All Commentary
Monday, April 27, 2015

Moving the Valuable Bits

On risk, credit, and entrepreneurship, from the stagecoach to the Internet


Two startup founders, Bill and Henry, notice that they’re in a pretty similar line of business and that they get along too well to remain competitors. They’re in a new and cutting-edge field, so why compete with each other when they can build something better together? So they merge (and raise some funding while they’re at it).

A year or two later, Bill and Henry decide they should expand into an adjacent market. Their backers point out that a massive competitor already has a head start, so, while continuing to work on their main job, Bill and Henry run a side project that pushes into the new market. Both the main company and the side project become quite successful, and the fearsome competitor just flails around for a while before exiting the business entirely.

They had the usual startup ups-and-downs, culminating in something all-too-familiar: they were earning lots of revenue from a single major platform controlled by a third party. And one day the third party changed its platform policies and gave Bill and Henry the boot.

Both the company and the side project successfully pivoted, and neither Bill Fargo nor Henry Wells would recognize their main gig — American Express — or their side project — Wells Fargo — today.

Bill and Henry demonstrated that a founding team is more important than theoretical competitors — and that if you build your business on someone else’s platform (in this case, package delivery over rail), you face intractable uncertainty (express rail nationalization in 1918). And, most interestingly, they showed that once you have the infrastructure necessary to move bits, the most lucrative bits to move are the ones that tell you who is creditworthy and who is not.

When Wells, Fargo, and company were plying their trade, the most efficient communications network was the stagecoach. Wells Fargo and American Express delivered goods, but the most valuable goods were hard currency — gold bars — and letters of credit.

By the time their express business was nationalized in 1918, Wells Fargo and American Express were both more in the credit business than the package business. By weight, the most valuable thing you can deliver on a regular basis is a piece of paper entitling the recipient to spend money.

These days, our bit-moving infrastructure is a bit improved from stagecoaches and more resilient to platform risk than railroads. But we’re still in the early days of shifting our wealth-moving and wealth-measuring infrastructure onto the Internet. We’ve been grafting older payment rails onto the Internet since the first e-commerce transaction, but we didn’t have a working Internet-native payment mechanism until early 2009.

Now, the most interesting problem in my two favorite fields (finance and the Internet) is the same problem: how do we turn Bitcoin from a clever proof of concept into the currency (and payment system) of the future?

The answer is unclear, but it’s a pretty cool problem to solve, so I’m moving to San Francisco and joining a bitcoin startup. We’ll see where the most valuable bits take us.


  • Byrne Hobart works at the intersection of marketing, finance, and technology.