Bitcoin Will Disrupt Working Capital Management

I’ve been thinking a lot about bitcoin lately. And thus, I’ve been talking to people about it. Even some of the smartest people I speak with though are still skeptical. So I thought I’d write out why exactly I’m so bullish on the future of bitcoin.

Plenty of smart people have written about the potential of bitcoin across many fronts. They’ve outlined how the protocol works, the security underlying the blockchain, and detailed some of the relatively obvious and compelling applications that will create value in the short term.

These are all fine and well. I’m generally supportive of all of the above. But I don’t think the potential power of bitcoin has been articulated in a way that most people can appreciate or absorb. Here’s my attempt:

The foundational protocol of the Internet as we know it today is the TCP/IP (thusly to be referred to as “TCP”). For those who aren’t familiar with TCP, this protocol guarantees that content - specifically packets - makes it from point A to point B. Why is this important? TCP ensures that even if you have 1 bar of cell reception, that your email still loads without missing letters. If TCP didn’t guarantee delivery, then the web that we know today would be quite literally littered with holes. But at the end of the day, TCP is simply a means by which to relay information from point A to point B.

In the early 1990s, TCP was relatively new. It was just starting to take off, and people like Marc Andreessen started playing with TCP to build what would become Netscape. At that time, people felt that most of the good ideas were taken. Seriously.

Given that there weren’t many good ideas to be had, the world was nearing peak efficiency. Circa 1993, there just wasn’t much left to do. The world was humming along just fine.

Wrong.

With hindsight, it’s clear that the world was massively inefficient. Using the Internet, securities markets would grow exponentially in transaction and dollar volume to price assets as perfectly as possible given information available. Google, Expedia, Kayak, and others would disrupt travel agents. But none of these examples compare to the massive wave of efficiency that the sharing economy has ushered into society. Uber and AirBnB are predicated on information arbitrage via the Internet. These companies exist because they can use the TCP protocol to guarantee delivery of information from one person with a need to another with supply as efficiently as possible.

Now that the Internet is in widespread use for myriad commercial and consumer applications, it’s rather clear that the world has been massively inefficient. By leveraging the TCP protocol, we have found ways to optimize billions of decisions around the most up to date information.

Who could have imagined that TCP would enable Uber 5 years ago? What about 20 years ago?

And that leads us to bitcoin:

Bitcoin will be to digital payments was TCP was to digital information. Why and how?

In short, bitcoin enables near instant, near $0 transactions at near $0 cost. This is the killer app for bitcoin.

How much of the global economy is predicated on the fact that this isn’t possible today? A few examples:

Amazon Web Services (AWS) is predicated on post-paid billing even though they are investing in capital leases each month regardless of utilization. What if AWS billed you per minute, every minute, based on per minute usage? This would have a dramatic impact on AWS’s working capital, which it would then invest in future growth and lower prices.

Apple purchases >$100B / year worth of components, or about $270M everyday. I can’t speak to Apple’s agreements with its vendors, but it’s probably fair to assume that many of them need capital from Apple to finance operations. What if Apple’s suppliers could charge Apple per component as it’s delivered to the appropriate assembly plant? This gives Apple all of the leverage by only paying upon delivery, while dramatically helping ease the suppliers’ working capital.

There are hundreds of comparable examples. But the common thread outlined here is that bitcoin profoundly impacts working capital management by enabling true per / unit billing. You could pay for water/electricity, rental cars, rent, etc on a per minute basis for some discount. Asset owners and renters alike should be thrilled as this solves a huge market inefficiency: working capital management.

The total value of working capital across the S&P 500 is measured in the hundreds of billions of dollars. I wouldn’t be surprised if the total value of all working capital in all businesses is 100x more. Bitcoin can dramatically affect how we think about working capital manageemnt.

Bitcoin supply is intrinsically fixed, this single application can drive enormous demand. This is why I believe bitcoin can go up 100-1000x over the next decade.

Full disclosure: I am long bitcoin.

Cost is King

I recently listened to an a16z podcast about disruption theory. I’m a big fan of the theory and have been thinking a lot about it lately. The most important facet of the theory is cost.

Incumbents are disrupted because their cost model - typically measured by gross margin - is too high. When a smaller company devises a way to deliver the same value as an incumbent with a lower cost structure, disruption can occur. Thus the key to disruption is cost, or rather reducing cost.

Although we like to think about innovation in terms of novelty - think electricity, airplanes, or computers - the history of technological development over the course of human history can be more cohesively understood as a systematic removal of cost. Very few innovations were truly novel along a dimension other than cost.

For example, airplanes dramatically reduced the cost of long distance travel. However, human didn’t need airplanes to travel long distances. Millions of people travelled across large swaths of land and sea over the course of human history without planes. Airplanes just made long distance travel much more economical. I don’t mean to understate the power of this particular cost reduction - planes substantially changed how frequently humans could travel long distances, which has shaped every facet of business and personal life across the planet.

Even computers can be described through the same lens. Travel agents did what Kayak does. Telephone operators did what computers do. Analysts do what SaaS dashboards do. Uber drives do what computers will soon do. Because computers are programmed by humans, computers can only do what humans instruct computers to do. Through this lens, computers can be recognized as infinitely cheap “humans.” Electricity, silicon, and software costs pale in comparison to paying people’s wages - and thus mortgages, cars, meals, clothes, etc.

It thus stands to reason that the best businesses are those that methodically remove cost. Business cases to justify new innovations are by definition more compelling the more significant the financial impact of the innovation. For most companies, the largest source of cost is human labor. Thus the largest opportunities in business will be those in which technology can automate what humans used to do.

This notion that cost is the central challenge in humanity is perhaps best described by this quote by Jeff Bezos, founder and CEO of Amazon. “There are two kinds of companies, those that work to try to charge their customers more and those that work hard to charge their customers less. We will be the second.”

Cost is indeed king.