcoin and Crypto Data and Analytics Companies.png

Portfolio Tools

Portfolio tools are products and services that focus on helping people track their overall portfolio of Bitcoin and other crypto assets over time, and through various trades. A few of these services have expanded to also cover tax information as well.

  • CoinTracking - Portfolio tracking and reporting

  • Coinigy - Portfolio management and exchange account management 

  • Blockfolio - Portfolio tracker + communications platform

Crypto Portfolio Trackers - Data and Analytics startups.png

DApp/Defi centric tools

Analytic tools that specialize in areas within the application ecosystem including decentralized applications (dApps), decentralized finance (Defi), and Ethereum services.

Ethereum, defi and dapp analytics companies.png

Institutional Centric Data Tools

These include data and analytic firms that specialize in catering to institutional clients (traditional funds, crypto funds, family offices, etc.).

Most of these services are paid subscription only services, so it’s unfair to stackrank by website data; however, it does give us a relative sense of the most popular services. Also some companies do provide reports via their blog and limited publicly available data.

  • TradeBlock - Data platform for institutional investors 

  • CoinMetrics - Provider of market & network data 

  • Delphi Digital - Boutique institutional-grade analysis on the digital asset market.

  • Digital Assets Data - Full scale data acquisition and application platform for institutions. 

Institutional data providers for bitcoin and cryptocurrencies.png

Mining tools

Mining is one of the most important, although often overlooked aspects of the Bitcoin and crypto ecosystem. Mining information providers include looking at real time hashrate’s of various blockchains, profitability calculators, pool profitability, etc. 

The majority of this data is public. Below is the full stack ranking of each provider. The top three are:

Block explorers

Block explorers are the source of truth for network data. 

From a consumer standpoint, people typically use block explorers to confirm & track transactions. On Ethereum you can also use them to verify tokens/supply information and track dApp transactions as well. From a business standpoint, you can also query data directly from the underlying blockchains (via full node) or use block explorers to aggregate directly from the blockchain. 

Below are the largest block explorers (in terms of viewership) with the top 3 being:

  • Blockchain Explorer - Bitcoin & Ethereum explorer offered by blockchain.com

  • Etherscan - Ethereum centric block explorer

  • BTC.com - Bitcoin block explorer with various mining pools overlaid on top of block data 

Blockchain Analytics Firms

These are firms that specialize in collecting and analyzing transaction data across Bitcoin and other crypto networks. The most typical use-cases are for Governments, exchanges, and financial firms, to track suspicious activity. 

All of these firms analysis’ are private so public website data can only give us a sense on the most used services. 

  • Chainalysis - Prevent, detect, and investigate crypto compliance violations. 

  • Eliptic - Blockchain analytics for regulatory compliance 

  • Crystal - Analytics for due diligence and compliance

  • Anchain - Analytics for threat detection & threat intelligence. 

Blockchain analytics compliance aml investigation tools startups.png

Media

I included media here as well because the media plays an important role in synthesizing market & network data to all of the participants in the crypto ecosystem. Further, outside of price, this is one of the main forms people take to consume information within the crypto ecosystem. 

Below are the media sites stackranked by website views, with the top five media publications being:

  • CoinDesk - Blockchain news and events. 

  • Cointelegraph - Crypto news and analysis 

  • CCN - Market update and crypto news. 

  • NewsBTC - Bitcoin news and analysis

  • The Block - Crypto news which shares a lot of great original analysis 

Geographic Analysis

While trying to understand all of the places people consume blockchain data & analysis, one of the interesting byproducts is also a high level overview of the geographic dispersion of the crypto industry.

Unlike previous innovation cycles, the crypto industry was global from day one. While looking at the top 3 geographic sources for all of these services above, here is one look at where the crypto industry is located: 

Crypto industry location by geographic location.png

Even though the United States is one major center of the crypto industry, it is by no means the only major geographic the industry is located in.


My Key Takeaways

After looking into the total landscape of all the various data providers in the Bitcoin and cryptocurrency sector, here are my biggest takeaways: 

  • Because the core blockchain data is inherently public, the whole ecosystem has a much greater level of access to data (vs. traditional finance).

  • There is a large and growing consumer demand for data and information within the crypto ecosystem.

  • We will likely see large companies built on both the consumer end of the spectrum and institutional end of the spectrum.

  • Yahoo Finance alone has 170M monthly views on their homepage, so we still have some time before the “crypto to finance flippening”. 

If you are an entrepreneur working in this space building unique data services with the crypto industry, I’d love to chat with you. My contact info is listed on our fund website: Proof of Capital.

Crypto Mining 101 - Overview & Landscape of the Mining Industry

As of July 2019, Bitcoin miners generate $6B+ in revenues (mining rewards + transaction fees) on an annualized basis. 

Mining and the underlying hardware that secures Bitcoin and other cryptocurrency projects is an often overlooked market within the cryptocurrency sector. However in conjunction with the exchange landscape, mining is one of the core markets which generates significant revenues.

In this post I will share an overview of the Bitcoin & crypto mining space, the underlying hardware which powers mining, an ecosystem landscape, and dive into the revenue & market size of the space.

How Cryptocurrency Mining Works 

Proof-of-work (mining) is the process in which new transactions are added to the Bitcoin blockchain and how the correct order of such transactions are agreed upon (consensus). 

One of my favorite analogies of the process is to think of it like a sudoku puzzle. It’s a puzzle that takes a lot of brainpower to solve, but once it’s solved it's very easy for everyone else to verify that you have found the correct answer.

This video below gives one of the best visual representations to more intuitively understand how blocks are created, chained together, how transactions are added into the blockchain, and how mining plays a central role in this process: 

Essentially, miners (computers geographically distributed around the world) compete to solve a computationally intensive puzzle which verifies the next block in the blockchain (in addition to the underlying transactions within the block). The miner who solves this puzzle first is the person who is able to claim the reward (the “coinbase reward” + transaction fees). Once the next block is found all of the miners on the network are able to verify that the block is correct, and move onto solving the next block in the chain.

The Role Miners Play in the Bitcoin & Crypto Ecosystem

All of the computers around the world racing to solve the next puzzle are the participants that make up the mining ecosystem. The collective computational resources are one of the core ingredients which provides the underlying security guarantees Bitcoin provides.

Through this network, Bitcoin participants are able to expect:

  • Their transactions will be confirmed on the Bitcoin blockchain.

  • Their transactions will be in the correct order (protect against double spends).

  • The history of the Bitcoin blockchain will stay intact (immutability).

In return miners are compensated both in newly minted Bitcoin (“coinbase rewards”) + the transaction fees associated with each transaction. If participants want stronger guarantees on when their transaction will be added to the Bitcoin blockchain, they can increase the transaction fees they are willing to pay for their transactions.

Hardware Used in Mining

While in the beginning of the Bitcoin network, it was profitable to mine Bitcoin using consumer grade central processing units (CPU’s), the Bitcoin network has developed to such a scale where it is impractical to do so now.

The Bitcoin ecosystem is largely dominated by application specific integrated circuits (ASIC’s). For most  other cryptocurrencies, graphics processing units (GPU’s) and field-programmable gate array (FPGA's) are the dominant form factors. A number of coins also exist with the same hashing algorithm at Bitcoin (SHA256) that are compatible with Bitcoin mining ASICs.

Hardware used in crypto mining ASIC GPU FPGA CPU.png

Mining Ecosystem Landscape

Below is a graphic of the mining sector in its totality, from the chips to the end user services:

Cryptocurrency mining ecosystem: Foundry, miners, pools, hashrate.png

Foundry

Taiwan Semiconductor (TSMC) and Samsung are the two core semiconductor foundries which produce all of the silicon wafers which go into mining hardware. Taiwan 🇹🇼in particular has a dominant share of the chipset supply chain. 

For example: NVIDIA, AMD, Xilinx, Bitmain, and Cannan all use TSMC for their core production lines.

cryptocurrency mining foundry: TSMC and Samsung.png

Packaging, Testing, Assembly

Once the wafers are complete you need to test them, cut them apart, package them into the final chip, and retest. This whole process is typically handled by OSAT companies (outsourced assembly and test companies) with the two largest of such being ASE Group (Taiwan) and Amkor Technology.

Cryptocurrency mining: OSAT Testing ASE Amkor SPIL.png

IC Design and Manufacturers 

The companies which design and sell the chips are typically referred to as fabless chip companies (the fabrication itself is left to the foundry and OSAT companies). 

For GPU’s, the two top manufacturers are NVIDIA and AMD. For FPGA’s, the top manufacturer is Xilinx. For crypto specific ASIC’s, the top three companies are Bitmain, Canaan, and Pangolin Miner (producer of the Whatsminer line).

In addition to these three manufacturers there are other IC design companies in the space including: Ebang, Innosilicon, Bitfury, Obelisk, and others. 

Cryptocurrency Mining IC manufactuers nvidia amd bitmain canaan.png

Miners & Mining Farms

After the chips have been produced, they can now be used to mine cryptocurrencies. ASIC’s are especially designed to mine one mining algorithm (typically SHA256 & Bitcoin) while GPU’s have more flexibility built in.

Miners include: people using one machine to mine, small mining operations (5-10 machines), medium sized mining farms (10-100 machines), large scale mining operations (100-1,000 machines) to industrial scale mining farms (1,000+ machines). Some of the largest operations I’ve heard of so far are in the range of 100,000’s of machines across multiple geographies. 

In addition to designing the chips some of the manufacturers mine themselves as well (Bitmain, Canaan, Pangolin). Bitmain, for example, publicly discloses their “self-mining” monthly.

Any sized mining operation can be pointed at a mining pool (more on these later) or if large enough they can self mine - aggregating all of their hashpower to find blocks directly, without commingling their hashrate with other miners. 

*It is quite controversial that the mining chip producers potentially use their own machines to mine before selling them. However if you really do have a device that generates revenue, there is no reason why you would leave it unused in inventory, but rather you would utilize it until you could sell it.


Pools (Single and multi-currency)

For individual to non-industrial miners it is more economically rational to join a pool rather than to self mine. Pools aggregate the hashpower of many miners together to smooth out the reward curves for each individual miner. The pool is in charge of optimizing all of the hashpower, running the mining notes, collecting & distributed rewards, and taking a fee on top for the service.

There are some pools that specialize in specific cryptocurrencies (Sparkpool: Ethereum & Grin) and other pools which have setup various pools covering all of the top cryptocurrencies (Antpool, F2Pool, Poolin, Slushpool, etc). All of these pools started by specializing in one cryptocurrency (typically Bitcoin) and have thus expanded to cover all forms of cryptocurrencies.

One of my favorite analogies of how mining pools work is to think of it like the office lottery pool. By pooling together all of the lottery tickets, all of the individuals (miners) have a better chance of winning the reward (block reward).

However with mining pools you are both trusting the service to both report the correct earnings and the correct number of tickets everyone in the pool has. To bring transparency there are services like PoolWatch that try to track and compare the reporting across various mining pools.

Cryptocurrency mining pools antpool F2pool Poolin Sparkpool.png

Hashrate Marketplaces

As a miner in addition to using your own hashrate for mining, you also have the option to sell your hashrate to someone else. Often, this is done in a marketplace - the biggest of such marketplaces is NiceHash. A smaller, peer-to-peer marketplace is Mining Rig Rentals

On these marketplaces, people can both sell their hashrate and/or purchase hashrate on any given set of mining algorithms across any kind of cryptocurrencies. Although there are a lot of reasons why someone would want to buy hashrate, one of the top reasons is buying hashrate is used as a form of onramp into cryptocurrencies. 

Often times people are using hashrate to speculate on various cryptocurrencies — e.g. want to purchase SHA256 hash rate and use it for Bitcoin SV instead of Bitcoin. (a terrible trade…)


Cloud mining

Cloud mining are services where consumers can purchase hashrate contracts directly, instead of operating any hardware themselves. It’s similar to the hashrate marketplaces above the cloud mining services typically are operated by one central supply. 

Two of the biggest companies in this space are Genesis Mining (US) and Bitdeer (Asia). Again similarly to above one of the top reasons is buying hashrate is used as a form of onramp into cryptocurrencies. Through this method, people can use fiat to purchase Bitcoin and other cryptocurrencies directly without going through an exchange. 

Smart Miners

Smart miners is a new category that has emerged. Mining is a complex endeavor in which participants need to have an understanding of hardware, networking, energy, forecasts of hashrate, optimizing for specific algorithms, etc. On top of this, all of these inputs are constantly changing on a daily basis with new long tail cryptocurrencies constantly coming and going.

Smart Miners, like Honeyminer, aim to optimize all of these factors to allow miners, both consumers and professionals, to earn as much as possible with the hashpower they have. Two other similar products are HashFish and Cudo Miner

In a short period of time these products have aggregated a considerable amount of the supply side hashpower of the marketplace.

Size and Revenue of the Mining Market

The crypto mining industry generates over $8 billion in revenue on an annualized basis.

Revenue comes from both the block rewards + the transaction fees included in every single block on all proof-of-work blockchains. Based on the most recent CoinMetrics data on June 25th, 2019 the mining rewards, here is the weekly, monthly, and yearly revenue run rates of mining in total.

Revenue of bitcoin mining ethereum litecoin zcasn.png
Market share of bitcoin mining.png

In the world of cryptocurrency mining, Bitcoin still dominates with 75% of all of the mining revenue being generated by the Bitcoin network alone. 

This also matches Bitcoin’s dominance by market cap where today (July 1st, 2019) Bitcoin comprises 60% of the total market cap of all cryptocurrencies according to CoinMarketCap.

However the overall revenue the mining sector generates is directly tied to the price of the underlying cryptocurrency, so it is highly reflexive back to the underlying cryptocurrency market (hence why Wall Street will have a tough time understanding the companies in this sector). More on this below. 

Understanding the Profitability of the Mining Sector

The overall revenue, cost, and profitability of participants in the mining sector is hinged on a few key factors. 

Capital Expenditure (Capex)

The main capex expense for miners is the cost of the mining machines themselves + any facilities/buildout which are needed to run the operation.

For example if you wanted to purchase 10,000 of the most recent Bitmain S17 models, this would cost $16M at retail price. Large miners can get special pricing; however, when machines are highly in demand it’s hard to even secure supply much less negotiate on rates. 

This does not take into account the cost of setting up the facilities which have turned from hobbyist activities into real professional industrial scale operations.

industrial scale bitcoin mining facility.png

Operational Expenditure (Opex)

The main opex expense for miners is the cost of electricity to power the machines on a daily basis. 

For example. if you were running 10,000 Bitmain S17 miners 24/7 this would cost you $36,000 per day (~$13M per year) in energy cost at $0.05 per kilowatt hour (kWh) - just to power the miners alone. 

The average cost of electricity is highly variable based on where you live and what electricity source you are using:

average cost of electricity in various countries china india germany.png

Miners are inherently incentivized to find the cheapest sources of energy around the world, which is why Coinshares estimates that 75% of the energy that powers the Bitcoin network comes from renewable sources, largely hydroelectric energy. 

In addition to the energy costs to power the mining machines, the other ongoing opex costs include: cooling, staff, maintenance, security, and general facility operations. A general rule of thumb is to 1.5x the energy cost to give a rough estimate on the ongoing opex costs.

Following our example above for a mining operating of 10,000 Bitmain S17 a rough estimate on the cost side would be:

  • $16M Capex + $3M (import tax) + $4M (Facilities + security)

  • $20M Opex (yearly)

  • $67M Revenue potential (based on today’s Bitcoin price). 

This is a rough estimate just to show the scale of factors miners are dealing with. The true cost would be highly dependent on your geographic location, buildout, etc.

However even these factors are always in flux, due the the market factors which will we will cover below.

Market factors

While opex and capex are two factors miners can control, there are market forces at play which greatly determine the profitability of mining. 

Miner costs & available supply

Unlike many traditional products, the mining producers (Bitmain, Canaan, Whatsminer, etc) will vary the price on the mining machines based on the profitability (the Bitcoin price) of the machines.

During big pull runs the price swings of the underlying cryptocurrencies + the mining machines themselves can swing wildly. In crazy periods there are whole secondary markets dedicated to just purchasing more hardware, and older machines can even become profitable again too.

In general I would always expect the price of machines to be priced close to the fair value the machine can generate at that point in time.

On top of this mining hardware tends to be supply constrained, especially with the newer machines. In keeping with our Bitmain S17 example, these machines are entirely sold out. Talking to some of the people on the team they don’t expect to have supply available until November at the earliest.

Hashrate

The chance of a miner solving the next block is directly proportional to their hashrate relative to the hashrate of the total Bitcoin network (using Bitcoin as an example for simplicity).

An oversimplifying example to illustrate this is if you as a miner controlling 1% of the Bitcoin hashrate (compared to the overall Bitcoin hashrate) then you would expect to earn 1% of the total rewards from the Bitcoin network. 

Bitcoin hashrate over time volatility.png

However, the overall hashrate of the Bitcoin is always changing so the profitability of each miner depends on how many miners enter or leave the ecosystem. The Bitcoin protocol does have an internal method on adjusting the difficulty level (to learn more about this, go here).

Bitcoin Price

Since the block reward is paid out in the underlying cryptocurrency. For example if you are mining Bitcoin, the block reward you earn is paid out in Bitcoin itself. Given this the reward amount is directly tied to the price of Bitcoin itself.

The more Bitcoin is worth, the more mining rewards are worth. To engage in mining you have to be inherently long the cryptocurrency you are mining, because your profitability is dependent on it.

One of the major reasons why Bitcoin is the dominant cryptocurrency (outside of being first) is Bitcoin’s transparent, open, and fair supply schedule. From the genesis block, Bitcoin has a fixed supply schedule with a fixed supply - there will only be 21M Bitcoin ever created. 

Mining is the way new Bitcoin are created and emitted into the world. Today each Bitcoin block reward is 12.5 Bitcoin; however, this amount decreases every 210,000 blocks. At block #630,000 (estimated around May 24th, 2020) this reward will drop to 6.25 Bitcoin - this is referred to as the halvening event.

To see how halvening events have affected the Bitcoin and other cryptocurrency networks before, check out this great post by CoinMetrics looking at prior halvening events.

If you would like to go even further into the supply schedule of Bitcoin and what happens after all of the Bitcoin is created, see these two posts about Bitcoins supply and overall security budget (shoutout to Dan Held for covering this topic throughly).

TLDR - The price of Bitcoin and underlying supply schedule of Bitcoin greatly affects the profitability of mining itself. 

My Key Takeaways

After diving deep into the cryptocurrency mining space here are my biggest takeaways: 

  • While often overlooked the mining industry & underlying hardware plays a very important role in blockchain networks. 

  • Hashrate = cryptocurrency = money. For many people hashrate is the key on-ramp into the crypto world.

  • Just like we see the financialization of Bitcoin, I predict we will see a similar financialization of hashrate.

If you are an entrepreneur working in this space building marketplaces, exchanges, financial products, or any related services within the mining industry I’d love to chat with you. My contact info is listed on our fund website: Proof of Capital.


A big thank you to Edith Yeung. Noah Jessop, Jane Wu, and a few other large miners who prefer to stay anonymous for providing feedback on this writeup.

Why Libra makes me even more bullish about Bitcoin

This post was originally written on June 19th, 2019 on Medium

On June 18, 2019 Facebook finally unveiled Libra their cryptocurrency project to the world.

The announcement has drawn the attention of the entire cryptocurrency industry, mediatechnology industry, and even public markets. After diving into the technical whitepaper and talking to industry insiders. My conclusion is — While Libra itself is not that interesting, it makes me even more bullish on Bitcoin than ever.

In this tweetstorm turned blogpost I want to lay out the reasoning on why I think this is the case. Keeping in mind Libra is not officially being launched until 2020 so many of these assumptions can change between here and then.

The bull case for Libra (& Crypto at large)

Before laying out why Libra is not very interesting, I do want to highlight a couple of the more interesting aspects of the project.

Cryptocurrencies are serious business
One of the largest internet companies in the world is launching their own cryptocurrency and their own blockchain is a huge validation point for everyone. Back in 2013 when I first started in this space, this fact would have been unimaginable.

David Marcus and team are real operators with real experience scaling large companies. Facebook is bringing their A team to the cryptocurrency market, this isn’t some small innovation team experiment for them.

Basket of fiat outside of USD
Libra is not just a fiat-pegged currency but rather a basket of fiat currencies. Facebook wants to create a global currency rather than just a USD replacement.

libra compared to stablecoin and dai.png

The Libra project is essentially a programmable stablecoin that is backed by a basket of fiat currencies & governed by all of its members. If Facebook keeps their promise to not control more than 1% of the network, it could be a real alternative rail for some types of payments.

Largest potential on/off ramp
The crypto market has an estimated 30M-40M users today (a projection from my post last year) and Libra has the potential to onboard 2B more people into this market. That’s a huge step function increase and cannot be ignored.

If correctly executed, Libra could become the largest on/off ramp for the crypto industry by orders of magnitude. This is also a critical part of the financial infrastructure stack to help enable all other types of crypto applications as well (remittances, B2B payments, etc.).

Identity, KYC, and AML built in
As CZ, the founder of Binance, puts it best, Facebook already has all of your identity info for KYC so users won’t need to input any other data.

On a more serious note if this could be packaged up and portable, this would solve so many of the identity issues in the crypto space and help the industry as a whole move towards a much more compliant future.

There are some major privacy implications of this, which cannot be ignored, which we’ll get into later in this post.

The bear case for Libra

No community or ecosystem
Before they have even launched Libra has already alienated many developers in the crypto ecosystem and much of the top advocates in the industry. The majority of the people who have been building products and services in this ecosystem are not excited about Libra. We did an informal poll at our crypto event yesterday and not one developer was excited about Libra’s release.

proof of capital event okcoin.jpeg

On top of this Facebook has a consistent track record of treating its developers unfairlychanging rules on its platform, building their own competing projects to compete with developers, etc.

Existing crypto users won’t use it
Arguably the dominant use-cases in the crypto space today are: exchanges, mining, trading, and store of wealth. For all of these existing users who use crypto extensively today, I do not see them switching over to Libra for the overwhelming majority of use-cases.

There is no way someone storing their wealth in Bitcoin (non-sovereign, censorship resistant, unseizable asset) would ever move their assets over to Libra. To help illustrate this point here is a comparison chart of Bitcoin, Libra, and some of the other major cryptocurrencies.

libra compared to bitcoin xrp jpm coin ethereum eos.png

Targeting the wrong customer segment
Given the two points above, Libra is fundamentally betting their distribution advantage will help them win a whole new segment of users (more “normal” users) for new use-cases (remittances, etc).

early adopters of crypto.png

Given Libra is backed by a basket of fiat currencies, you are in essence giving up the upside of investment while subject yourself to volatility (FX & exchange risk). People will never 10x their money by buying Libra so at most it can only be a valuable bridge currency.

Comparison chart  of USD, EUR, GPB, AUD, NZD

Comparison chart of USD, EUR, GPB, AUD, NZD

Emerging countries have many other market dynamics
Given most people in developed countries would not convert their fiat currencies to Libra, they would mainly be targeting emerging countries.

Along with Facebook’s big vision to “bank to unbanked” one of the main markets Libra is touted to be going after is the remittance market. While in theory this is a large ($550B) and underserved market I’ve looked deeply into the remittance market and I do not see Libra playing much of a role here. The reality of remittances is — 80% of the worldwide remittance volume is handled via cash payments which requires money transfer operators (MTO) to have both physical presences & cash inventories.

While in theory Libra can partner with organizations to facilitate these cash transactions, nothing in their announcement shed any real details on how they would approach this. Crypto companies as a whole have not reached any significant volume in the remittance market.

On top of all of this, crypto is banned in India & China. Given Libra would have to comply with local regulations which cuts out 2.7B of their target demographic.

Regulatory risks for Libra
Facebook itself is already a very unloved company (it has an NPS score of -19, which is lower than all of the banks), is facing multiple lawsuits, is at the center of major privacy violations, and is in the political hot seat for its role in influencing elections around the world.

I forecasted that there would be no way Facebook would be able to launch their cryptocurrency initiative quickly, and already we are starting to see international and domestic politicians react to their announcement.

Moving fast and breaking things might have worked when Facebook was starting up, but I do not believe they will be able to take this same approach if they are trying to move into core banking/money services.

I predict that Libra will have to delay their 2020 launch date, not for technical reasons, but rather political and regulatory reasons.

Why Libra makes me even more bullish about Bitcoin

My personal takeaway is Libra at best will be a core fiat gateway for Bitcoin, and at worst case will be a closed & permissioned network that violates the privacy of its users to an even greater extent.

On the other hand, Bitcoin is aiming to become a worldwide store of value asset. Bitcoin is also moving towards this goal without a billion dollar company behind it, without the need of member organizations, without a leader, and without a large existing install base.

It is achieving all this purely through the incentive structure of Bitcoin itself and forming a large international ecosystem behind it. To me Bitcoin is far more revolutionary in its intent and is addressing a much larger total addressable market and for those reasons Libra makes me even more excited about Bitcoin.

Remittance Market— Primer and Landscape

This post was originally written on May 25th, 2019 on Medium.

Note — I originally wrote this writeup on the Remittance industry in April 2019. I’m releasing a redacted version of this writeup publicly. All of the numbers and stats in this article were from April.

An Introduction to Remittances

Remittance is the capital flow between individuals in two different countries, typically by foreign workers to individuals in their home country. According to the World Bank, the total remittance market is comprised of $550B in total flows, 80% of which are within emerging economies.

Because of globalization, remittances have increased sharply worldwide and have increased 5x from 2000 to 2018. Remittance is a significant activity and can be as high as ⅓ of the total GDP of various countries and is 3x the value of developmental aid.

The global average for sending $200 worth of value between countries is 6.94%. This means that ~$48B is taken directly out from remittance transfers through fees, middlemen, and financial institutions. These exact rates are highly regionalized, and will be discussed further below.

The goal of this document is to give a short introduction to the remittance market, a landscape of existing participants within this market, and how the blockchain could impact this market sector.

Primer on the Remittance Market

Remittances sit within the larger market of cross border payments, which includes all forms of payments between consumers and businesses

payments landscape crypto.png

Zooming in on the remittance category, the majority of remittances payments are handled by traditional banks & credit unions and specialized money transfer operators (MTO) which specialize in cross border payments. Some of the largest providers in this space include Western Union, UAE Exchange, MoneyGram, and up-and-coming operators such as TransferWise.

Because of the macroeconomic forces of globalization & migration,remittances have been growing 10% on average worldwide. Three key reasons why the remittance market is growing faster than worldwide GDP are:

  1. The number of migrants grew faster than world population, in total there are 266M international migrants (240M migrants workers and 26M total refugees). This means they are proportionally more people likely to send remittances.

  2. Migrants were able to earn higher incomes, because of relocation towards higher earning countries.

  3. It has become cheaper to send remittances, falling from 10% on average to 7% on average. This reduction in cost is likely to have allowed migrants to send a larger fraction of their incomes.

Source: World Bank — Migration and Remittances: Recent Developments and Outlook

Source: World Bank — Migration and Remittances: Recent Developments and Outlook

For remittances, sending money abroad has traditionally been an expensive task (vs. domestic transfers), with a never-ending supply-chain of middle men, paperwork, and hidden fees. On top of this, it is estimated that 80% of these remittance payments are still handled via physical cash.

Below is a diagram showing just how complex the movement of money internationally can become:

Source: Bank for International Settlements — Cross-border retail payments report

Source: Bank for International Settlements — Cross-border retail payments report

In terms of the overall market, remittances are highly fragmented based on geography and by specific corridors, which is the combination of 2 countries: where the money is sent and received.

Below are the largest receivers of remittances and the top coordinators worldwide.

Source: World Bank — Migration and Remittances: Recent Developments and Outlook Presentation

Source: World Bank — Migration and Remittances: Recent Developments and Outlook Presentation

Source: World Bank — Migration Remittances Factbook

Source: World Bank — Migration Remittances Factbook

The business model of cross border transactions is primarily a mix of two variables: direct fees and foreign-exchange (FX) fees.

  • Direct Fees — Direct fees include all of the fees related to the transfer itself. Examples include: a flat fee, transfer fee, % of transaction fee, outgoing fee, amendment fee, bank-to-bank fee, etc.

  • Foreign-Exchange Fees (FX) — The FX fee is the difference between the mid-market rate, and the actual rate money is exchanged into. Many remittance companies charge a premium on top of their internal FX rate and keep the difference.

These two factors combine together to create the ultimate margin the money transmitter takes. Today the worldwide average is about 7%. Western Union, for example, had a split of 70% and 27% between fee and FX revenue respectively in its 2016 results.

Below are some example mixes of fees + FX charges from some of the highest cost corridors in the world.

Source: World Bank — Migration and Remittances: Recent Developments and Outlook Presentation

Source: World Bank — Migration and Remittances: Recent Developments and Outlook Presentation

Remittance Market Landscape

remittance market landscape.png

Money Transfer Operators (MTO’s)

MTO’s dominate the remittance market and make up the majority of remittance volume worldwide.

Financial Institutions
For traditional financial institutions & banks, international remittances make up a relatively small portion of their overall product offerings; however, on average, banks charge a much higher rate (11% vs. 7%) for international money transfers.

Financial Institutions remittance landscape.png

Fintech Startups
Fintech startups have targeted the remittance market due to their large incumbent market share, although with the exception of TransferWise, very few have broken out. In addition, these startups mostly target digitally savvy customers with bank accounts vs. cash agents — which is the lion share of the market.

Blockchain Specific Fintechs
Blockchain technology has the potential to dramatically lower sending rates and add much needed transparency into the market. Although for the time being it does not seem like any of the new startups have dented the overall market yet.

Incumbent Advantages

Brand, Agents, Cash, Compliance, and Acquisition.

While on the surface, incumbents like Western Union looks like a great target for disruption, there are deep structural reasons why they are still maintaining their lead.

  • Brand — Incumbent providers have huge brand & awareness advantages across the globe with 90%-100% brand awareness in all of the top remittance corridors across the world.

  • Network — Incumbent providers have a huge embedded network of local MTO operators in countries globally, Western Union has 204 regulatory licenses, 500K retail locations, 100K ATM’s, 150M customers, covering every major currency & corridor around the world today. Many of these retail locations are also binded to exclusive contracts to Western Union as well.

  • Cash — It’s estimated that of the total remittance volume worldwide, 80%+ of this is handled via cash payments which also require MTO’s to have both physical presences & cash inventories. For the most part, fintech startups are not serving this segment of the market.

  • Compliance — What most startups don’t realize is the cost of transfering money is not the most expensive part, but rather compliance costs. It is inherently difficult to ensure money is being sent compliantly in multiple jurisdictions 24/7, which is why 20%-40% of the remittance cost is due to compliance alone.

  • Acquisition — On top of compliance, since the remittance market is an established market, incumbent players are willing to spend $15–70 per customer depending on the specific corridor they are targeting.

Demand Side: Satisfaction?
For all of these costs, fees, and friction in sending money cross-border — users of incumbent services are generally satisfied with their experience.

On top of this, as mentioned a few times, the majority (80%+) of remittance payments are processed via cash — either on the receiving, sending, or both ends. Even when people have bank accounts remittance senders prefer cash for a few reasons:

  • Many migrant workers are undocumented.

  • Many migrants are afraid of being deported

  • Avoiding taxes by sending cash to family members

  • Not wanting to fill out paperwork to setup bank accounts

Core Value Proposition
In my opinion, most startups are touting cheaper fees, when that is not the main motivating factor for most remittance senders or receivers. Instead new startups should focus on:

  • More transparency (TransferWise)

  • Ability to track payments

  • Lower compliance costs

  • Unique acquisition channels

  • Focus on underserved corridors

The biggest strategic questions any new startup needs to decide on is if they want to focus on more affluent customers first (where all the startups are today) or focus on the larger (but harder) cash market.

Why now?
In the ideal world, sending money cross border should be as easy as sending a message via WhatsApp to anyone across the world. In theory you can send a digital currency, like Bitcoin, quickly and at low cost; however, anything that interfaces with the banking system (especially cash) adds many complications and cost.

There is a massive opportunity to roll up all of these regional players into one large international payments company. Expanding from there to business payments, etc. also massively expands the total adjustable market these new companies can service.

Appendix

Future Evolution of Remittance
Remittances today is most commonly thought of in the most basic function — sending money overseas.

As this fundamental layer is solved digitally, new services can be offered to this customer base, blurring the lines between remittance, checking, and business accounts, etc.

future evolution of remittance.png

Average Transactions Amounts by Providers
Among remittances specialists, average transfer size is much smaller depending on core customer segments. For CurrencyFair and TransferWise that mostly target expats from developed countries, the average transfer size could be few thousands of dollars. For money transfer companies targeting migrants from developing countries, the average transfer size is usually a few hundreds.

  • CurrencyFair — $5,500

  • TransferWise — $2,300

  • Remitly — $500

  • Transfergo — $400

  • WesternUnion — $300

  • WorldRemit — $200

  • Large banks

  • JP Morgan — $15,000

  • BofA — $10,000

  • Citi — $7,000

  • Wells Fargo — $2,000

Additional reading