Institutional Money In Bitcoin: Problem or Solution? An Expert Take
Institutional investors and their money have been painted as both the doom and the salvation of Bitcoin. Analytics say they are important for the first crypto to reach new heights. Bitcoin maximalists say they threaten the very nature of it, at least as it was envisioned by Satoshi, and its role as the alternative to traditional finance.
Figuring out what’s the deal with the institutional investors and what to expect from their advent into Bitcoin, it is useful to have an opinion of someone knowledgeable in the nuance of both the crypto-industry and traditional finance.
Konstantin Richter is one such person. He is the founder and CEO of Blockdaemon, a New York-based company that provides institutional investors and developers with full node management solutions for over two dozen blockchain protocols. In May, the company raised $5.5 million of venture capital from Hashkey, CoinShares, Blockchain.com, and Fenbushi Capital among others.
Big Day at Blockdaemon! We’re excited to announce our latest funding round with participation from @HashKeyGroup, @CoinSharesCo, @fenbushi, @blockchain, @SPiCE_VC, @KeneticCapital, @ComcastVentures, @LererHippeau, @Boldstartvc, @heavybit! Read more here! https://t.co/vlqNAf4S8w
— Blockdaemon (@_blockdaemon) May 12, 2020
In an exclusive interview with ForkLog, Konstantin Richter explains why Bitcoin needs institutional money and shares his views on staking along with other attributes of alternative blockchain projects.
ForkLog: People often say that Bitcoin has been built not just to improve financial technology but as a means of liberation, a reaction against corrupt governments, multinational corporations, and the Wall Street financial institutions. However, the narrative has somewhat changed in recent years with many people believing that the way to unlock the true potential of the cryptocurrency and to achieve mass adoption is through institutional investors. Is there still a place for revolution in Bitcoin?
Konstantin Richter: I am a firm believer in the disruptive power of blockchain-based cryptocurrencies, but I also think that the interest of large institutions in the space accelerates the revolutionary impact because it takes crypto to a different scale. It also means that we need to think about building bridges into normalcy. That in itself is a good thing because it will allow more people to participate, and this is something that we ultimately want. The question is about how you ensure that institutions that participate in these networks don’t have any way to control them. The second concern is how you protect the tools associated with these networks.
I can only respond to those concerns technically, and that’s why we are building our platform trying to reach a good balance of active public nodes on the network so that institutions can’t just jump on and take it over. But over time, there has to be an institutional-grade performance of these decentralized networks, because you can’t have mass adoption without a really rigorous set of standards and security. It would just probably not work in a practical manner.
A good example of that is the Quadriga exchange and what has happened to it. I understand the arguments of Bitcoin people very well, but traditional crypto guys can often be more dangerous than institutions coming into the market. So an open, fair, and transparent market is not what crypto is right now. I also think that a lot needs to happen for the revolution to become a reality, and institutions are one aspect of that.
FL: Some people would probably disagree with you on that. For instance, Dr. Adam Back, the man behind some important technological advancements in crypto space, recently said that an additional institutional adoption may not be necessary for the Bitcoin price to reach $300,000 because the current environment is causing more individuals to think about hedging.
Konstantin: I don’t want to speculate on market prices because you can do wash trading and make Bitcoin price go up. I think it’s a misconception of what institutional involvement is. What institutions mean is that entities are functioning within the framework of a government-managed society and there are a lot of solutions for which they will be really important.
The valuation of cryptocurrency can be driven by so many different factors, and a lot of them are prone to market manipulation. What I think institutions will offer in time is that individuals are less likely exposed to such experiments.
Today we have three or four Bitcoin-centric OG-managed entities that are capable of sending the price up and down 30% at no notice. Ultimately, that is not a good thing. That means that a lot of people are at the mercy of entities that are not managed by anyone and have no proper security. For me, that is not the best possible outcome.
FL: Tell us more about yourself, your background, and why you have started to do what you are doing today with Blockdaemon?
Konstantin: I have always been interested in technological networks and initially started with wireless networks in Germany, my home country. I worked at Nokia and Deutsche Telekom in the area of mobile payments. I became an entrepreneur about a decade ago, but not because of the money, rather because I wanted to build tech companies and to be my own boss. Perhaps, I was a bit lucky since I took several software companies from inception to some form of success, and I really enjoyed that.
In 2012, I became aware of Bitcoin and bought some. Not too much because I was not that rich, but, more importantly, I saw its potential value and the potential to deal with the inequality that is inherent to our democratic capitalist system. And the more I saw financial institutions take over democracy, specifically in the U.S. where I’m living now, the more I realized that the general interest of a normal citizen is not best served by the elected government any longer. And there seems to be no way to change that. It doesn’t matter who you elect, the mechanisms remain the same.
In Bitcoin, I saw the value currency coming from the outside of that system that can’t be influenced by politicians. Also, as an immigrant in the U.S., I have always hated the credit-based system where I couldn’t get a loan because I’m not a citizen and don’t have a credit history, where I couldn’t open a bank account or the bank accounts were shut down. I saw that the government can randomly take things off me, I saw that there is no rhyme or reason, or rules that would really work well.
By 2017, I knew quite a lot about blockchain, about Bitcoin and other altcoins, I was on advisory boards of several entities that raised substantial amounts of money, and it was clear to me that I want to be an instrumental part of building the blockchain technology infrastructure. I really looked for the right opportunity and was running an Ethereum node to participate and organize token sales. I was surprised to learn how difficult it was to manage an Ethereum node and keep it synced. It seemed to me that there was a need for a technology that would automate this management making things a lot easier for people who are not crypto-experts.
That was the genesis block of Blockdaemon, and that’s why I came into this: to democratize the process and enable people to easily run their nodes on different networks and to participate in the consensus. Of course, as a venture-backed company, Blockdaemon has to make money. It needs a growth story and commercial models that work, and that’s a challenge that up to this point we have done successfully. We have hundreds of paying institutional customers, including some big exchanges, custodians, and crypto investors, which probably makes us the largest full node operator in the space. And the important thing is that we see more and more of non-native crypto companies coming into the game.
FL: How many Bitcoin full nodes do you run at the moment?
Konstantin: I’d say around a hundred of them, automatically dispersed around the world thanks to cloud hosting solutions like Amazon, Google, Digital Ocean, etc.
FL: At the moment, Ethereum is the second cryptocurrency after Bitcoin in terms of market capitalization. However, with the upcoming launch of ETH 2.0, change of the consensus algorithm, and possible issues with the protocol, do you see any particular blockchain replacing Ethereum and possibly even becoming a global Proof-of-Stake protocol?
Konstantin Richter: I agree that Bitcoin is number one and I don’t see that changing. Ethereum is definitely number two so far, but even though we have seen many other projects coming online, most of them don’t even remotely have the same application activity or transaction volume. If ETH 2.0 ever launches, it will still be the biggest PoS network, and I haven’t seen any network that doesn’t have issues.
Technically outstanding networks that address interesting use cases could be about mobile payments. Maybe that is because this is the world that I am very familiar with, but projects like Celo and MobileCoin look very intriguing and I really want them to succeed.
In fact, I also like the idea of Libra and messenger-centric platforms to bypass traditional financial systems. I think that these types of chains will suck out a lot of value in the space. But that also might be the value that currently sits in the Swift network.
FL: The idea that the future is multichain and different blockchains will have to learn to talk to each other is gaining traction these days. Do you agree with that?
Konstantin: I do like the idea of interoperability projects with a strong network of validators where you can attach other blockchains. Polkadot looks very interesting technically, there are also other projects doing the same things and I am super curious to see if they can ignite enough interest. We at Blockdaemon back a few of them that we think have a strong shot at success and might attract investors’ money.
FL: Staking is often advertised as a way of earning extra income with interest rates being substantially higher than those offered by banks. But is it a viable idea at all? Imagine that an average German pensioner decides to bet on staking, what size of investment do you think it could take to get a return that will guarantee them a minimum income level for survival?
Konstantin: It’s a tricky question. Bitcoin has been around for 10 years and staking is still at very early stages so I think the best way to go is to treat it as a venture investment. If you are a pensioner, I wouldn’t recommend that. Younger people are more prone to taking risks and they probably have more time to wait for when it pays off.
If you need reliable money, I think that Bitcoin is the only thing I would recommend my grandfather to invest in.
FL: Recently, Germany has effectively given green light to local banks to offer cryptocurrency-related services, including custody and online banking, provided they have a license from the Federal Financial Supervisory Authority (BaFin). What do you think about this move?
Konstantin: I certainly wouldn’t put my Bitcoins in custody at any bank because you never know what’s on the government’s mind and whether they might freeze it or not. But at the same time, the question is whether Bitcoin will ever get mature enough to lead to a revolution without a connection to the existing banking infrastructure. Bitcoin needs that traditional legitimacy in order to become large enough and to disrupt and destroy those institutions.
Konstantin Richter was interviewed by Andrew Asmakov
The piece was originally published on ForkLog in Russian.
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