Presented at the INAUGURAL CAIA-SKBI CRYPTOCURRENCY CONFERENCE 2014 on 04 November 2014 held at the Singapore Management University This talk gives a general overview of Bitcoin and other cryptocurrencies.

1. Dr. Ernie Teo
Research Fellow
Sim Kee Boon Institute for Financial Economics
Singapore Management University

2. Mainstream
Acceptance in Recent
News

3. Many More on a Daily
Basis

4. Introduction
• Motivations of this Conference
• To engage industry and professional organizations to further
understand and contribute to the pool of knowledge
• To understand the impact and identify areas of financial
technology that improves welfare of Singapore and beyond
• To examine the incentives that will encourage the development
of an ecosystem for financial technology and financial
cryptography
• Disseminate research by SKBI and the speakers today,
• to be published in a HANDBOOK OF DIGITAL CURRENCY

6. Introduction
• The aims of this introduction
• Give you enough non-technical information to be able to:
• Understand the topics to be discussed in the coming panel
sessions
• Be able to ask critical questions during the Q&As sessions
• Outline the main issues with cryptocurrencies which the
panel sessions will try to address later

7. Even before Bitcoin…
“I think the internet is going to be one of the
major forces for reducing the role of
government. The one thing that’s missing
but that will soon be developed, is a reliable
e-cash.”
Milton Friedman, winner of Nobel prize in
economics, 1999

8. The Future of Money
“There are 3 eras of currency: commodity
based, politically based, and now, math
based.”
Chris Dixon, Technology Investor
“Bitcoin will do to banks what email did to the postal
industry.”
Rick Falkvinge, IT entrepreneur

9. Bitcoin
• To understand cryptocurrencies today,
we need to start Bitcoin
• Cryptocurrency history can be traced
back to DigiCash started David Chaum
in 1990’s
• Bitcoin was started in 2009 by Satoshi
Nakamoto who created the Bitcoin
protocol and reference software
• bitcoins are created and held
electronically
• Encryption (cryptology) is used
• to create currency
• to verify transactions

10. Bitcoin
“With e-currency based on cryptographic
proof, without the need to trust a third party
middleman, money can be secure and
transactions effortless.”
Satoshi Nakamoto
Bitcoin developer

11. Bitcoin: not so easy
“The first five times you think
you understand it, you don’t.”
Dan Kaminsky, American Security Researcher

12. Bitcoin Made Simple
• Watch video here:
• https://www.youtube.com/watch?v=Mq9TEFRaunU
taken from: www.theguardian.com

13. Is it the same as
Money?
3 Functions of Money
(found in most economics textbooks)
•Medium of exchange
• Can you give a seller bitcoins for goods/services?
•Unit of account (or measure of value)
• Will you post prices or record debts in bitcoins?
•Store of Value
• Will bitcoins hold their value into the future?

14. Is it the same as
Money?
Warning: just like money, you can lose it!
•If you do not back up your mobile wallet, you
lose your bitcoins when you lose your phone
•If you store your encrypted bitcoins on your PC
and a hackers gets onto your computer (just like
a burglar breaks into your home), your bitcoins
can be stolen

15. Is it the same as
Money?
Warning: just like money, you can lose
it!
•Due to this issue, some users have turn to
“Cold Storage”
• Storing your coins offline
• On a piece of paper in a secured safe deposit box
• On a USB/disk drive disconnected from the internet
• If you lose the piece of paper you have written
your bitcoin keys on, you lose your bitcoins as
well
•If you intend to own a lot of bitcoins, get the
technical expertise on how to store it securely

16. Is it the same as
Money?
“Bitcoin is exciting because it shows how
cheap it can be.
Bitcoin is better than currency in that you
don’t have to be physically in the same
place and, of course, for large transactions,
currency can get pretty inconvenient.”
Bill Gates, Microsoft co-founder

17. Why would you use it?
• Lower transactions costs
• Faster transactions across borders
• Traditional international transfers take as
long as 3 days and costs as much as 8% (it
usually costs 0.001 BTC for a transaction)
• Cashless way to travel

18. Why would you use it?
• Hedge against hyper-inflation
• Crowd-funding
• Donate to charities
• Support startups
• Decentralized: No central government
or institution controlling it

19. Cryptocurrency?
• Cryptography is used to
• secure transactions
• control the creation of new units
• You use public addresses to send and receive
money (similar to your account number)
• Transactions have to be signed with a private key
(similar to your password or pin)
• Cryptocurrency is one form of virtual currency
• Bitcoin is one form of Cryptocurrency

20. Where are my
bitcoins?
• There are no actual bitcoins
• What you store are the secure digital (private) keys
used to access your public bitcoin addresses and sign
transactions
Hash
QR Code

21. The Blockchain
• Bitcoin is a distributed network
• Data is stored by all individuals on the network
• Every node on the network has a copy of the
ledger of transactions called the Blockchain
• It is a chain of block of information that holds the
record of all the transactions with the public
address, the quantity, where the bitcoins came
from and other information

22. The Blockchain
• Block chain is a sequence of blocks, which holds
the complete record of transactions like a
public ledger.
• No one is in charge but everyone has a copy
• Those who update the Bitcoin blockchain, called
miners, are enticed by a reward via a cryptography
contest periodically (e.g. every ten minutes)

23. Isn’t it for criminals?
• Silk Road (website) allowed users to make
anonymous drug purchases using Bitcoin
• Shutdown in 2013
• Bitcoin has also been used for online gambling
• Can be used for money laundering…
• Most drugs are still paid for with cash!
• More legitimate companies are accepting bitcoins

24. Regulator is Part of
the Ecosystem
“…a challenge to our great innovators: extend
your focus to devising creative solutions for
preventing the abuse of virtual currencies by
criminals, such as those who would exploit
children. We all stand to benefit from such
innovation, and the related transparency and
integrity to our financial system.”
Jennifer Shasky Calvery,
Director
FinCEN, Jun 2013

25. Bitcoin is only
pseudo-anonymous
• Argument:
• Easier to use anonymously compared to other financial
networks
• All transactions that have taken place can be seen
by anyone on the network
• Users are identified by pseudonyms
• Satoshi recommends to change pseudonyms every
time you transact to be anonymous
• However, it is still possible to link transactions if there
were multi-input transactions

26. Bitcoin is only
pseudo-anonymous
• Evaluating User Privacy in Bitcoin
• By Androulaki, Karame, Roeschlin,Scherer and Capkun
from ETH Zurich NEC Laboratories
• Shows that almost 40 percent of Bitcoin user identities
could be recovered, even if they were using the
recommended privacy protections.
• Identities can be recovered by law enforcement
officials if required through similar investigations
methods used to track internet users

27. Changing the
Technology
• “The customers we’re talking about aren’t
trying to be anonymous. They’re willing to be
known, so Bitcoin technology is key and you
can add to it or you could build a similar
technology where there’s enough attribution
where people feel comfortable that this is
nothing to do with terrorism or any type of
money laundering.”
• Bill Gates, Microsoft co-founder

28. “I’m a big fan of Bitcoin … Regulation of
money supply needs to be depoliticized.”
Al Gore
Former US Vice President
Winner of Nobel Peace Prize
Decentralized Network

29. Decentralized
Network?
• New bitcoins are created through a process
called mining where a cryptographic puzzle is
solved
• This also verifies a set of transactions and places
them on the ledger or blockchain
• This process requires computational power and
the difficulty is adjusted such that each “block”
takes approximately 10 minutes
• As the competition for mining goes up,
difficulty becomes harder

30. Decentralized
Network?
• Bitcoin was designed to be a distributed
decentralized system with no central authority
• In the sense that no one has a major influence
over the way mining functions
• If no one wins consistently, then the ledger is
updated by different miner each critical cycle (6
blocks), ascertaining the accuracy and
completeness of the transactions
• However, as the systems evolves this may not
necessarily to be the case

31. Decentralized
Network?
• As difficulty increases, it becomes inefficient
for an individual to mine on his own
• Over time, individuals start combine their
computational power on a platforms known as
a mining pools
• Reference: “Emergence, growth and
sustainability of Bitcoin: the network
economics perspective”, by Ernie Teo (2014)

32. Decentralized
Network?
• SKBI’s agent-based computer simulations shows:
Number
Time
Non-Miners
Mining Pool
Individual Miners

33. Decentralized
Network?
• The majority of computing power now falls on
a few large entities such as owners of mining
pools and IT developers
• There are no clear regulations on decision
making or changes to the Bitcoin protocol
unlike a government or financial institution

34. Announced in Aug
2014
“I can today announce that the Government will start
a major programme of work exploring the potential of
virtual currencies and digital money.
These alternative payment systems are popular
because they are quick, cheap, and convenient – and
I want to see whether we can make more use of them
for the benefit of the UK economy and British
consumers. I also want to be alert to the risks that
accompany any new technology.”
George Osborn
Chancellor of the Exchequer
Second Lord of the Treasury

35. “I really like Bitcoin. I own Bitcoins. It’s a store of value, a
distributed ledger. It’s a great place to put assets,
especially in places like Argentina with 40 percent
inflation, where $1 today is worth 60 cents in a year, and
a government’s currency does not hold value. It’s also a
good investment vehicle if you have an appetite for risk.
But it won’t be a currency until volatility slows
down.”
David Marcus
CEO of Paypal
Bitcoin’s Volatility

36. Bitcoin’s Volatility
• In 2013, We saw the price of bitcoins go up more than 80 times in
January ($14 USD) to $1242 USD per bitcoin in November
• 2014, we see it fall down to a low of about $294 USD in October

37. Bitcoin’s Volatility
• As with any disruptive asset class, bitcoin prices
are highly volatile
• As a payment system, this is manageable
• Most prices are tagged in conventional currencies and
are converted to bitcoins at the time of purchase
• It is a risky investment for now
• Regulatory risk is high in some countries

38. Some Issues
• Highly volatile
• Susceptible to pump and dump
• Hoarding of coins may cause volatility
• Need more real transactions for price to stabilize
• Mining has become highly expensive
• Uses energy
• Transactions are irreversible, no consumer
protection like credit cards

39. Some Issues
• Sustainability (large Blockchain)
• As all nodes are required to store the ledger on their
system/devices, this may not be sustainable in the long
run
• Attacks
• 51% attack
• Goldfinger attack
• Selfish Mining
• Double spending may still be a risk for instant
transactions

40. State of Bitcoin Q3
2014
From www.coindesk.com

41. Venture Capital

42. Block Chain
Technology

43. Uses of the Block
Chain Technology
• Smart contracts
• Issue shares – replace exchanges
• Currency exchanges - Ripple
• Can be integrated by banks
• Property, virtual property,
• Smart Accounting

44. Some popular
cryptocurrencies
• Namecoin – a decentralized domain name system
(with .bit domain)
• Litecoin – each block takes 4 times faster than
Bitcoin
• Dogecoin – created as a joke, used as an internet
tipping system on social media
• Mastercoin – successful crowd-funding effort
• some 500 people invested in the project,sending a total
of about 5000 bitcoins worth about US$500,000 at the
time
• aims to enable complex financial functions such as a
decentralized exchange

45. Some popular
cryptocurrencies
• Peercoin – uses “proof of stake” protocol,
sustantially different from bitcoin
• Darkcoin - uses a system called Darksend to add
privacy to transactions, with a different hashing
algorithm
Ripple – a payment network for transfer of coins

46. Historical map of
cryptocurrencies
551
currencies
(as of July
2014)
(Taken from http://mapofcoins.com/)

47. Future Coins &
Business Models
• New cryptocurrencies or altcoins can be developed to address
the shortcomings of current coins or to cater to different needs
• National coins
• Bitcoin 2.0

48. Bitcoin 2.0
• New protocols which innovatively build upon the Bitcoin
platform
• A layer lying on top of the blockchain
• Using the blockchain for applications other than just for the
purpose of payment transactions
• Bitcoin 2.0 technologies include
• GEMS – A social network currency
• STORJ – Cloud Storage based on blockchain technology
• The Internet of the Sharing Economy
• To distribute the reward in proportion to those who contribute and it
pays to be part of the distributed “NETWORK”, e.g. FB versus GEMS,
Dropbox versus STORJ, etc
• Reference: Bitcoin IPO, ETF and Crowdfunding, by
Bhaskar, Lam and D. Lee (2014)

49. Ending Quotes
“Bitcoin is a remarkable cryptographic
achievement and the ability to create
something that is not duplicable in the
digital world has enormous value”
Eric Schmidt
CEO of Google

50. Ending Quotes
“Given that most of the welfare improvement will
come from the bottom of the wealth pyramid,
emerging markets have the upper hand in
harnessing the low hanging fruits of
Cryptocurrency via a decentralised, but not
necessary distributed system.
It is about reduction of business cost. Welfare
improvement will occur as a consequence, and
new financial technology will lead to enhanced
efficiency in a sharing economy and the growth of
profitable social businesses.”
David Lee, Director, Sim Kee Boon Institute for Financial Economics

51. The End
Thanks!