Digital Currencies

1. DigitalCurrencies (Bitcoin) ENT 470 Social Innovation inFinance HULT International Business School - Summer One2016 AlessandroLanteri alessandro.lanteri@faculty.hult.edu

2. Schedule More orless… MarkLamb CEO &Co-Founder CoinFloor Money 9am ca. 60min. Blockchain +Bitcoin 10:30pm ca. 60min. GuestLecturer 11:30pm ca. 60min. Wrapup 12:30pm Break 15min

3. DigitalCurrencies vs.Money

4. PrivateMoney ENT 470 thedaringandfascinatingalternativestogovernment-backedcurrencies Bitcoin. Sweat. Tide. Meet the future ofbranded currency. Paul KempRobertson ContagiousCommunications watchat home http://www.ted.com/talks/paul_kemp_robertson_bitcoin_sweat_tide_meet_the_future_of_branded_currency

5. A history ofMoney ENT 470 (very, very, verybrief) commodities commodity-backed fiatmoney items representing underlying commoditieswithintrinsicvalue goldcertificates… legaltenderissuedbyacentral (trusted)authority USD,GBP… goodswithintrinsicvalue cows, pottery, shells,grains… ECB (2012); Ali et al.(2014) trust is veryimportant (e.g.,dollarization)

6. The functions ofMoney ENT 470 Classical theory ofmoney Store ofvalue money can be savedand retrieved in thefuture. example:houses… Medium ofexchange money is used as an intermediaryintradetoavoid the inconveniences ofa barter system, i.e. the need for a coincidence of wantsbetween thetwopartiesinvolvedinthe transaction. example: trading cards,hours… Unit ofaccount money acts as a standard numerical unit for the measurement of value and costs of goods, services,assets andliabilities. example:cigarettes… Ali et al. (2014) NOTE: money with such functions is not necessarily legaltender (ex. gold,diamonds…)

7. The functions ofMoney ENT 470 Hierarchy offunctions money is a socialconvention as such, it evolves overtime notallthefunctionsmustbe presentatalltimesandforall constituencies Unit ofaccount Medium ofexchange Ali et al. (2014) Store ofvalue

8. Types ofcurrencies ENT 470 formats and legalstatus ECB(2012)

9. Types of virtualcurrencies ENT 470 withrespecttotheirrelationshipwithlegaltenderandrealgoods Closed virtualcurrencies Almostnolinktotherealeconomy and sometimes called “in-game only”schemes.Usersusuallypaya subscription fee and then earn virtualmoneybasedontheironline performance. The virtual currency can only be spentbypurchasingvirtualgoods and services offered within the virtualcommunityand,atleastin theory,itcannotbetradedoutside the virtualcommunity. example: WoWGold… Unidirectionalflow The virtual currency can be purchased directly using real currency at a specific exchange rate,butitcannotbeexchanged backtotheoriginalcurrency. Thecurrencyisusedtopurchase virtual goods and services, but some may also allow their currenciestobeusedtopurchase real goods andservices.. example: FacebookCredit, airmiles… Bidirectionalflow Users can buy and sell virtual moneyaccordingtotheexchange rateswiththeircurrency. The virtual currency is similar to anyotherconvertiblecurrencywith regard to its interoperability with the real world. These schemes allow for the purchase of both virtualandrealgoodsandservices. example: LindenDollars, Bitcoin… ECB(2012)

10. Types of virtualcurrencies ENT 470 withrespecttotheirrelationshipwithlegaltenderandrealgoods ECB(2012)

11. Electronic vs VirtualMoney ENT 470 Types of moneyschemes electronic virtual moneyformat digital digital unit ofaccount traditionalcurrency inventedcurrency acceptance ‘universal’ within acommunity issuer legal moneyinst. non-fin.company supply fixed determined byissuer ECB(2012) redeemability guaranteed notguaranteed

12. VirtualCurrencies ENT 470 Adefinition // A virtual currency is a type of unregulated, digital money, which is issued and usually controlled by its developers, and used and accepted among the members of a specific virtual community.// private issuer issuer determined community based unregulated digital ECB(2012)

13. Bitcoin ENT 470 the first virtualcurrency Disrupt AndreasAntonopoulos BitcoinFoundation watchat home https://www.youtube.com/watch?v=c2CsJ2HMA2I

14. TimeforaBREAK Pleasebebackin15minutes

15. Bitcoinbasics

16. How to storebitcoin ENT 470 anintro Wallets are wherebitcoins are virtually stored and are used to make transactions. HOTwallets areonline allow forinstantaneous transfer offunds greater ease of usebut more vulnerable to hacking COLDwallets areoffline moresecure payment processis slower and more cumbersome

17. How to obtainbitcoin ENT 470 anintro EARN Likeanycurrency,Bitcoincanbeobtainedin exchange forgoods and services rendered. ATM’s ATMusersfirstverifytheirbitcoinwalletby scanning a QR code on their smartphone. They then insert cash into the ATM and submit to complete the transaction. The appropriateamountofbitcoinsarecredited totheirwallet(atcurrentexchangerate). DIGITALEXCHANGE Digital currency exchanges allow buyingand sellingBitcoinatthecurrentmarketrates. MINING Miners are the backbone of the Bitcoin ecosystem, providing services that help secure the network and keep it running. Minersarerewardedfortheirserviceswith Bitcoinpayments.

18. How to spendbitcoin ENT 470 anintro PURCHASES A growing number of merchants are acceptingbitcoinasaformofpayment. P2PPAYMENTS Bitcoins’ fast transfer times, lowerfees and absenceoftransactionlimitsmaketheman attractive option formicro-payments. INVESTING Bitcoinsarefrequentlytradedondigital currencyexchanges. CHARITY Bitcoinsofferafasterandsaferwaytogive to charities in the developing countries marred by social andpolitical unrest.

19. Intro toBitcoin

20. Bitcointransactions ENT 470 (in anutshell)

22. Theblockchain ENT 350 Minersworldwide www.blockchain.info(2015) USA EUROPE

23. Inside a BitcoinMine ENT 470 thephysicalmakingofdigitalcurrencies Life inside asecret Chinese Bitcoin mine https://www.youtube.com/watch?v=K8kua5B5K3I

24. Some features ofbitcoin ENT 470 Mainly, itsstrengths Only a finite amount of bitcoin is available. Thus, no entity can manipulate bitcoin value throughan increase or decrease in currency production. This leaves bitcoinvalue largelytothelawsofnaturalsupply and demandeconomics. The decentralized nature ofBitcoins eliminates the prospect of government control orownership. Decentralised Stable The blockchain is a permanentpublic record of all confirmed transactions that occur in the system and an integral part of the Bitcoin ecosystem. The blockchain helps promote order and transparency while preventcounterfeiting. Although all Bitcoin transaction details are stored publicly, the identities of the users involved remain relativelyanonymous. BUT Transparent Private Digitalpaymentstoindividualsandmerchantscanoccurat anytime and are processed faster with lower fees. This is due in large part to removing banks from the transaction processingequation. ThesebenefitsextendtopaymentsrangingfrombasicP2P transfers toremittances. Remittances are instantaneous and inexpensive,< 1% fee. FX fees areeliminated. Ali et al. (2014) Fast,Cheap

25. Theblockchain ENT 470 The truesocial innovation in bitcoins // A blockchain is a public ledgerof all Bitcoin transactions that have ever been executed. It is constantly growing as 'completed' blocks are added to it with a new set of recordings. The blocks are added to the blockchain in a linear, chronological order.// chronological permanent complete public

26. Theblockchain ENT 470 The truesocial innovation in bitcoins // A blockchain is a public ledger of all Bitcoin transactions that have ever been executed. It is constantly growing as 'completed' blocks are added to it with a new set of recordings. The blocks are added to the blockchain in a linear, chronological order.// miners confirm the validityoftransactions andaddthemtothe blockchain the blockchain publicly records the transactionsbetween sender and recipient andallowsverification the blockchain ensures each BTC is uniquely coded and thereforecanonlybe spentonce thesystemsallowthe elimination of intermediaries (e.g., banks), creating new possibilities beyond thecurrency

27. Theblockchain ENT 470 The truesocial innovation in bitcoins Blockchain technology isarguably the greatest innovation of the Bitcoinsystem. The blockchain is a constantly updated public ledger of all transactions that haveoccurred. It provides transparency acrossthe Bitcoin system, allowing transactions to be processed in a decentralized, trustlessmanner. Nakamoto(2008)

28. Theblockchain ENT 470 The truesocial innovation in bitcoins counterparty public traditional privacy model trusted thirdparty identities transactions identities public new privacy model transactions Nakamoto.(2008)

29. Theblockchain ENT 470 The truesocial innovation in bitcoins Blockchain technology is arguably thegreatesttriumphoftheBitcoin system. The blockchain is a constantly updated public ledger of all transactions that haveoccurred. It provides transparency acrossthe Bitcoin system, allowing transactions to be processed in a decentralized, trustlessmanner. Nakamoto(2008)

30. The supply ofBitcoin ENT 470 million BTC, sincelaunch Bank of America - Merril Lynch GlobalResearch

31. Bitcoin asmoney

32. Is Bitcoinmoney? ENT 470 Accordingtotheclassicaltheoryofmoney itis,butforlimitednumbersofusers. can it become morewidespread? Store ofvalue average transactions perwallet USD0.02/day encouraged bydeflationary nature penalised by highvolatility Medium ofexchange currently littleused inthelongrun,transaction costs will likely increase (end ofmining) Unit ofaccount little evidence of use merchants who accept BTCuse USD as unit ofaccount Ali et al. (2014)

33. The marketprice of Bitcoin ENT 470 in USD, sincelaunch price volatility www.blockchain.info

34. Bitcointransactions ENT 470 value in USD, perday low valueof transactions (USD daily transactions are > $ 5trillion) www.blockchain.info

35. Bitcointransactions ENT 470 number, perday possibly overstated www.blockchain.info

36. Bitcointransactions ENT 470 daysdestroyed still imperfect www.blockchain.info

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38. (some) Bitcoin businessmodels

39. NO In-Class QuizTODAY ENT 470

40. Case Study:BitGold ENT 470 BitGold vs Bitcoin(video) www.bitgold.com https://www.youtube.com/watch?v=l4d612am7ZQ

41. The risks of virtualcurrencies ENT 470 everything is not sobad Digitalcurrencies like bitcoin are coming (and it'sa goodthing) JuanLlanos EVPBitreserve watchat home https://www.youtube.com/watch?v=0GL9PTQiqxw

42. The main Bitcoin‘operators’ ENT 470 actors in the bitcoinecosystem wallets payment exchanges processors • softwarewallets • payment serviceproviders • OTC bitcoinexchanges • web & mobilewallets • paymentnetworks • spot & forwardexchanges lenders investment hardware& vehicles equipment • P2Plending • BTC hedgefunds • BTC mininghardware • bank-likeborrowing • BTC venturefunds • BTCATMs • remittances • BTC int’ltransfers • BTC mobilepayments others • BTCcasinos • BTC binaryoptions

43. The main Bitcoin‘operators’ ENT 470 actors in the bitcoinecosystem wallets Although a necessary part of the Bitcoin infrastructure, mostofthereputableBitcoinwalletsarenotmonetized per se. Additional services, like currency exchange or merchant tools, provide revenue generatingcapabilities. Safetyofawalletisaprimeconcernforauser.

44. The main Bitcoin‘operators’ ENT 470 actors in the bitcoinecosystem payment processors Paymentprocessingappearstobeanattractivebusiness model due to a large volume of transactions daily and a growing number of merchants accepting Bitcoin. Ability toacquiremerchantsisthekeytosuccess. Competition,howeverputsdownwardpressureonfees.

45. The main Bitcoin‘operators’ ENT 470 actors in the bitcoinecosystem exchanges Startupsseealotofspacetoinnovatewithadditional trading services, exchange pairs (both currency and precious metals), and financial instruments(forwards, shares). However, market leaders process 75+% transactions. A novel unilateral exchange model is throughATM’s.

46. The main Bitcoin‘operators’ ENT 470 actors in the bitcoinecosystem hardware& equipment Hardwareandequipment,builtspecificallyforbitcoin, represent arecentdevelopmentinthevaluechain. Despitethepotentiallycappeddemandformining equipment(duetothecappedbitcoinsupply),the demand exceedssupply.

47. The main Bitcoin‘operators’ ENT 470 actors in the bitcoinecosystem investment vehicles ETF and mutual find-like investment vehicles are yet to gainpopularityduetothevolatilityofBTCandpotential oflargeplayerstoinfluencetheprice. Prominent venture capital investors increasingly fund companies in theBitcoinecosystem. BTC Hedge Fund launched inMalta.

48. The main Bitcoin‘operators’ ENT 470 actors in the bitcoinecosystem lenders Lending platforms represent a great potential (with Bitcoin credit cards being a part of it). The operators releasethemselvesoftheliabilityfortheloanrepayment andfromtheguaranteesondepositinvestments.

49. The main Bitcoin‘operators’ ENT 470 actors in the bitcoinecosystem remittances Remittancesarea$500bil/yearmarket. New BTC operators are entering thespace (e.g., Kipochi integrated with M-Pesa,BitPesa…).

50. The main Bitcoin‘operators’ ENT 470 actors in the bitcoinecosystem others MinerLease–Bitcoinminingcontractsforinvestment; BTCLevels–platformallowingausertoprofitfromcorrectpredictionoftheBTCprice forecasts; Satoshi dice – leading Bitcoin gamingsite; Coinster – cryptocurrency searchengine; BTCVoip – provides VOIP services at low prices forBTC only; BitcoinGet–allowsearningbitcoinsbywatchingthevideosandcompletingsimple tasks; Cryptcard-internationalprepaidBitcoinloadablevirtualMasterCardtogetmoneyto thepeople,whodonotacceptbitcoins.