7 insights from Needham’s Bitcoin research report

On a flight back to Austin for holidays. Just read this Needham & Company research report on bitcoin which carries a price target of $848 (bitcoin just crossed $900 in its recent jump). Among institutional researchers and analysts that I’ve followed, Needham seem to “get” bitcoin best. Some notes from my pdf:

Bitcoin’s daily liquidity is equivalent to a mid-cap stock, and its daily return volatility is equivalent to a small-cap stock.

The US daily dollar volume = $28M

GBTC – one of the only exchange listed products that provide bitcoin exposure – has a market cap of $160M and $9M in daily trading volume

Worldwide gold supplies have grown annually between 1-2%. The US monetary base historically grew between 3-5% a year until 2008 when it began to grow 20, 30% a year

Immediately after Brexit, bitcoin was among the top three assets to show a price increase, alongside gold and the US dollar

An estimated 75% of bitcoin is held as digital gold – a store of value investment. This is about $10B of bitcoin’s current $14B market cap. By comparison, the worldwide gold market is $7 trillion, and $84 billion is invested in gold ETFs.

In the ongoing blocksize debate, Needham believes Core is “prudently conservative” given the value at stake, and agrees with the philosophy of shifting innovation to 2nd layer services, to the edges of the network.

Here are more notes from Needham’s research call with well-known bitcoin participants.

Hi! I write about habits and spirituality and random whatevers. Click here to see the daily habits that I track. Find me on Twitter @kgao.

Notes from Needham’s Bitcoin update call: bitcoin as digital gold and internet cash

For those interested in bitcoin, I read the full transcript of this November call and wanted to share some highlights. You can read or download the PDF transcript here.

Instead of writing notes, I’m just quoting participants verbatim. My takeaways: in the developed world bitcoin is digital gold and in the developing world it’s internet cash. Capital flight is not a big driver of price. There is no real cryptocurrency competitor given bitcoin’s size and network effects and ecosystem. Block size limit has slowed growth but there are promising solutions on the way.

Spencer Bogart (Needham & Company)

  • we find that Bitcoin’s average daily trading volume resembles that of the average security in the S&P midcap 400.
  • there was something on the order of $500 billion of capital flights in China in 2015. And if we think about $500 billion, if any significant percentage whatsoever was using Bitcoin, the price would necessarily be significantly higher. (me: this is also confirmed by Wences)

Wences Casares (Xapo)

  • in the developed world, we see a small number of customers with a large number of coins that do not move very much and they’re not being used for payments. […] It’s, I think, what you refer to as Bitcoin as digital gold.
  • Developing world: And their number one use case there that we see are people who have a smartphone and don’t have a credit card, and they have cash that they’re ready to spend, that they want to spend digitally. And because they don’t have a credit card, they are turning the cash into digital money, Bitcoin
  • But since January, when we began to have more and more fuller blocks and the transaction fees began to go up, we have kept growing by a much more linear fashion, not exponential, until – the way we were growing them until January
  • And in all of those large markets, when we interview our customers, and we see why they are using us, and there’s – the vast majority of them do not have an interest or understanding of Bitcoin per se. This is something they found to be able to turn the cash that they have […] They want to spend on something digitally. […]
  • Bitcoin has that dimension, has network effect around how many people are using it. And depending on how you count, Bitcoin has between 10 to 15 million users, and it’s adding around 30,000 new users a week. Those 30,000 new users that Bitcoin adds every week are more than all of the other cryptocurrencies have ever added combined.

Adam Back (Blockstream)

  • I mentioned fungibility, so I think it depends on the uses obviously. […] It’s one of the attractive things about Bitcoin is that it’s very permissionless, cash-like, payment hubs, strong finality.
  • In the layer two and Lightning side protocols, it’s no longer a broadcast mechanism but the payments are sent, routed much like fetching a web page from the web service in that other people that are not in the path of the transaction would not see the payments. So that improves privacy obviously as a side effect, but greatly improves scalability.
  • So there was some evidence that people who, you know, were slightly aligned with one chain would switch chains because it’s more profitable, and many more switched to mine Ethereum just as a way to sell it and buy Bitcoin. So I think that dynamic could exist in Bitcoin.
  • I think that’s one of the hard and fastest rules in Bitcoin, the 21 million issuance cap on Bitcoin.
  • And my personal view is that permissionless and censor-resistance is quite interesting, since you know, we already do have PayPal, and if users are just trying to make PayPal like small-value transactions, they may not be worried about censor-resistance, and we are then directly competing against PayPal.

Jerry Brito (Coin Center)

  • law enforcement generally feels that they have a handle on illicit uses, and that they have tools to investigate and prosecute illicit uses
  • If people have to ask me, what is Bitcoin? And they will say, “Well look, the IRS says that Bitcoin is property. It’s not money.” And the SEC has said that – well they haven’t but they probably will say that cryptocurrency could be a security. And the CFTC has said it’s a commodity like gold. And these things seem to be in contradiction with each other and isn’t that a problem for Bitcoin? And the answer is no.

Hi! I write about habits and spirituality and random whatevers. Click here to see the daily habits that I track. Find me on Twitter @kgao.

Why bitcoin is an asset class all its own, and why that matters (notes from a report)

An interesting bitcoin white paper from Ark and Coinbase. My notes:


There are three superclasses of assets

  1. capital assets (equities, bonds, income generating real estate like an apartment rental)
  2. transformable assets (physical commodities like grain, precious metals like gold)
  3. store of value assets (precious metals like gold, currency, fine art)

Four qualities distinguish each superclass

  1. investability (how liquid is the asset, how easy is it to invest)
    • bitcoin: surprisingly deep liquidity (see figure 1 below)
    • more and more bitcoin holders are in it as an investment tool
  2. politico-economic features (how its governed, how to value it)
    • bitcoin’s obvious applications are similar to fiat currency (medium of exchange) and gold (store of value), but it has far greater potential (eg, for smart contracts, for IoT accessibility)
    • in may 2016, trading volume averaged $1B a day, transactional volume averages $100-150M
  3. correlation of returns (price should move independent of other assets)
    • Strikingly, bitcoin’s price movements have been separate and distinct from those of other asset classes during the last five years. Bitcoin is the only asset that maintains consistently low correlations with every other asset. Remarkably, the maximum correlation, positive or negative, that bitcoin exhibited with each of the other assets is the minimum correlation that any of the other paired assets displayed with each other
    • see figure 2 below
  4. risk-reward profile (what are an asset’s absolute returns and volatility?)
    • all about the Sharpe Ratio: measure of returns per unit of risk taken
    • bitcoin’s price volatility decreasing over time
    • it’s still the most volatile of the asset classes (compared against equities, bonds, gold, real estate, oil, emerging market currencies)
    • but bitcoin has the best absolute returns and superior Sharpe Ratio when you look at last 5 years
    • ARK and Coinbase believe bitcoin is the first of its kind in what is rapidly becoming a distinct asset class. Since cryptocurrencies are subject to the strong network effects of users and developers, they may submit to a “winner takes most” model unlike bonds and equities. The cryptocurrencies that successfully foster the flywheel of user and developer engagement could grow to formidable market capitalizations.

Figure 1
Bitcoin trading liquidity

Figure 2
Bitcoin correlation with other assets

Read the complete white paper here.

Also, here’s the best definition(s) of a blockchain I’ve read:

See the blockchain as a database replicated as many times as there are nodes and (loosely) synchronized, or as a supercomputer formed by the combination of the CPUs/GPUs of all its nodes.

Hi! I write about habits and spirituality and random whatevers. Click here to see the daily habits that I track. Find me on Twitter @kgao.

How I manage my money: personal finance if you’re lazy and like to take risks

As my older brother, who to keep me off the streets invited me to live with him after his wife died, said, shaking his head in warning, “Don’t spend your capital.” His advice was right, but his timing was wrong. I’d already spent it. He sounded like the ghost of my father. Capital produces income. If you want to have an income, don’t dip into your capital. I’d always been a bit of a contrarian, even as a child.

It was while reading the above story that the importance of saving your money and growing your capital finally hit home. No one plans to be broke. But it can happen to anyone. Better to be smart today, suffer a little now by saving and reducing and planning, to prepare for an uncertain tomorrow (especially if like me you never want another “job” :).

And over the last few years I’ve been fortunate enough to build a small nest egg. Plain luck, nothing more. In fact my spending habits were by and large terrible. While this tiny egg gives me the freedom to live where I want and do what I want, it’s a double edged sword as I’m fond of saying, and like all double edged swords, both sides can hurt you. To imitate a favorite saying, money is the food of the wise man and the liquor of the fool.

The combination of the above article and reaching 30 has forced me to pay attention to personal finance and money management. Growing up it was a non-issue. My parents gave me a credit card at 16, but budgeting and saving and investing were seen as unpleasant, strange, adult activities. Until a few years ago I didn’t even check my credit card statements (even today I can only manage a casual perusal).

But there’s no hiding the fact that even though I dislike being an adult in some ways, I dislike being stupid more. And parking a lot of money in a checking account earning effectively negative interest is plain stupid.

So I thought this was a good chance to review how I’m managing my money, and share my methods here. Not an expert, simply an engaged and motivated learner. So, standard “I am not a licensed financial advisor” disclaimer. Follow any of the advice at your own risk. Etc. etc.

First things first. With personal finance, what matters most is knowing the lifestyle you want not only today but well into the future, and your tolerance for risk and volatility. To describe mine:

  • I like extremely high risk, high reward opportunities. That’s why startups suit me
  • I’m lazy with money management. As in, I want to spend less than an hour each week doing the administrative work on my money and investments. In truth I spend far more time than that, but it’s only on things that interest me, like reading about cryptocurrencies
  • While currently I have a fairly simple lifestyle, I want to preserve the flexibility to work only on interesting projects, to travel where I like, and to splurge on the occasional luxury (like a night out)

To extrapolate from these bullets, high volatility assets like bitcoin and startups are interesting. So also are very liquid investments. No 5-year CDs for me. Finally, it means I approach most investments with a set-it-and-leave-it mentality and don’t day-trade or rebalance weekly. Finally finally, it means no brick-and-mortar real estate: too much work, too little liquidity.

David Swensen, Yale’s endowment manager and finance guru, gave the above wonderful lecture. My big takeaway: asset allocation is BY FAR the most important driver of returns. Popular approaches like trying to time the market and picking select securities (as opposed to investing in an index fund) are rolls of the dice, especially for individual investors.

So here are the things I do to manage my money:


This is the biggest chunk. Wealthfront is one of the better known roboadvisors. In return for a small monthly fee, they allocate your assets depending on your specified risk level, they rebalance as needed, and they give you an easy to use interface and simplified tax documents for Uncle Samwise.

Yes, roboadvisors like Wealthfront and Betterment cost more than Vanguard index funds. Blake Ross wrote a great essay on why he doesn’t use a roboadvisor. But Wealthfront works for me. And I’d specially recommend it if you can put in more than $100K, the level where tax-loss harvesting kicks in. I saved several thousands in capital gains losses on my 2015 tax returns from this feature alone, more than paying for Wealthfront’s management fees.

Signup with my link, and we both get an additional $5K managed for free.

Since I’m self-employed, I also use Wealthfront to host a self-funded IRA and I max this out every year. While there are some tax benefits to investing in an independent IRA, probably the biggest value is the forcing function of knowing I will save $5.5K (the max contribution) every year no matter what. And once it’s invested you can’t withdraw that money without paying a penalty. Let negative reinforcement work for you.

Bitcoin and cryptocurrencies

If you’ve followed my blog for awhile you know I’m an fervent fan of bitcoin and the possibilities of decentralized, open-source cryptocurrency. I’d recommend investing no more than 5% of your total liquid assets in this category, though I have well broken this rule.

Here are two good research papers on why to invest in bitcoin:

  • Bitcoin: Ringing the bell for a new asset class [link]
  • How to position for the rally in bitcoin [link]

If, let’s say, you want to invest $10K in crypto, ideally you’d put $9K into bitcoin and $1K into ethereum. Ether has the second biggest market cap and a lot of promise as an innovation platform. And while most cryptocurrencies are highly correlated, ethereum is both (relatively) liquid and (relatively) less correlated with bitcoin than, for example, litecoin.

I’d recommend these two services to buy and store small amounts of bitcoin (under $10K): Coinbase and Circle.

If you signup to Coinbase using my referral link, we both get $10 when you purchase $100 worth of bitcoin. And I like Circle because it includes some level of deposit insurance.


I use Fidelity to invest a small amount in index funds and ETFs (like, I own a tiny amount of a gold ETF). This is a small percentage of my assets when compared to Wealthfront and crypto. While Vanguard seems better and I’d switch to Vanguard if I were starting over, both brokerages are huge and reliable and get the job done. One of the benefits of a brokerage account like Fidelity is its debit card which refunds all ATM fees no matter what ATM you use. This is awesome if, like me, you simply use whichever ATM is most convenient. Fidelity has refunded even $35 one-use ATM fees (you can probably guess where I was). Vanguard probably has a similar benefit, as does Schwab.


Chase Sapphire credit card (I use this card most when traveling overseas, as it has no foreign transaction fees). I’m not an expert at maximizing credit card rewards and rebates, I simply stick with one that covers most of my needs

LendingClub. Started recently. Diversifies the portfolio and has decent returns but mostly, microloans are an interesting asset class and I want to learn more. Automated investing make allocation easy. You don’t have to spend a lot of time picking loans

A small percent (5% or 2 months of living expenses) in cash as an emergency / rainy day fund.

A couple angel investments in tech startups but I haven’t made many of these. For one, I don’t have enough cash to truly diversify as an angel investor (you should target 25-50 startups for ample diversification and to figure out what you’re doing) and it takes a lot of time to become a good startup investor and the skillset just doesn’t interest me

Hi! I write about habits and spirituality and random whatevers. Click here to see the daily habits that I track. Find me on Twitter @kgao.

Wences on bitcoin, from Digital Gold (a great book)

Wences was sourly dismissive of all the talk about Bitcoin’s potential as a new payment system. He was an investor in Bitpay but he said that fewer than one hundred thousand individuals had actually purchased anything using Bitpay. “There is no payment volume,” he scoffed. “It’s a sideshow.” The real story, he said, was the steady viral growth that had already taken Bitcoin, by Wences’s count, from a few people on that first day back in January 2009 to six million users. “People buying half a Bitcoin, storing it, treasuring it, and talking about it—and getting more than one person in,” he said. “That’s all Bitcoin has been about for four years—and that’s all we need to get to where we want it to be.” He did believe it would eventually be the best payment network the world had ever seen. But that would happen only when a billion people owned some Bitcoin.

A great book [Kindle] that covers both bitcoin basics and the story of its creation.

Hi! I write about habits and spirituality and random whatevers. Click here to see the daily habits that I track. Find me on Twitter @kgao.