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Is Bitcoin really a currency?

Is Bitcoin really a currency?. David Yermack NYU Stern School of Business November 22, 2013. What is Bitcoin?. A stateless , “ algorithmic ” currency That exists only in cyberspace Major demand is in U.S., China, and certain European countries Bitcoin / USD exchange rate:

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Is Bitcoin really a currency?

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  1. Is Bitcoin really a currency? David Yermack NYU Stern School of Business November 22, 2013

  2. What is Bitcoin? • A stateless , “algorithmic” currency • That exists only in cyberspace • Major demand is in U.S., China, and certain European countries • Bitcoin / USD exchange rate: • July 17, 2010 1 Bitcoin = $ 0.0495 • November 21, 2013 1 Bitcoin = $740.5948

  3. Bitcoin’s appreciation vs. USD • Past week 71% • November 2013 (so far) 251% • 2013 year to date 5,382% • Since inception 1,495,749%

  4. Daily trading volumeMt. Gox exchange $1,000,000,000 $10,000,000 $100,000 $1,000 $10 $0 2010 2011 2011 2012 2013

  5. History of Bitcoin • Bitcoin is proposed as a “peer to peer electronic cash system” by an unknown software engineer, October 2008. • First Bitcoin issued electronically, January 2009. Current worldwide supply = c. 12 million. • Mt. Gox trading market opens, July 2010. • U.S. Treasury issues first regulatory guidance for virtual currencies, March 2013. • Federal regulators, including Bernanke, comment favorably upon Bitcoin at the U.S. Senate hearing, November 2013.

  6. Bitcoin’s appeal • Bitcoin’s value cannot be debased by any government. • The supply of Bitcoins can only grow slowly and is limited by a computer alogrithm to 21 million. • Bitcoin attacts young, affluent users of eCommerce. • Seigniorage revenue goes to entrepreneurs who “mine” new Bitcoins by solving math problems.

  7. Does Bitcoin have the characteristics of a currency? A currency is . . . • A medium of exchange • A unit of account • A store of value

  8. Living on Bitcoin101 days, 4 countries

  9. Bitcoin ATM • Installed in a Vancouver coffee shop, October 2013 Victoria Hansen makes first-ever transaction

  10. Bitcoin investment vehicles • Winklevoss Twins claim to own 1% of worldwide supply, July 2013, and file for IPO of the Wilklevoss Bitcoin Trust

  11. Does Bitcoin have a stigma?Silk Road online drug market

  12. Bitcoin’s security risksDenial-of-service attacks depress Mt. Gox trading volume, April 2013

  13. Bitcoin and other currenciesSeems to be worthless for hedging

  14. Bitcoin’s beta 50% 40% 30% 20% Slope = 0.67 10% Bitcoin return 0% -10% -20% -30% -40% -50% -10% -5% 0% 5% 10% Market return

  15. What’s the best hedge for Bitcoin?Growth stocks like Vitamin Shoppe (NYSE VSI): ρ = 0.607 Vitamin Shoppe 2011-12 (rescaled) Bitcoin 2011-12

  16. Bitcoin’s volatility2013 to date 1.20 1.00 0.80 0.60 0.40 0.20 0.00 Euro / USD Bitcoin / USD

  17. What can you not do with Bitcoin? • Store it in a real bank that has deposit insurance • Spend it anonymously • Sell it short

  18. How does the government feelabout Bitcoin? • Bitcoin precludes monetary policy • Bitcoin precludes money laundering and tax evasion too

  19. Bitcoin’s greatest vulnerabilityMarket entry by competitors

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