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BITCOIN
THE INTERNET MONEY
CAMERON WINKLEVOSS @winklevoss
TYLER WINKLEVOSS @tylerwinklevoss
DIGITAL
MATH-BASED
ASSET
INTERNET
OF MONEY
DECENTRALIZED
LEDGER
PEER-TO-PEER
NETWORK
• Bitcoin (capital “B”) is a peer-to-peer network that
maintains a public decentralized ledger of digital
math-based assets known as bitcoins (lowercase “b”).
The integrity of this ledger is backed and secured by a
subnetwork of computers (miners) who audit and
archive its transactions for a reward.
• The supply of bitcoins is fixed at 21 million and each
bitcoin can be divided into a hundred million pieces.
• Their ownership cannot be changed within the ledger
without instructions from their current owner that have
been cryptographically authenticated (digital
signatures) by a majority of nodes on the Bitcoin
network. In essence, “sending a bitcoin” is sending
instructions to the network to make a change of
custody in the public ledger.
• These attributes make the Bitcoin network a financial
network, or the “Internet of Money”.
WHAT IS BITCOIN?
WHO CREATED BITCOIN?
OCTOBER 31, 2008
Satoshi Nakamoto
publishes white paper
titled Bitcoin: A Peer-to-
Peer Electronic Cash
System via “The
Cryptography Mailing
List”.
JANUARY 3, 2009
Satoshi releases Bitcoin
source code and
software client to the
world.
2009-2010
Satoshi updates the source
code and writes hundreds
of posts totaling 80,000
words (length of a novel).
APRIL 23, 2011
Satoshi vanishes from
the Internet after
emailing a developer
saying he has “moved
onto other things”.
WHO CREATED BITCOIN?
• Satoshi Nakamoto is believed to be a pseudonym for
the individual or group of individuals responsible for
Bitcoin. No record of a programmer by this name
exists prior to Bitcoin.
• His P2P Foundation account details say he is a 38-year
old male living in Japan.
• In Japanese satoshi means “clear-thinking” or “wise”,
naka can mean “inside” or “relationship” and moto is
used to describe “the origin” or “the foundation.”
Strung together it reads “thinking clearly inside the
foundation”.
• If an individual, he is a world class programmer with
deep knowledge of C++, economics, cryptography and
peer-to-peer networking.
• He writes in flawless English. His first post used
American spellings; every post thereafter employed
British spellings and British colloquialisms.
• He has read a British newspaper. He embedded Times
of London headline (“The Times 03/Jan/2009
Chancellor on brink of second bailout for banks”) into
first Bitcoin transaction (Genesis Block).
• His timestamps do not reflect a particular timezone.
CLUES
PHILOSOPHY
IN CRYPTOGRAPHY WE TRUST
“What is needed is an electronic payment system based on cryptographic proof
instead of trust, allowing any two willing parties to transact directly with each other
without the need for a trusted third party.”
-Satoshi Nakamoto, "Bitcoin: A Peer-to-Peer Electronic Cash System” | October 31, 2008
PHILOSOPHY
IN CRYPTOGRAPHY WE TRUST
“The root problem with conventional currency is all the trust that's required to make it work.
The central bank must be trusted not to debase the currency, but the history of fiat currencies
is full of breaches of that trust. Banks must be trusted to hold our money and transfer it
electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve.
We have to trust them with our privacy, trust them not to let identity thieves drain our
accounts. Their massive overhead costs make micro-payments impossible.”
-Satoshi Nakamoto, blogpost in P2P Foundation forum | February 11, 2009, 22:27
“A group of generals of the Byzantine army camped with their troops around an enemy city.
Communicating only by messenger, the generals must agree upon a common battle plan.
However, one or more of them may be traitors who will try to confuse the others. The problem
is to find an algorithm to ensure that the loyal generals will reach agreement.”
-Marshall Pease, Robert Shosthak and Leslie Lamport, The Byzantine Generals Problem
PROBLEM
HOW TO REACH CONSENSUS IN A DECENTRALIZED SYSTEM
BREAKTHROUGH
MINING
Projected Bitcoins
0
13
25
38
50
0
5.5
11
16.5
22
2009 2016 2024 2032 2040 2048 2056 2064 2072 2088 2100 2116 2136
Total BTC in existence (million)
BTC per block
• The Bitcoin “mining algorithm” is the breakthrough that
solved the Byzantine General’s Problem and allows the
network to reach majoritarian consensus as to which
bitcoin transactions are valid and which are not, without
the need for a trusted 3rd party.
• Mining ensures "digital scarcity" in a decentralized system
by preventing the same bitcoin from being spent twice by
the same person (i.e., it solves the double-spend
problem).
• By dedicating computing power to solving the mining
algorithm, miners act as the network's scrupulous
accountants.
• For their efforts, miners are rewarded with newly minted
bitcoins (or very small transaction fees) roughly in
proportion to the computing power they provide.
• Mining makes decentralization possible by taking all of
the costs associated with centralized trusted 3rd
parties out of the system, giving the Bitcoin network
and bitcoin the asset its technological intrinsic value.
HOLY TRINITY OF MONEY
TECHNOLOGYCOMMODITY CURRENCY
Scarce Durable Portable Divisible
Authenticity
Verification
Storage Fungible
Difficult to
Counterfeit
Widespread Use
Gold
Bitcoin
COMMODITY: BITCOIN VS GOLD
YES
NEUTRAL
NO
COMMODITY: BITCOIN VS GOLD
• Scarce: The supply of bitcoin is more fixed than the supply of gold. While
gold can still be found on earth and possibly mined on asteroids, there will
never be more than 21 million bitcoins minted.
• Durable: Due to its decentralized and distributed public ledger, Bitcoin
could survive a nuclear attack, whereas Ft. Knox could not. Gold boils at
2,856°C (5,127°F), while the temperature of a nuclear explosion is
~100,000,000°C (~180,000,000°F) or 10x the surface temperature of the
sun. Moreover, there are plans to launch a Bitcoin node with the public
ledger into space via satellite.
• Portable: Any amount of bitcoin can be sent around the world instantly
and for free with a data connection. Gold is heavy, and transporting large
quantities requires infrastructure (i.e., armored truck, bonded guards) and
customs declarations if cross-border.
• Divisible: A bitcoin can be divided into 100 million pieces. Gold must be
smelted, which is possible but not easy. Gold cannot be divided into
infinitesimal amounts.
• Authenticity Verification: A bitcoin is digital, therefore, it must be
identified in the public ledger by software. Gold requires a trained eye or
chemical test.
• Storage: Private keys that control bitcoin ownership can be stored on
paper, in your brain (brain wallet) or on a USB stick. Storing large quantities
of gold requires infrastructure (i.e., safe or vault).
• Fungible: At the moment, all bitcoins are treated equally. Chemically, gold is
equal, but purity levels vary and gold bars must be weighed to detect
counterfeit authority stamps.
• Difficult to Counterfeit: It is mathematically impossible to counterfeit a
bitcoin, and the possibility of a “double spend attack” remains remote and
highly unlikely. Gold cannot be counterfeited, but gold bars can be
tampered with, and vaults don’t generally test every bar.
• Widespread Use: Once a medium of exchange, today gold serves almost
entirely as a store of value with a small percentage of it used in jewelry and
industrial applications. Bitcoin does not currently have widespread
adoption as a medium of exchange, however, large scale retailers are
beginning to accept it as a form of payment. Many institutional and
professional investors have added bitcoin to their portfolios alongside gold
and other commodity/capital asset holdings.
*If 51% of miners agreed to change the supply, they could. This, however, is
viewed as be unlikely given that this would decrease the value of bitcoin, and
thereby decrease the profits of miners.
Scarce Durable Portable Divisible
Authenticity
Verification
Storage Fungible
Difficult to
Counterfeit
Widespread Use
Fiat
Bitcoin
CURRENCY: BITCOIN VS FIAT
YES
NEUTRAL
NO
CURRENCY: BITCOIN VS FIAT
• Scarce: Bitcoin's supply is fixed at 21M; fiat’s is not. Since 2008, the Fed
has more than tripled the U.S. Monetary Base with its quantitative easing
policies.
• Durable: Bitcoins have been lost or stolen, but never destroyed. Fiat
currency can be easily lost, stolen, or destroyed, however, damaged bills
can be replaced without loss of value. With proper backup, bitcoins can
last forever.
• Portable: Bitcoins are digital, therefore, any amount can easily be
transported over any distance with an internet/data connection for free. It
is relatively easy to transport cash up to a certain amount (i.e., wallet),
however, larger amounts can require infrastructure (i.e., armored truck),
customs declarations for cross-border transportation and/or instruments
(i.e., debit/credit cards and their fees).
• Divisible: One bitcoin can be divided into 100 million pieces; the USD, for
example, is divisible into 100 pieces (i.e., penny).
• Authenticity Verification: Bitcoins are digital, therefore, they must be
identified in the public ledger by software; the USD is easily identifiable by
eye or chemical tests (i.e., markers).
• Storage: Private keys that control bitcoin ownership can be stored on
paper, in your brain (brain wallet) or on a USB stick. You can only store a
limited amount of fiat before requiring infrastructure (i.e., mattress, bank
vault).
• Fungible: At the moment, all bitcoins are treated equally, as are fiat
denominations that are equivalent to one another.
• Difficult to Counterfeit: It is mathematically impossible to counterfeit a
bitcoin, and a “double spend attack” has never been successfully
perpetrated. Fiat currencies have dealt with counterfeiting since their
inception.
• Widespread Use: Fiat money achieves status of legal tender via
government decree. As a result, merchants must accept it and citizens must
settle their taxes with it. Bitcoin is ~5 years old and does not currently have
widespread adoption, however, large scale retailers are beginning to accept
it as a form of payment. Many institutional and professional investors have
added bitcoin to their portfolios alongside gold and other commodity/
capital asset holdings.
net·work: a system of devices that are connected to each other.
TECHNOLOGY: A NETWORK
Global
computer
network
INTERNET
Server-
based
network
AMAZON
Peer-to-
peer
network
BITCOIN
pro·to·col: (computer science) a set of rules or procedures for transmitting data between electronic
devices, such as computers.
INTERNET
Internet Protocol
Suite (TCP/IP)
WEBPAGES
(HTTP)
EMAIL
(SMTP/IMAP)
VOICE
(VoIP)
BITCOIN
(MoIP)
TECHNOLOGY: A PROTOCOL
POSTAL SERVICE
Slow+
Costly
Instant+
Free
SMTP
TELECOMMUNICATIONS
Packet-switching networks like the Internet, digitize and
transmit voices via real-time data packets over protocols like
the Voice over Internet Protocol (VoIP), for free (e.g., Skype).
Circuit-switching telephone networks convert voices into
electronic signals and transmit them over costly,
duopolistic infrastructure (e.g., AT&T).
Expensive
+
Slow
Bitcoin
Protocol
Free
+
Instant
FINANCIAL SERVICES
IMPLICATIONS
• March 25, 2013 - Cypriot Financial Crisis: “The shot
heard round the world”.
• Cyprus freezes all bank accounts, restricting all
withdrawals and transfers of money.
• €10B Eurozone bail-out contingent upon a Cyprian
bail-in or haircut of 40% or more on all domestic
bank accounts > €100K (including those insured).
• March to June of 2013 - Cyprus faces greatest risk of
stagflation and greatest drop in Eurozone bank
deposits (-15.68% or -€10B).
• Crisis introduces bitcoin to the world as an asset
class immune to bail-ins and fiscal mismanagement;
price of a bitcoin increases 10x.
IMPLICATIONS: CYPRUS
2013 USD/BTC Exchange Rate
0
75
150
225
300
Jan Feb Mar April May June
Cyprus bail-in
announced
• April 5, 1933 - President Roosevelt signs Executive
Order 6012 “forbidding the hoarding of gold coin,
gold bullion and gold certificates within the
continental United States”.
• A bitcoin lives in a distributed public ledger and is
associated with a specific 256-bit private key, the
possession of which determines its ownership.
• A private key can be stored in your memory (i.e.,
brain wallet), making it and the bitcoins associated
with it difficult to appropriate.
IMPLICATIONS: UNITED STATES
2013 - Capital
controls are
tightened
annually, while
inflation climbs
to over 20%
IMPLICATIONS: ARGENTINA
The spot price
of bitcoin in
Argentina is
38% higher than
its spot price on
global
exchanges
June 2013 -
Bitcoin client
downloads
double in one
month where it
stays the same or
less in other
countries
2002 - The
Argentine
government
introduces capital
controls due to
dwindling reserves
IMPLICATIONS: ZIMBABWE
• 1999 - Zimbabwe president Robert Mugabe begins
redistributing private farm land, leading to a steep
drop in economic productivity.
• 2000 - Mugabe prints an excessive amount of
money to finance the Second Congo War, spending
~$22M per month.
• 2008-2009 - Inflation climbs to an alleged 6.5
sextillion percent.
• 2009 - Zimbabwe abandons the Zimbabwean
Dollar (Z$) and does not replace it with another
fiat currency.
• Bitcoin is decentralized system which adheres to a
strict set of rules and parameters - requiring a
majority network consent to change - making it
more immune to this type of manipulation and
mismanagement.
• M-PESA is a private, mobile phone-based centralized
currency that facilitates money transfers
• Used by over 35M people in Kenya, Tanzania, South
Africa, Afghanistan and India
• Users can buy and sell prepaid cellphone “minutes”
and transfer them to pay bills, satisfy debts and make
purchases
• Volume-based fee structure of ~1-15% (the smaller the
transactions, the larger the fee percentage)
• In 2011, $10B (30% of Kenya’s GDP) was transferred
via M-PESA on mobile phones
• Bitcoin payments, including micro-payments, are
instant and free
9%
32%
5% 7%
47%
M-PESA
DIRECT DEPOSIT
OTHER
HAND
BUS
How people in Kenya send money
after the introduction of M-PESA
IMPLICATIONS: KENYA
IMPLICATIONS: UNITED STATES
• 2008 - Global Financial Crisis
• 2009-2014 - The U.S. Federal Reserve more
triples the monetary base in five years.
• Inflation remains low, however, much of this
newly minted money is not in the system
yet.
• Outcome of these policies remains to be
seen.
• Bitcoin’s supply is fixed at 21M BTC.
St. Louis Adjusted Monetary Base
0
1000
2000
3000
4000
1984 1988 1992 1996 2000 2003 2005 2007 2009 2011 2013
Reserves (US$ billion)
US Recession
POSSIBILITIES
REMITTANCES MICROPAYMENTSBANK THE UNBANKED
POSSIBILITIES: REMITTANCES
• In 2012 remittances hit an all
time high of $534B.
• On average, global remitters
pay an 8.3% transfer fee, with
some inter-African remittance
fees as high as 30%.
• Bitcoin can be sent for free and
instantly around the world with
a data or Internet connection.
World Bank Global Remittance Inflows 2013
0
20
40
60
80
India China Philippines Mexico France Nigeria Egypt
Share of GDP (%)
Remittance Inflows (US$ billion)
Average transfer fee* (%)
5.46.247.5
4.415.76
7.92
4.76
202121.6422
26
60.18
71
*Transfer fees based on sending US$200 from US and selecting the quickest option
• 2.5 Billion adults (half the global
population) are underbanked/
unbanked.
• 2/3 of the unbanked do not have
enough money to use a bank.
• A Bitcoin wallet allows anyone to send
and receive money, much like a bank
account, only quicker and without fees.
• A Bitcoin wallet is free - all you need is
Internet access or a data connection.
POSSIBILITIES:
BANK THE UNBANKED
World Bank Financial Inclusion 2011
0
22.5
45
67.5
90
U.S. China Brazil Russia Kenya India Afghanistan Niger
Account at a formal financial institution (% age 15+)
• PayPal defines a micropayment as anything less than $12
USD, while Visa defines them as less than $17 USD.
• Research shows that consumers are more willing to spend
money on incremental payments as opposed to
subscriptions, however, payments less than $2 USD are
impractical given the costs of the current global banking
system
• Bitcoin allows for true micropayments (even less than
$0.01 USD) giving consumers a more dynamic and fairer
offering, thereby increasing revenues and decreasing IP
theft (e.g., individual article paywalls vs. monthly
subscription paywalls)
• True micropayments would facilitate an economy of
micro consumption (e.g., virtual goods, in-app purchases,
gaming credits, etc.).
POSSIBILITIES:
MICROPAYMENTS
Forecast of Subscription and Microtransaction
Revenue in North Amwerica and European
MMO/MOG Markets (US$ million)
0
1250
2500
3750
5000
2007 2008 2009 2010 2011 2012 2013 2014 2015
Subscriptions Microtransactions
POSSIBILITIES:
EXCHANGE-TRADED FUND
FRICTIONLESS
Buying bitcoin
isn’t easy and
requires
technological
proficiency
ETF can
bypass these
pain-points
SECURE
Storing bitcoin
securely takes
expertise
ETF can
offload this
security
burden
ACCESSIBLE
Pension funds,
mutual funds,
401k’s cannot
hold bitcoin
(or gold)
ETF can give
mainstream
and institutional
investors
bitcoin
exposure
“Our agency approaches the issue of virtual currencies
without any prejudgements. A lot of people initially
react to a very outside-the-box idea like virtual
currencies with immediate skepticism. I think we
should resist being completely overtaken by that urge.
It’s hard to say precisely what the future holds for
virtual currency and its associated technology.
Currently, there is not widespread adoption of virtual
currencies among the general public. And some doubt
whether there will ever be. But the same has been said
about many other technologies that have since
become everyday features of our lives. It’s generally a
difficult proposition for financial regulators to forecast
technological trends. It’s not something we do
particularly well…Indeed, virtual currency could
ultimately have a number of benefits for our financial
system. It could force the traditional payments
community to “up its game” in terms of the speed,
affordability, and reliability of financial transactions.
-Ben Lawsky, Superintendent, New York State Department
of Financial Services (NYSDFS)
POSSIBILITIES: REGULATION
FUTURE
Imagine if you could take a time machine back to the early days of the Internet:
how would you act differently?
REFERENCES IMAGES
Page 3: Satoshi White Paper
Page 4: New Yorker, Motherboard, Fast Company
Page 6: P2P Foundation
Page 8: Bitcoin Wiki
Page 10-13: The Genesis Block
Page 20 BlockChain.info
Page 24: Groupe Speciale Mobile Association (GSMA)
Page 25: St. Louis Fed
Page 27: The World Bank, Send Money Africa
Page 28: The World Bank
Page 29: Digital Media Academy
Page 31: New York Department of Financial Services
Page 1: Stock
Page 3-4: Flickr | Stig Nygaard
Page 5-6: Flickr | Dennis Gerbeckx
Page 7: Joey De Villa
Page 8: Wikipedia
Page 9: Stock
Page 14: Getty | Chris Cheadle
Page 15: Seinit, Stock, Stock, Stock, Unknown
Page 16: Unknown, 9to5Mac
Page 17: Flickr | Kevin Meredith, iMore
Page 18: Getty, Stock, Getty
Page 19: Stock
Page 20: Flickr | fragglerocks
Page 21: Wikipedia
Page 22: Flickr | Rod Waddington
Page 23: Wikipedia
Page 24: Think M-PESA
Page 25: Flickr | Steve Thompson
Page 26: DiMola Bros, Oxfam, Unknown
Page 30: Unknown
Page 31: Mike Stimpson
Page 32: Getty
Page 33: Flickr | Pearled

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Bitcoin: The Internet of Money

  • 1. BITCOIN THE INTERNET MONEY CAMERON WINKLEVOSS @winklevoss TYLER WINKLEVOSS @tylerwinklevoss
  • 2. DIGITAL MATH-BASED ASSET INTERNET OF MONEY DECENTRALIZED LEDGER PEER-TO-PEER NETWORK • Bitcoin (capital “B”) is a peer-to-peer network that maintains a public decentralized ledger of digital math-based assets known as bitcoins (lowercase “b”). The integrity of this ledger is backed and secured by a subnetwork of computers (miners) who audit and archive its transactions for a reward. • The supply of bitcoins is fixed at 21 million and each bitcoin can be divided into a hundred million pieces. • Their ownership cannot be changed within the ledger without instructions from their current owner that have been cryptographically authenticated (digital signatures) by a majority of nodes on the Bitcoin network. In essence, “sending a bitcoin” is sending instructions to the network to make a change of custody in the public ledger. • These attributes make the Bitcoin network a financial network, or the “Internet of Money”. WHAT IS BITCOIN?
  • 3. WHO CREATED BITCOIN? OCTOBER 31, 2008 Satoshi Nakamoto publishes white paper titled Bitcoin: A Peer-to- Peer Electronic Cash System via “The Cryptography Mailing List”. JANUARY 3, 2009 Satoshi releases Bitcoin source code and software client to the world. 2009-2010 Satoshi updates the source code and writes hundreds of posts totaling 80,000 words (length of a novel). APRIL 23, 2011 Satoshi vanishes from the Internet after emailing a developer saying he has “moved onto other things”.
  • 4. WHO CREATED BITCOIN? • Satoshi Nakamoto is believed to be a pseudonym for the individual or group of individuals responsible for Bitcoin. No record of a programmer by this name exists prior to Bitcoin. • His P2P Foundation account details say he is a 38-year old male living in Japan. • In Japanese satoshi means “clear-thinking” or “wise”, naka can mean “inside” or “relationship” and moto is used to describe “the origin” or “the foundation.” Strung together it reads “thinking clearly inside the foundation”. • If an individual, he is a world class programmer with deep knowledge of C++, economics, cryptography and peer-to-peer networking. • He writes in flawless English. His first post used American spellings; every post thereafter employed British spellings and British colloquialisms. • He has read a British newspaper. He embedded Times of London headline (“The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”) into first Bitcoin transaction (Genesis Block). • His timestamps do not reflect a particular timezone. CLUES
  • 5. PHILOSOPHY IN CRYPTOGRAPHY WE TRUST “What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.” -Satoshi Nakamoto, "Bitcoin: A Peer-to-Peer Electronic Cash System” | October 31, 2008
  • 6. PHILOSOPHY IN CRYPTOGRAPHY WE TRUST “The root problem with conventional currency is all the trust that's required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts. Their massive overhead costs make micro-payments impossible.” -Satoshi Nakamoto, blogpost in P2P Foundation forum | February 11, 2009, 22:27
  • 7. “A group of generals of the Byzantine army camped with their troops around an enemy city. Communicating only by messenger, the generals must agree upon a common battle plan. However, one or more of them may be traitors who will try to confuse the others. The problem is to find an algorithm to ensure that the loyal generals will reach agreement.” -Marshall Pease, Robert Shosthak and Leslie Lamport, The Byzantine Generals Problem PROBLEM HOW TO REACH CONSENSUS IN A DECENTRALIZED SYSTEM
  • 8. BREAKTHROUGH MINING Projected Bitcoins 0 13 25 38 50 0 5.5 11 16.5 22 2009 2016 2024 2032 2040 2048 2056 2064 2072 2088 2100 2116 2136 Total BTC in existence (million) BTC per block • The Bitcoin “mining algorithm” is the breakthrough that solved the Byzantine General’s Problem and allows the network to reach majoritarian consensus as to which bitcoin transactions are valid and which are not, without the need for a trusted 3rd party. • Mining ensures "digital scarcity" in a decentralized system by preventing the same bitcoin from being spent twice by the same person (i.e., it solves the double-spend problem). • By dedicating computing power to solving the mining algorithm, miners act as the network's scrupulous accountants. • For their efforts, miners are rewarded with newly minted bitcoins (or very small transaction fees) roughly in proportion to the computing power they provide. • Mining makes decentralization possible by taking all of the costs associated with centralized trusted 3rd parties out of the system, giving the Bitcoin network and bitcoin the asset its technological intrinsic value.
  • 9. HOLY TRINITY OF MONEY TECHNOLOGYCOMMODITY CURRENCY
  • 10. Scarce Durable Portable Divisible Authenticity Verification Storage Fungible Difficult to Counterfeit Widespread Use Gold Bitcoin COMMODITY: BITCOIN VS GOLD YES NEUTRAL NO
  • 11. COMMODITY: BITCOIN VS GOLD • Scarce: The supply of bitcoin is more fixed than the supply of gold. While gold can still be found on earth and possibly mined on asteroids, there will never be more than 21 million bitcoins minted. • Durable: Due to its decentralized and distributed public ledger, Bitcoin could survive a nuclear attack, whereas Ft. Knox could not. Gold boils at 2,856°C (5,127°F), while the temperature of a nuclear explosion is ~100,000,000°C (~180,000,000°F) or 10x the surface temperature of the sun. Moreover, there are plans to launch a Bitcoin node with the public ledger into space via satellite. • Portable: Any amount of bitcoin can be sent around the world instantly and for free with a data connection. Gold is heavy, and transporting large quantities requires infrastructure (i.e., armored truck, bonded guards) and customs declarations if cross-border. • Divisible: A bitcoin can be divided into 100 million pieces. Gold must be smelted, which is possible but not easy. Gold cannot be divided into infinitesimal amounts. • Authenticity Verification: A bitcoin is digital, therefore, it must be identified in the public ledger by software. Gold requires a trained eye or chemical test. • Storage: Private keys that control bitcoin ownership can be stored on paper, in your brain (brain wallet) or on a USB stick. Storing large quantities of gold requires infrastructure (i.e., safe or vault). • Fungible: At the moment, all bitcoins are treated equally. Chemically, gold is equal, but purity levels vary and gold bars must be weighed to detect counterfeit authority stamps. • Difficult to Counterfeit: It is mathematically impossible to counterfeit a bitcoin, and the possibility of a “double spend attack” remains remote and highly unlikely. Gold cannot be counterfeited, but gold bars can be tampered with, and vaults don’t generally test every bar. • Widespread Use: Once a medium of exchange, today gold serves almost entirely as a store of value with a small percentage of it used in jewelry and industrial applications. Bitcoin does not currently have widespread adoption as a medium of exchange, however, large scale retailers are beginning to accept it as a form of payment. Many institutional and professional investors have added bitcoin to their portfolios alongside gold and other commodity/capital asset holdings. *If 51% of miners agreed to change the supply, they could. This, however, is viewed as be unlikely given that this would decrease the value of bitcoin, and thereby decrease the profits of miners.
  • 12. Scarce Durable Portable Divisible Authenticity Verification Storage Fungible Difficult to Counterfeit Widespread Use Fiat Bitcoin CURRENCY: BITCOIN VS FIAT YES NEUTRAL NO
  • 13. CURRENCY: BITCOIN VS FIAT • Scarce: Bitcoin's supply is fixed at 21M; fiat’s is not. Since 2008, the Fed has more than tripled the U.S. Monetary Base with its quantitative easing policies. • Durable: Bitcoins have been lost or stolen, but never destroyed. Fiat currency can be easily lost, stolen, or destroyed, however, damaged bills can be replaced without loss of value. With proper backup, bitcoins can last forever. • Portable: Bitcoins are digital, therefore, any amount can easily be transported over any distance with an internet/data connection for free. It is relatively easy to transport cash up to a certain amount (i.e., wallet), however, larger amounts can require infrastructure (i.e., armored truck), customs declarations for cross-border transportation and/or instruments (i.e., debit/credit cards and their fees). • Divisible: One bitcoin can be divided into 100 million pieces; the USD, for example, is divisible into 100 pieces (i.e., penny). • Authenticity Verification: Bitcoins are digital, therefore, they must be identified in the public ledger by software; the USD is easily identifiable by eye or chemical tests (i.e., markers). • Storage: Private keys that control bitcoin ownership can be stored on paper, in your brain (brain wallet) or on a USB stick. You can only store a limited amount of fiat before requiring infrastructure (i.e., mattress, bank vault). • Fungible: At the moment, all bitcoins are treated equally, as are fiat denominations that are equivalent to one another. • Difficult to Counterfeit: It is mathematically impossible to counterfeit a bitcoin, and a “double spend attack” has never been successfully perpetrated. Fiat currencies have dealt with counterfeiting since their inception. • Widespread Use: Fiat money achieves status of legal tender via government decree. As a result, merchants must accept it and citizens must settle their taxes with it. Bitcoin is ~5 years old and does not currently have widespread adoption, however, large scale retailers are beginning to accept it as a form of payment. Many institutional and professional investors have added bitcoin to their portfolios alongside gold and other commodity/ capital asset holdings.
  • 14. net·work: a system of devices that are connected to each other. TECHNOLOGY: A NETWORK Global computer network INTERNET Server- based network AMAZON Peer-to- peer network BITCOIN
  • 15. pro·to·col: (computer science) a set of rules or procedures for transmitting data between electronic devices, such as computers. INTERNET Internet Protocol Suite (TCP/IP) WEBPAGES (HTTP) EMAIL (SMTP/IMAP) VOICE (VoIP) BITCOIN (MoIP) TECHNOLOGY: A PROTOCOL
  • 17. TELECOMMUNICATIONS Packet-switching networks like the Internet, digitize and transmit voices via real-time data packets over protocols like the Voice over Internet Protocol (VoIP), for free (e.g., Skype). Circuit-switching telephone networks convert voices into electronic signals and transmit them over costly, duopolistic infrastructure (e.g., AT&T).
  • 20. • March 25, 2013 - Cypriot Financial Crisis: “The shot heard round the world”. • Cyprus freezes all bank accounts, restricting all withdrawals and transfers of money. • €10B Eurozone bail-out contingent upon a Cyprian bail-in or haircut of 40% or more on all domestic bank accounts > €100K (including those insured). • March to June of 2013 - Cyprus faces greatest risk of stagflation and greatest drop in Eurozone bank deposits (-15.68% or -€10B). • Crisis introduces bitcoin to the world as an asset class immune to bail-ins and fiscal mismanagement; price of a bitcoin increases 10x. IMPLICATIONS: CYPRUS 2013 USD/BTC Exchange Rate 0 75 150 225 300 Jan Feb Mar April May June Cyprus bail-in announced
  • 21. • April 5, 1933 - President Roosevelt signs Executive Order 6012 “forbidding the hoarding of gold coin, gold bullion and gold certificates within the continental United States”. • A bitcoin lives in a distributed public ledger and is associated with a specific 256-bit private key, the possession of which determines its ownership. • A private key can be stored in your memory (i.e., brain wallet), making it and the bitcoins associated with it difficult to appropriate. IMPLICATIONS: UNITED STATES
  • 22. 2013 - Capital controls are tightened annually, while inflation climbs to over 20% IMPLICATIONS: ARGENTINA The spot price of bitcoin in Argentina is 38% higher than its spot price on global exchanges June 2013 - Bitcoin client downloads double in one month where it stays the same or less in other countries 2002 - The Argentine government introduces capital controls due to dwindling reserves
  • 23. IMPLICATIONS: ZIMBABWE • 1999 - Zimbabwe president Robert Mugabe begins redistributing private farm land, leading to a steep drop in economic productivity. • 2000 - Mugabe prints an excessive amount of money to finance the Second Congo War, spending ~$22M per month. • 2008-2009 - Inflation climbs to an alleged 6.5 sextillion percent. • 2009 - Zimbabwe abandons the Zimbabwean Dollar (Z$) and does not replace it with another fiat currency. • Bitcoin is decentralized system which adheres to a strict set of rules and parameters - requiring a majority network consent to change - making it more immune to this type of manipulation and mismanagement.
  • 24. • M-PESA is a private, mobile phone-based centralized currency that facilitates money transfers • Used by over 35M people in Kenya, Tanzania, South Africa, Afghanistan and India • Users can buy and sell prepaid cellphone “minutes” and transfer them to pay bills, satisfy debts and make purchases • Volume-based fee structure of ~1-15% (the smaller the transactions, the larger the fee percentage) • In 2011, $10B (30% of Kenya’s GDP) was transferred via M-PESA on mobile phones • Bitcoin payments, including micro-payments, are instant and free 9% 32% 5% 7% 47% M-PESA DIRECT DEPOSIT OTHER HAND BUS How people in Kenya send money after the introduction of M-PESA IMPLICATIONS: KENYA
  • 25. IMPLICATIONS: UNITED STATES • 2008 - Global Financial Crisis • 2009-2014 - The U.S. Federal Reserve more triples the monetary base in five years. • Inflation remains low, however, much of this newly minted money is not in the system yet. • Outcome of these policies remains to be seen. • Bitcoin’s supply is fixed at 21M BTC. St. Louis Adjusted Monetary Base 0 1000 2000 3000 4000 1984 1988 1992 1996 2000 2003 2005 2007 2009 2011 2013 Reserves (US$ billion) US Recession
  • 27. POSSIBILITIES: REMITTANCES • In 2012 remittances hit an all time high of $534B. • On average, global remitters pay an 8.3% transfer fee, with some inter-African remittance fees as high as 30%. • Bitcoin can be sent for free and instantly around the world with a data or Internet connection. World Bank Global Remittance Inflows 2013 0 20 40 60 80 India China Philippines Mexico France Nigeria Egypt Share of GDP (%) Remittance Inflows (US$ billion) Average transfer fee* (%) 5.46.247.5 4.415.76 7.92 4.76 202121.6422 26 60.18 71 *Transfer fees based on sending US$200 from US and selecting the quickest option
  • 28. • 2.5 Billion adults (half the global population) are underbanked/ unbanked. • 2/3 of the unbanked do not have enough money to use a bank. • A Bitcoin wallet allows anyone to send and receive money, much like a bank account, only quicker and without fees. • A Bitcoin wallet is free - all you need is Internet access or a data connection. POSSIBILITIES: BANK THE UNBANKED World Bank Financial Inclusion 2011 0 22.5 45 67.5 90 U.S. China Brazil Russia Kenya India Afghanistan Niger Account at a formal financial institution (% age 15+)
  • 29. • PayPal defines a micropayment as anything less than $12 USD, while Visa defines them as less than $17 USD. • Research shows that consumers are more willing to spend money on incremental payments as opposed to subscriptions, however, payments less than $2 USD are impractical given the costs of the current global banking system • Bitcoin allows for true micropayments (even less than $0.01 USD) giving consumers a more dynamic and fairer offering, thereby increasing revenues and decreasing IP theft (e.g., individual article paywalls vs. monthly subscription paywalls) • True micropayments would facilitate an economy of micro consumption (e.g., virtual goods, in-app purchases, gaming credits, etc.). POSSIBILITIES: MICROPAYMENTS Forecast of Subscription and Microtransaction Revenue in North Amwerica and European MMO/MOG Markets (US$ million) 0 1250 2500 3750 5000 2007 2008 2009 2010 2011 2012 2013 2014 2015 Subscriptions Microtransactions
  • 30. POSSIBILITIES: EXCHANGE-TRADED FUND FRICTIONLESS Buying bitcoin isn’t easy and requires technological proficiency ETF can bypass these pain-points SECURE Storing bitcoin securely takes expertise ETF can offload this security burden ACCESSIBLE Pension funds, mutual funds, 401k’s cannot hold bitcoin (or gold) ETF can give mainstream and institutional investors bitcoin exposure
  • 31. “Our agency approaches the issue of virtual currencies without any prejudgements. A lot of people initially react to a very outside-the-box idea like virtual currencies with immediate skepticism. I think we should resist being completely overtaken by that urge. It’s hard to say precisely what the future holds for virtual currency and its associated technology. Currently, there is not widespread adoption of virtual currencies among the general public. And some doubt whether there will ever be. But the same has been said about many other technologies that have since become everyday features of our lives. It’s generally a difficult proposition for financial regulators to forecast technological trends. It’s not something we do particularly well…Indeed, virtual currency could ultimately have a number of benefits for our financial system. It could force the traditional payments community to “up its game” in terms of the speed, affordability, and reliability of financial transactions. -Ben Lawsky, Superintendent, New York State Department of Financial Services (NYSDFS) POSSIBILITIES: REGULATION
  • 32. FUTURE Imagine if you could take a time machine back to the early days of the Internet: how would you act differently?
  • 33. REFERENCES IMAGES Page 3: Satoshi White Paper Page 4: New Yorker, Motherboard, Fast Company Page 6: P2P Foundation Page 8: Bitcoin Wiki Page 10-13: The Genesis Block Page 20 BlockChain.info Page 24: Groupe Speciale Mobile Association (GSMA) Page 25: St. Louis Fed Page 27: The World Bank, Send Money Africa Page 28: The World Bank Page 29: Digital Media Academy Page 31: New York Department of Financial Services Page 1: Stock Page 3-4: Flickr | Stig Nygaard Page 5-6: Flickr | Dennis Gerbeckx Page 7: Joey De Villa Page 8: Wikipedia Page 9: Stock Page 14: Getty | Chris Cheadle Page 15: Seinit, Stock, Stock, Stock, Unknown Page 16: Unknown, 9to5Mac Page 17: Flickr | Kevin Meredith, iMore Page 18: Getty, Stock, Getty Page 19: Stock Page 20: Flickr | fragglerocks Page 21: Wikipedia Page 22: Flickr | Rod Waddington Page 23: Wikipedia Page 24: Think M-PESA Page 25: Flickr | Steve Thompson Page 26: DiMola Bros, Oxfam, Unknown Page 30: Unknown Page 31: Mike Stimpson Page 32: Getty Page 33: Flickr | Pearled