Preliminary notes:

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I am at the Cambridge center of alternative finance. I am also the founde rof... macroeconomics if you will... very proud to have created and ... this is our .. we started this in 2014, this is a snapshot of what will be coming out over the next few days. If you are worried about the speed that I will be going through these, it will be online soon.

So... I am going to try to cover 4 things. I wnat to provide a general industry overview. We think of cryptocurrency and watching together these reports. I want to talk about the state of bitcoin. It's still the killer app of blockchain. I want to talk about ethereum and then go into the state of blockchain.

First we will start with an industry overview. Whoops. There's been $1.1 billion dollars raised today by Bitcoin and cryptocurrency startups and blockchain startups. the other point that is interesting is that we saw the reversal of the trend, of the declining levels of investment, both in terms of fund flow and average deal size. This changed in Q1 as the emergence of the blockchain investment category. What makes this more impressive is that it has happened in a continued slowdown of the overall venture capital environment. It continues to soften.

I am going to spend a couple of minutes on this slide. How do we analyze this space and how do we segment this space? I spoke about this in September. We think about 3 different categories of companies when we do analysis. Bitcoin companies or currency companies, focusing on currency activity, a Bitcoin company is involved in payments, remittances, exchange trading, any type of currency company. That's one class of companies. We distinguish this from blockchain companies which do non-currency non-financial things, such as identity management. These are often not financial assets or currency transactions in the same way that currency companies focus on it. Then we have hybrid companies, like itbit, which started as a currecy company as an exchange platform and then moved into blockchain solutions to do a bit of both. If you run this segmentation and numbers, you see 40% of the total 1.1 billion has gone to blockchain and hybrid startups, up from 36% at end of Q4. Still less than half investment is in blockchain. In Q1, blockchain investment went over the bitcoin market investment, this is clear evidence to move beyond hype and we're now in the implementation phase where people are walking the talk in terms of backing blockchain initiatives.

I am going to say some words about Bitcoin. They have had an interesting few months. It has had an interesting morning. It's one of those things you dread as a presenter. You have to work on your slides and then your phone rings in the morning because some news agencies want you on. Bitcoin is this economic miracle. Bitcoin is often dismissed... people think it's old news, but really it has defied economic theory. Many millions of people aren't supposed to move ot a currency not backed by a central bank. You should not dismiss this. Bitcoin has had positives. Market capitalization is up 2x, it has doubled in value. The number of ATMs has doubled. The computing power that has underpinned the network has gone up 3x, it has tripled. The bitcoin price has been relatively stable, in Q1 it was not volatile, which is not necessarily a good thing. Some people argue that bitcoin will be adopted if it was more stable in value, but I would argue that volatility would attract traders and attract media attention. No volatility is no panacea for Bitcoin. Something unusual for trading this quarter is that exchange volume spikes. When volatility is low, traidng is usually low. Take the volume data with a grain of salt, but it's still interesting.

How does bitcoin perform against other currencies? It's up, but it's underperforming other leading currencies like silver and gold, it has a mediocre start to 2016 I would say. This is largely responsible for the mixed forces weighing on Bitcoin. There's the scaling debate, which was solved with segregated witness, the emergence of alternatives like Bitcoin XT, and later this year the mining reward will be cut in half from 25 to 12.5 BTC which will be a supply constraint. I think some forces are keeping bitcoin roughly where it is.

The final comment for Bitcoin is regarding the regulatory environment. Only one company has been approved for a BitLicense, which is Circle. Many others are waiting for their applications. The regulatory cloud over Bitcoin is still a big issue. In Europe ther eis a concern around using Bitcoin for threat financing, which could have implications for ethereum and other currencies.

Let's move on to Ethereum. Traditionally, altcoins have been a small space. If you take a look at the total market cap, over 5000 cryptocurrencies, Bitcoin has traditionally represented most of that. There's been the rise and fall of ethereum which has had the best by far, up over 1300% against bitcoin's price, a huge spike in value. It's often the case that Google search interest is tightly correlated with price flights, you see ethereum rising in the search rankings against other blockchain bitcoin currencies.

So what's so special about ethereum? Well there's a lot of things that we will hear from Ethereum developers... Smart contracts actually work on both Bitcoin and Ethereum. They are killer apps for Bitcoin technology. Both have smart contracts and scripting. Imagine you have a dog walker, Fido, he has a GPS chip, the dog walker walks around his route, the chip sends a signal to the network, commanding a computer to send a payment to your dog walker. That's how smart contracts work. It's how automation works. And this is native to blockchains.

The final slide about ethereum, this is the slide I was worried about, Linux has Linus Torvalds, Ethereum has Lil' Buterin, and who does Bitcoin have? Satoshi Nakamoto? This is an interesting issue. Open source movements, governance, innovation. For the last year, Bitcoin has been broiled in a big debate about scaling hte protocol, which was solved later with segregated witness. Ethereum does not have this gridlock because Vitalik Buterin can decide everything. It's the importance of founders for governance and innovation. It's interesting that Lil' Buterin coming out today announcing that he's Cookie Monster, has announced a strong position on the scaling argument, that he is taking some shots of critics of that approach, it's something to watch in terms of the importance of founders in innovation and governance.

So let's move on to Blockchain.... first sentiment, then taxonomy, conceptual framework and we'll talk about investment and biz dev. So the sentiment around blockchain is obviously, gotten pretty significant, we can run word cloud dominance analysis, it's still bitcoin and blockchain. Another important point to make is that blockchain interest is in Asia, it's massive. It's going to have huge impact on how this technology progresses. Anothe rthing to highlight is that the number of press releases is continuing to grow, which firms are announcing new blockchain initiatives? It accelerated in Q1.

So the taxonomy is important for understanding how we approach the blockchain sector. We have, you know, we noticed how blockchain technologies is this warshack effect. Some people look at blockchain and see open source and other people look at it and see something different, they see a private closed system. This is one of the most powerful things about databases, it's the ability to do different things from different people. We want to distinguish between the blockchain and the blockchain technology. It's akin to oracle or IBM which sells databases. The blockchain can refer to Bitcoin or Ethereum. That's one distinction we should make. The second distinction we don't have time to go through this, it's public and private blockchain databases. Here in NY, it's easy to understand why there's interest in private databases. Having the ability to reverse transactions is powerful and financial firms want this. Having control, having faster speed, having more throughput, this is something that databases offer over blockchains.

The final point that I wanted to make, I wanted to use a 2x2 matrix slide because of Deloitte people here. Let's distinguish between public and private blockchains. Platforms and software. Platform is like Facebook, iOS, you can build on this, other developers can build things on tihs. Software is more like Oracle sells a database to a compay, use it in a more limited way. Example is that public platforms like Ethereum and Bitcoin, Blockstream, the reason why this 2x2 is useful is because it allows us to observe areas of concentration. Where do we see activity in this space? There's the public platform quadrant, and then the private software project quadrant. In the lower right you have companies like DAH, Chain, R3 is an interesting example of you know a company or organization that might be in the process of transitioning but might become a platform but the jury is still out on whether these firms will survive or whether they will have important implications for development of this space. To wrap up on biz dev....

To wrap up on biz dev, the total number of bitcoin deals in Q1, there were 2x more than currency, there was 4x more startups as there were 1 year ago, these are some of the highlights of the blockchain space, if you look at geographic dispersion the U.S. continues to dominate, but also UK and Israel, Sweden and Germany. Argentina is also attracting significant investment. We are seeing similraities with Bitcoin which is that advanced countries are attracting the most investment.

R3 was first to build a large consortium, that does not seem to have a negative impact of other initiatives to attract a wide range of partners, like Hyperledger (Open Ledger Project) is 40 members, Microsoft has Azure, SWIFT made an announcement, being first has not led to a lock on the space, I would say the environment is very fluid still.

I want to leave you with a question- as we move from hype, this really important question is timing. 2.5 years ago, Marc Andreessen wrote a piece in the NY Times where he said this area reminded him of the Internet in 1993. This space resembled to him the 1993 Internet. From 1993 we know that only a few short years we saw a world media company like Cisco emerge. Are we, the question I am leaving with, which I hope we can get a , are we closer to that view of the world, only a few years off? Are we close to the 10 year timeline? Morgan Stanley suggested the latter.....