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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)
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Bitcoin – a currency only for criminals?
No!
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The main problem with the Bitcoin debate
The technologists don’t understand economy
The economists don’t understand technology
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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
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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!
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The role of money?
1. A medium of exchange
2. A store of value
3. A unit of account
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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
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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
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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
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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!
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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
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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
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Bitcoin – price appreciation
Source: Coindesk
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Bitcoin – exchange rates 2011 - 2014
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Value of Bitcoins exchanged daily
Source: Coindesk
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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]
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Mistrust
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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
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What does the Goverment say?
The jury’s still out
Governments are very much in doubt what to do
Source: Coindesk
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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
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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.”
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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.”
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How does Bitcoin affect Net payments?
Internet
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How does Bitcoin affect Net payments?
Internet
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How does Bitcoin affect Net payments?
Internet
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How does Bitcoin affect Net payments?
Internett
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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
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Don’t underestimate the newcomer!
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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”
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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
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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
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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
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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
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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’
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Bitcoin client
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Account in a Bitcoin exchange
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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..
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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
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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!
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Thanks for your attention!
Svein Ølnes, Vestlandsforsking
Email: [email protected]
Twitter: @sveinol
Blog: sveino.blogspot.com
