Contrarian Investing in Bitcoin: Going Against the Grain, Looking at Things Differently, and Finding Value Where Others Don’t
Over the last ten years our team has developed a deep and nuanced understanding of bitcoin's potential and its inevitable role in the future of finance and technology. This understanding wasn't immediate or obvious; it started as an inkling that became a belief and resulted in a conviction that bitcoin would eventually become the fundamental monetary good of the world. Our knowledge has been cultivated through rigorous analysis and hands-on experience questioning the very fundamental ideas underpinning money and global commerce. Our confidence in bitcoin has been cemented against the broader private investing market in what can only be described as a contrarian conviction, as 99.99% of individual and institutional capital allocators still have yet to recognize this outsized asymmetric opportunity of bitcoin and its ecosystem and are instead focused elsewhere.
Ten31’s first investment in the bitcoin ecosystem was in Unchained in early 2020. At the time, underwriting Unchained’s unique model of leveraging bitcoin’s native multi-signature properties for collaborative custody and non-rehypothecation of customer assets was counterintuitive to traditional banking and the approaches by the leading crypto custody and lending platforms: Blockfi, Celsius, and FTX. However, we believed Unchained’s differentiated approach was the correct path forward for appropriately managing risk under a new paradigm underpinned by bitcoin, and this was ultimately proved correct after these now defunct crypto platforms zeroed out tens of billions of dollars of investors capital with near-overnight collapses as a result a fundamental misunderstanding and mismanagement of bitcoin. Meanwhile, for the last eight years Unchained has demonstrated an unblemished track record, with no losses of customer funds and zero loan losses on its lending product (even during 50% bitcoin price drawdowns), highlighting their position as one of the leading bitcoin financial services companies. We have continued to bolster our involvement with Unchained, investing in them multiple times further since 2020, and have grown our investment portfolio to more than 35 companies focused on bitcoin and freedom tech, many of which further exemplify our willingness to take contrarian positions in different ways when we have conviction in global bitcoin adoption and the companies which can enable and accelerate it. I highlight a few such examples below.
Going against the Grain
Our investment thesis is anchored in two core beliefs: firstly, the adoption of bitcoin will accelerate, reaching the untapped 99% of the global population yet to engage with this revolutionary asset in the coming decade. Secondly, widespread adoption will catalyze the development of innovative technologies designed to meet the diverse needs of a global user base. This perspective on bitcoin guides our investment decisions, leading us to look for and support unique companies we think have made or can eventually make the zero-to-one leap on product-market-fit, resulting in a coiled spring-like action ready to explode alongside the adoption cycle of bitcoin. A clear example of this thesis is our investment in Coinkite, which develops and manufactures the Coldcard, the industry standard for bitcoin security hardware for over a decade and a device our investment team has been personally relying on for years. While most traditional VC investors would quickly dismiss investing in any hardware business, we took a different point of view, even if non-conventional.
Ten31’s investment into Coinkite aligns with our core belief that as the realization of bitcoin’s value continues to grow, so will the need to safely and securely store bitcoin private keys. This need will become such an imperative that individuals and institutions will be forced to adopt security best practices because of the sheer value of bitcoin being secured. We see significant value in best-in-class physical security devices protecting bitcoin private keys which are entirely digital: when money moves to the digital realm, we believe security needs to move to the physical realm. The demand for the Coldcard has been robust and accelerating year over year, with the device’s value being validated by spikes in sales every time there are exchange frauds and hardware hacks, which dramatically reinforce an individual's need for secure ownership of bitcoin.
In addition, security hardware businesses are more attractive and more recurring than they get credit for. Coinkite’s security offering is not a static endeavor isolated to one piece of software or hardware. Since security is a process that must be continuously refined for protecting against outside vectors and improving the user experience with updated software and hardware, first movers who continually innovate become impossible to catch, and the continuous innovation cycle drives repeat purchases from loyal customers. Security hardware competitors like Ledger and Trezor are not singularly focused on bitcoin, resulting in increased attack surface and continually compromised security for end users, as in the case of last year’s Ledger Connect Kit hack, the multiple hacks of Trezor products in recent years, and a variety of other noteworthy vulnerabilities. Coinkite has a decade head start in securing bitcoin value that has already grown 1000x since the company’s inception. They have kept billions of dollars worth of bitcoin secure in the early days and will keep trillions of dollars worth of bitcoin secure into the future.
Looking at Things Differently
Having invested in over 35 diverse companies to date, ranging from financial services and mining to consumer applications and scaling solutions, Ten31 has an unique vantage point in the ecosystem that bolsters our long term vision of how bitcoin adoption will evolve. This breadth of involvement allows us to identify and invest in companies that might not make sense to outsiders or those without the foresight to anticipate where bitcoin is going. The thesis driving our investment in Mempool.space, for instance, increasingly looks obvious in hindsight but was anything but just a few years ago. Our view was on the scarcity of blockspace and specifically the next block: we believed getting a transaction into the next block was going to become increasingly expensive as more users bid for the chain’s limited blockspace. Wiz and SoftSimon, cofounders of Mempool.space, shared our vision of the future, and we have subsequently invested in Mempool.space multiple times over the past several years, during a period when blocks were usually empty and few cared about mempools. Each time we invested the company had progressively de-risked themselves as they moved from zero-to-one building the go-to block explorer.
Today, Mempool.space provides blockspace analytics and fee estimation behind most bitcoin apps along with their newly launched transaction fee accelerator. The new transaction accelerator provides a seamless way for enterprise clients to have transactions included in the next block reliably. This is important because exchanges and other enterprises with large quantities of daily transactions interact with an open bidding market and therefore are at risk of frequently over- and under-paying miners to include their transactions in the next blocks. Mempool.space’s accelerator helps to align the incentive structure amongst miners, pool operators and exchanges due to the shared economic benefit from out-of-band payments for the accelerated transactions as well as the enterprise clients receiving assurance on transaction inclusion in the blockchain. Mempool.space demonstrates an innovative business model with a clear vision for their role in expanding the bitcoin economy, and Ten31 is proud to be backing them and aligned on the same vision.
Finding Value Where Others Don’t
Bitcoin offers a blueprint on how to build a successful brand in an open permissionless manner, and at Ten31 we embrace investing in companies building open-source software that interacts with open protocols. What many traditional investors – and even some dedicated “crypto” funds – still haven’t grasped is that in an open system, all participants can benefit from advancements made by other independent participants. For instance, both individual academic researchers contributing to Bitcoin Core and large teams of engineers at PayPal, Robinhood, or CashApp can and have all added entry points for new users of the bitcoin network, which directly benefits all participants as the network expands creating exponential value. Thanks to Metcalfe’s Law we have a framework on how to model the future expected value of the network and thereby the companies servicing the bitcoin ecosystem. Thus, Ten31’s core beliefs align with the growing trend of new network participants (Argentina, BlackRock, ERCOT and TVA) and the outsized value to be captured as novel utility is unlocked for these new users of the bitcoin network and the resulting network effects.
Network effects or synergies usually do not exist across a portfolio, but they become more evident every day in ours. Traditional VC often takes a “spray and pray” approach across the broad digital asset ecosystem, and thereby completely misses the benefit of investing in singularly focused bitcoin companies. In contrast, Ten31’s sole focus on bitcoin companies provides our portfolio the ability to leverage one another with synergies emerging across every vertical we cover due to the open properties of bitcoin and the deliberate approach we have taken towards fostering an open community amongst our portfolio. Ten31’s initiatives are not just about capital infusion; we are about fostering a community, sharing insights, and building synergies that drive growth and innovation in an open and permissionless manner. Strike is a great example of the power of this approach. The interactions Ten31 facilitated between Strike and the rest of our portfolio helped Jack and team to identify unmet needs in the market that laid the foundation for new and upcoming Strike products. Strike Black now offers any company the ability to have a legally and regulatory compliant way to provide bitcoin services globally, thereby lowering the hurdles for start-ups to create new products and services seamlessly and legally in over 70 jurisdictions globally reaching 4+ billion people. Strike unlocking a global market for new companies to emerge creates a more rich and robust bitcoin ecosystem that can develop which aligns with our core beliefs at Ten31.
This kind of true cross pollination leading to unlocking new markets across a portfolio can only occur because our companies are building out and contributing to open protocols, whereas the walled gardens and closed source software stacks in traditional tech investing limit intra-portfolio synergies. We’ve seen security infrastructure companies like Start9 partnering with lightning infrastructure provider Mutiny and leading Nostr client Primal; Primal partnering with Strike; and financial services players like Battery and Unchained partnering with Ibex and Coinkite, respectively. All of these unique collaborations exist because of the open properties of bitcoin and these companies’ direct proximity to one another in the Ten31 portfolio.
Ten31's investment strategy, deeply rooted in our hard earned core beliefs, reflects a long-term, contrarian vision of finding the best bitcoin founders and helping them unlock value in new and unique ways. So, while others are chasing the next buzzword blockchain or shiny NFT we will be focused on the best founders building novel, long-lasting technologies in bitcoin that are ready to scale to the next billion people globally. Our approach is characterized by a blend of strategic investment, active involvement, and a commitment to fostering innovation and growth within our portfolio companies and broader ecosystem. We will continue to lean into the open permissionless model that is bitcoin and focus on the outsized asymmetrical opportunities in the emerging and globally expanding bitcoin ecosystem, even (or especially) if it is at odds with conventional thinking or the approach by traditional investors.