Bitcoin nhh 26.03.14

Preview:

DESCRIPTION

 

Citation preview

www.vestforsk.no

What is

Bitcoin?

-- GEP, NHH – 26.03.2014

-- Svein Ølnes, Vestlandsforsking

www.vestforsk.no

Bitcoin – a currency for criminals?

Ja Yes It’s a fact that criminals prefer cash (mostly US dollars)

www.vestforsk.no

Bitcoin – a currency only for criminals?

No!

www.vestforsk.no

The main problem with the Bitcoin debate

The technologists don’t understand economy

The economists don’t understand technology

www.vestforsk.no

Outline

What is money?

What is Bitcoin?

Bitcoin history

Bitcoin and the financial crisis

What does the Government say?

The technology

Bitcon in practice

The future of Bitcoin

www.vestforsk.no

What is money?

Wikipedia: ”Money is any object or record that is generally

accepted as payment for goods and services and repayment of

debts in a given socio-economic context or country.”

Money has perfect liquidity and carries no interest

Money is what the Government says is money!

www.vestforsk.no

The role of money?

1. A medium of exchange

2. A store of value

3. A unit of account

www.vestforsk.no

Is Bitcoin money?

It is liquid (although not everybody will accept it for payment)

No interest

So, yes, technically it is money

But... The Government has not said that it is money

www.vestforsk.no

Can Bitcoin fulfill the role of money?

1. Medium of exchange: Yes

This is Bitcoin’s most important mission

2. Store of value: Yes, but..

Unfortunate, but not critical

3. Unit of account: No, not for the time being

Not very important as long as Bitcoin is not a dominant currency

www.vestforsk.no

What is Bitcoin?

Fully digital currency without central control

No central bank

No central authority

Baset on peer-to-peer technology

Deterministic (the money supply is controlled)

Based on open source software and open standards

Bitcoin is one of many digital currencies

seems to be the best constructed and the most tested

by far the biggest

www.vestforsk.no

Bitcoin - history

Developed by Satoshi Nakamoto

A pseudonym – no one knows for shure who he/she/they are

Newsweek ”revealed” the identity of Satoshi Nakomoto as Dorian Satoshi Nakamoto, a 64 year old US citizen of Japanese origin. He has denied any involvement with Bitcoin

The fundamentals of Bitcoin was presented in the paper ” Bitcoin: A Peer-to-Peer Electronic Cash System” in 2008

The Bitcoin system was launced on the Internet 3rd of Jan. 2009

The Bitcoin open source software is overseen by the Bitcoin Foundation

1 Bitcoin = 100 000 000 (108) satoshi

Well suited for micro transactions!

www.vestforsk.no

Bitcoin - history

The first Bitcoin spending was for buying to pizzas for

10.000 BTC! (worth about NOK 36 million today)

Not much happened before spring 2011

$US/BTC = 1 start of year, rose to $35/BTC in May

www.vestforsk.no

Bitcoin - history

The first Bitcoin spending was for buying to pizzas for

10.000 BTC! (worth about NOK 36 million today)

Not much happened before spring 2011

$US/BTC = 1 start of year, rose to $35/BTC in May

www.vestforsk.no

Bitcoin – price appreciation

Source: Coindesk

www.vestforsk.no

Bitcoin – exchange rates 2011 - 2014

www.vestforsk.no

Value of Bitcoins exchanged daily

Source: Coindesk

www.vestforsk.no

Bitcoin and the financial crisis

Bitcoin must be understood in the light of the financial crisis:

[Bitcoin is] completely decentralized, with no central server or trusted

parties, because everything is based on crypto proof instead of 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.

[Satoshi Nakamoto in a blog comment]

www.vestforsk.no

Mistrust

www.vestforsk.no

Bitcoin backed by very different interests

Libertarian, anarchist movement

See the Government as the main enemy

Wants a currency that is totally out of reach for Governments

Wants full anonymity

Silicon Valley investors (VCs)

See Bitcoin as the future of digital money

See an enormous innovation potential

Also see a much wider use of the Bitcoin technology

Wants the Government to regulate it somehow

www.vestforsk.no

What does the Goverment say?

The jury’s still out

Governments are very much in doubt what to do

Source: Coindesk

www.vestforsk.no

What does the financial sector say?

± Federal Reserves, US

Wait-and-see, but emphasizes the potential for innovation

÷ JP Morgan

”The Audacity of Bitcoin” (’audacious’ = frekk, dristig)

Bank of America

”Clear potential for growth”

PayPal (eBay)

Ready to integrate Bitcoin and other virtual currencies

What about Norwegian banks, and Norges Bank?

Silcence..., but the Tax authority of Norway (Skatteetaten) declared Bitcoin a commodity last year and gains or losses due to trading with Bitcoin is therefor subject to taxation or deduction

www.vestforsk.no

What do the economists say? Paul Krugman

“What’s really happening is a determined march to the days when money meant stuff you could jingle in your purse. In tropics and tundra alike, we are for some reason digging our way back to the 17th century.”

Robert Schiller

“It is a bubble, there is no question about it. ... It's just an amazing example of a bubble.”

www.vestforsk.no

What do the investors say?

Marc Andreessen (Netscape ++)

“The Internet of Money”

Warren Buffett

“Stay away from it. It’s a mirage basically, it’s a method of transmitting money, it’s a very effective way of transmitting money and you can do it anonymously and all that… a check is a way of transmitting money, too. Are checks worth a whole lot of money?”

Paul Singer (hedge fund manager)

“There is no more reason to believe that bitcoin, a computer-generated, algorithm-driven currency of supposed limited supply, will stand the test of time than that governments will protect the value of government-created fiat money. One difference: Bitcoin is newer and we always look at babies with hope.”

www.vestforsk.no

How does Bitcoin affect Net payments?

Internet

www.vestforsk.no

How does Bitcoin affect Net payments?

Internet

www.vestforsk.no

How does Bitcoin affect Net payments?

Internet

www.vestforsk.no

How does Bitcoin affect Net payments?

Internett

www.vestforsk.no

A payment system ready for change

Present system Bitcoin

Transaction costs, Net trans. 2-3 % ≈0*

Money transfer up to 10 % ≈0

Transaction time Long (days) Short (sec.)

Security Not good Secure**

Open, verifiable transactions No Yes

* Zero or close to zero (but will rise a bit) ** Transactions are secure, storing Bitcoin is potentially risky

www.vestforsk.no

Don’t underestimate the newcomer!

www.vestforsk.no

A disruptive technology

Characteristics of disruptive businesses (Clayton Christensen)

lower gross margins

smaller target markets

simpler products and services (not as attractive as the traditional)

this creates space in the bottom of the market

“I just replaced your entire industry with 100 lines of Python

code”

www.vestforsk.no

Bitcoin advantages

No central control

no inflation (amount of Bitcoin predefined)

no ”single point of failure”

transactions are irrevokable

Low transaction costs

fully digital and distributed P2P network

no trusted third party

Goldman Sachs estimates potential trans. costs savings > US$ 200 bill.

Free of use

no regulations of use

no one can stop/regulate transactions

Privacy

all transactions are pseudonyms, id of payer hidden

www.vestforsk.no

Bitcoin weaknesses

No central control

Governments highly suspicious to things they cannot regulate

irrevokable transactions: Cannot undo a transaction

Deterministic

predefined amount of bitcoins creates deflation

Bitcoin value has rosen from 0,3 cent/BTC to $600 /BTC

• stimulates speculation and hoarding

Privacy

pseudonymity attracts criminals

www.vestforsk.no

Technology

Bitcoin is based on Public Key Infrastructure

One bitcoin is defined as a chain of digital signatures

To give you a bitcoin I have to:

sign a ”hash” of a previous transaction plus your public key

only I can do that because of my private key

but everybody can validate the transaction because of my public key

secure because it relies on proven technology, and it is open

www.vestforsk.no

Technology

However, cryptography cannot prevent double-spending

The solution is to let every user have insight to all

transactions

open ledger containing all transactions, from day one

It takes about 10 minutes to verify a transaction

the difficulty, and thus the time, is regulated by the software

Conclusion: Bitcoin is a deeply elegant technology

www.vestforsk.no

How to get started with Bitcoin?

Download a Bitcoin client (desktop or mobile application)

you will also get the whole Bitcoin blockchain (the ledger)

By Bitcoin from an exchange (e.g. Norwegian Justcoin.com)

open an account and transfer money from your net bank account

The Bitcoin client works like ordinary net banking

by services and goods by copying the public address of the receiver (or with a smart phone: scan a QR code) and pres ’Send’

www.vestforsk.no

Bitcoin client

www.vestforsk.no

Account in a Bitcoin exchange

www.vestforsk.no

Bitcoin regulations

Technologists: No way Bitcoin can be regulated

Governments: Oh yes, we have the power to regulate

The exchanges are the ”weak” points

Bitcoin transactions themselves cannot be stopped by Governments

Going in and out of the Bitcoin currency can be made very hard

Resembles the start of the Internet

Utopians declared cyberspace a place without interference from Governments and businesses

We now know better..

www.vestforsk.no

Is Bitcoin going to be a flop?

The technology: Bitcoin with a capital ’B’

The currency: bitcoin with a lowercase ’b’

”It’s the technology, stupid!”

bitcoin might die, but Bitcoin will live on

www.vestforsk.no

The future of Bitcoin

Very interesting as an alternative currency for Net

transactions

payments for services and goods

transfer of money (Bitcoin already larger than Western Union)

alternative to PayPal o.l.

the first major company accepting Bitcoin will give it a tremendous boost (Amazon, eBay..)

Fundamental break-through in technology & trust

opens up for a wide range of possible use

The Internet of Money!

www.vestforsk.no

www.vestforsk.no

Thanks for your attention!

Svein Ølnes, Vestlandsforsking

Email: sol@vestforsk.no

Twitter: @sveinol

Blog: sveino.blogspot.com