Square Slips, Satoshi Hides (Again) And Prosper Shrinks

Two big segments of the world made news last week: politics and payments. And although there is no shortage of controversy about the former, we thought we’d stick with the latter, where there was more than enough drama to go around.

Take, for example, the saga of the bitcoin creator who stepped forward before he stepped back. Then, Square’s earnings went splat, and Prosper Marketplace ran into the buzzsaw otherwise known as network effects in reverse.

Need to know more?

A Satoshi By Any Other Name

Doomsday preppers got two pieces of good news this week. The first is that, for those who have been hoarding gold, their stash got more valuable last week. And they now have someone they can officially send a thank you note to for the bitcoin that they believe will sustain the economy post-political apocalypse next fall.

Last Monday (May 2), Australian entrepreneur Craig Wright stepped forward and admitted to being the real “Satoshi Nakamoto.”

Apart from the claim, Wright also submitted proof in the form of bitcoin known to be owned by bitcoin’s creator. Said proof has already been accepted by some members of the bitcoin community as legitimate proof of identification.

Wright sent messages digitally signed with cryptographic keys created during the early days of bitcoin’s development. The keys are inextricably linked to blocks of bitcoin known to have been created or “mined” by the infamous Satoshi Nakamoto.

“These are the blocks used to send 10 bitcoins to Hal Finney in January [2009] as the first bitcoin transaction,” said Wright during his demonstration.

“I was the main part of it, but other people helped me,” he said.

Gavin Andresen, chief scientist at the Bitcoin Foundation, published a blog post supporting the claim.

“I believe Craig Steven Wright is the person who invented bitcoin,” he wrote.

Jon Matonis, an economist and one of the founding directors of the Bitcoin Foundation, said he was convinced that Wright was who he claimed to be.

“During the London proof sessions, I had the opportunity to review the relevant data along three distinct lines: cryptographic, social and technical,” he said.

“It is my firm belief that Craig Wright satisfies all three categories.”

Case closed.

Or not.

The claim is not without controversy, however, as many bitcoiners believe he has not shown sufficient proof yet. Some technical experts seem to agree that the evidence Wright has presented so far isn’t proof that he is, in fact, the real Satoshi Nakamoto.

“It would take the real Satoshi about five minutes to provide conclusive proof to the entire bitcoin community, if the real Satoshi wanted to do that,” said Joseph Bonneau, a researcher at the Applied Crypto Group at Stanford University, to The New York Times.

Others noted that whether or not Wright’s claim is true does not matter, since bitcoin is bigger than its founder these days.

“Satoshi was more than a name. It was a concept, a secret, a team, a vision. Now, Satoshi lives on in a new form — changed,” another bitcoin expert told NYT. “Much of the secret is gone, but the vision is still there.”

And it seems the mystery will remain just that, since Craig Wright has announced that he is done proving he is the creator of bitcoin.

“I believed that I could do this. I believed that I could put the years of anonymity and hiding behind me. But, as the events of this week unfolded and I prepared to publish the proof of access to the earliest keys, I broke. I do not have the courage. I cannot,” Wright wrote in his Dear John letter to the world on Thursday (May 5).

“I really do not want to be the public face of anything.”

Wright then signed off, leaving the mystery of bitcoin’s founding arguably less solved then when he first stepped forward.

Square’s Bruising Earnings

There were only so many Jedi mind tricks in Square CEO Jack Dorsey after all. After fending off an IPO some thought fated for disaster and managing to do better than expected on its first public earnings report, Square’s most recent release was a letdown for investors.

Square showed a loss of $0.14 per share on $379 million in revenues, up 51 percent, compared to the $0.09 per share loss on $344 million in sales The Street expected for the March period.

That shortfall indicates that transaction volumes have been ramping up well (and, after all, gross payment volume was up 45 percent in the quarter, year over year), but that costs have more than kept pace, up 72 percent overall. Software and data product revenues grew as well, up 197 percent year over year, but still remain a relatively small part of the business.

Moreover, though volumes may be on the upswing, as its readers are gaining traction, the days of focusing only on the top line may be coming to an end.

Investors seem to be looking for positive numbers, down to the bottom of the income statement, and not seeing them with Square.

Product development expenses, on their own, were up 63 percent year over year, on the back of higher personnel costs.

By vertical, as disclosed by Square’s first quarter shareholder letter, retail garnered 26 percent of contactless and chip reader orders, followed by services at 16 percent. Square Capital extended $153 million in advances in the period, with anemic sequential growth of 4 percent, stymied by pushouts of two large investors, a “result of more challenging credit market conditions,” though the firm noted those two investors did sign on after the close of the quarter.

And Square has a big problem looming in the form of the lockup expiration when 64 million options and warrants are free to be traded.

That potential free-for-all opens mid-month and represents around 10 percent of all shares outstanding. The question now is: Will institutional investors take the chips and get out before all those ground-floor investors come to call, looking to cash out?

Yikes.

Prosper’s Ongoing Problems

Square was not the only startup powerhouse that showed signs of strain this week.

Prosper Marketplace announced plans to shed 28 percent of its staff. The biggest individual cut will be a Utah office dedicated to lending for medical procedures, but 14 percent of Prosper’s San Francisco- and Phoenix-based workforce is also on its way out the door. All in, 171 jobs will be cut.

The moves comes as the firm is working to account for declining loan volumes.

Say hello to network effects in reverse or what happens when one side of your platform runs out of steam.

For Prosper, that is the lifeblood of its business — capital to lend.

Changing market conditions (and some higher-than-expected default rates) have changed the math and softened investor interest. That’s problematic because Prosper does not fund loans. Like most marketplace lenders, Prosper specializes in arranging the loans and then selling them (usually in packaged groups) to investors. It makes its money that way — on the originating fees. No investor interest, no money to lend. No money to lend, no people to give money to. No people to give money to, no originating fees.

Prosper’s loan volume actually fell in Q1, to $973 million — a 12 percent decline from $1.1 billion in the last quarter of 2015. Loan volume had been expected to double this year, but that target has since been taken off the table by Prosper.

The staff cuts will also include some management players. Chief Risk Officer Josh Tonderys and Prosper’s top business development executive, Itzik Cohen, are both departing. Tonderys is being replaced by Brad Pennington.

Going forward, the next steps involve a more intensive focus on marketing and human resources. Prosper has also announced it is hiring a capital markets team to help manage the firm’s shift from selling to hedge funds to focus on banks and small investors.

Justin Wee, formerly of Goldman Sachs, will be vice president of retail distribution, and a new platform aimed at retail investors and retail funds will be rolled out next month.

Prosper’s problems of late highlight a general difficulty marketplace lenders have, as laid out in Karen Webster’s commentary on the subject from three months ago.

“If you’re in a capital-intensive business and you’re in the part of a cycle where capital is flowing, it’s easy for people to extrapolate” continued expansion, said Ravi Viswanathan, a general partner at venture capital firm New Enterprise Associates, about the online lending sector. “It’s hard to say the good times are coming to an end … [and] a lot of folks didn’t put that calculus in when they were funding these companies.”

At least, they’re not alone. OnDeck and Lending Club had a horrible week, too, for many of the same reasons.

So, what did we learn this week? Well, we learned that we may never know who invented bitcoin, Square’s bad week may not look so bad by comparison in the weeks ahead and the bloom may be way off the rose for marketplace lending.

But it could be worse.