An Introduction to Bitcoin

An Introduction to Bitcoin Table of Contents October 2013 Buzz of Bitcoin – What People Are Saying? …………………………... What is Bitcoin? …………………………………………………………….……... What is the USD Conversion Rate? ……………………..………………… Why Do Bitcoin Have Value? ……………….…………………………………

How are Bitcoins Tracked? ………………….……………………………….…

What is Bitcoin Mining? ………………………………………………………… Bitcoin versus Gold ……………………………………………………………….. Who Accepts Bitcoin and Who Invests? ………………………….……. Risks of Bitcoin ……………………………………………………………………….

How to Get Bitcoins ………………………………………………………………. Bitcoin Online Gambling ……………………………………………………..... Future of Bitcoin …………………………………………………………………....

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What is Bitcoin?

• Bitcoin (BTC) is a new kind of currency introduced in 2009. It’s the first decentralized electronic currency not controlled by a single organization or government

• Bitcoin is an open source project that anyone can validate its security and stability

• All over the world people are trading millions of dollars worth of bitcoin every day

• Trades are made with no middle man and no credit card companies

It’s a startup currency which has never happened before.

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• Transactions are fast, borderless, nearly free, and transactions are irreversible

• Digitally distributed crypto-currency with no central authority

• Transferred between its users on the bitcoin network from a computer, printout, coins, or cell phone

• Creation of new bitcoins are “mined” by computers running the network

• They are a scarce resource and there will only be 21 million bitcoins created

o approximately 11.5 million bitcoins currently in circulation

• Bitcoins are divisible to 8 decimal places yielding a total number of 21 x 1014 currency units. (reference table below)

What is Bitcoin? continued .

1 BTC……………………..1 bitcoin 0.01 BTC…………………1 cBTC (bitcent) 0.001 BTC……………….1 mBTC (millibit or mbit) 0.0001 BTC……………..1 uBTC (microbit or ubit) 0.00000001 BTC …….1 satoshi

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What is the USD Conversion Rate? Market Capitalization (billions)

2.75

2.50

2.25

2.00

1.75

1.50

1.25

1.00

0.75

0.50

0.25

0.00 Nov 12 Dec 12 Jan 13 Feb 13 Mar 13 Apr 13 May 13 Jun 13 Jul 13 Aug 13 Sep 13 Oct 13

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1. Nov 12 – Feb 13: Consistent Bitcoin price from early adopters

2. Feb 13 – Jun 13: First media attention and Cyprus banking crisis led to large price increase and drop

3. Jun 13 – Aug 13: Stable, but still volatile, market price with Government debates and new company announcements

4. Aug 13 – Oct 13: China learns about bitcoin, Silk Road black market bust brings trust and investors enter market

• Rolling 12 price change $11.14 USD per BTC to over $200

• Market cap has grown to $2.4bn (115%) during 2013

• First purchase was a delivered pizza for 10,000 bitcoins, current pizza value: $2,023,200 Source: blockchain.info

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2 3

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Bitcoin has value because of its nearly free global transfers, political

neutrality, scarcity, divisibility, privacy, resolute property ownership,

credibility, and free “bank” accounts

• Significantly reduces payment friction, transfer cost, and expenses to businesses

• Spends like cash, transfers not subject to chargebacks

• Elimination of identity theft, no counterfeiting, significant reduction of payment fraud

• High privacy, protection of individual rights, pseudo-anonymous (users choice)

• Protection from monetary policies and risk (confiscation, inflation, debasement)

• Based on mathematic algorithms. Transparency replace a central authority

o Distributed peer-to-peer network ensures software stability by consensus

o Open source code is public to review and replicate

• Competition currencies called “altcoins” (Peer-to-Peer coin, Litecoin, Feathercoin, etc) Source: Western Union 2013 Conference – Emergence of Digital Currencies Presentation

Why Do Bitcoins Have Value?

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• Every transaction is maintained on a public ledger called the “blockchain”

o Public ledger of all transactions assembled and shared within the network o Dividing coins creates a new chain that can still be traced back to its creation o Computers maintain the blockchain’s credibility through group consensus

How are Bitcoins Tracked?

How Transactions Work Through the Chain

Source: themisecircle.org

one new bitcoin is created

seller receives payment, new chain is created

Black squares represent the original holder’s transactions Grey squares represent merchants receiving payment

two merchants receive bitcoin as payment

original owner’s current amount

0.5 BTC

0.25 BTC

0.25 BTC

0.125 BTC

0.5 BTC

0.125 BTC

1 BTC

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Miners are rewarded with new bitcoins and transfer fees for their service

• Mining bitcoin is comparable to buying lottery tickets, a user exchanges processing power for

the chance to win bitcoins

• The faster a computer mines (more processing output), the higher their odds of winning

• Bitcoin mining has created a hardware industry within itself with high gross sales, new

technologies of computer chips have been developed to mine more efficiently

• Miners calculate their profitability through expected return on investment versus

hardware investment and power consumption

What is Bitcoin Mining?

Bitcoin mining creates new bitcoins, guarantees transaction legitimacy, and is handled by PCs running the free software.

These computers verify and store trades made on the network.

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• 11.5 million bitcoins have always been mined of the total 21 million

• This system evenly distributes bitcoins in a fair and mathematically ensured basis

• The difficulty to generate bitcoins are automatically adjusted to the total power of the network

itself, this results in a predictable timeframe until 21 million coins will exist in 2033

What is Bitcoin Mining? continued .

Bitcoins in Circulation (millions) 21

18

15

12

9

6

3

0 ’09 ’10 ‘11 ’12 ’13 ‘14 ’15 ‘16 ’17 ‘18 ’19 ’20 ‘21 ’22 ’23 ’24 ’25 ’26 ’27 ’28 ’29 ’30 ’31 ’32 ’33

Years

currently 21 million bitcoins (55% of total) has been mined

Source: Quartz.com 8

1. Definite owner at time of holding 2. Hard to “mine” 3. Limited resource (21 million) 4. Can’t be copied 5. Easily divisible 6. Easy to transport, secure, and hold 7. Digital

Bitcoin as an Investment

vs

1. Definite owner at time of holding 2. Hard to mine 3. Limited resource (on earth) 4. Can’t be copied 5. Relatively divisible 6. Difficult to transport, secure, and hold 7. Physical

Source: Trukhin Roman, Software Developer

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Who Accepts Bitcoin? • Bitcoin payment processors Bitpay, Coinbase, and Blockchain combined report over 20,000

merchants and 1 million users. Merchants can also accept bitcoin and get paid in dollars

• Baidu’s, Chinese version of Google, announcement to accept bitcoin drove up the price

Who Invests in Bitcoin Companies?

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Buy In-Person Buy On a Currency Exchange • LocalBitcoins matches local buyers and sellers • Open air bitcoin exchange meet up groups

such as Satoshi Square buy and sell in-person • Private bulk-purchase sellers • Bitcoin ATMs swap cash for BTC

How to Get Bitcoins

• Coinbase connects to your bank account and is the easiest method

• Bank wires, cashiers checks, SEPA transfers, and other methods are accepted on other exchanges

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Risks of Bitcoin • Potential money laundering and illegal activity

o Silk Road market sold drugs online for BTC o The alleged creator was arrested and the FBI

seized over $20 million worth of bitcoins • News, politics, and economy can impact price • The market may determine bitcoins don’t have

ample utility or better solutions arise • Like physical currency – bitcoins can be subject to

theft or be lost • Few consumer protections – no complaint center

from credit card companies or PayPal • Some economists debate against bitcoin’s

inherent deflationary characteristics o No access to inflate or print more o Users may not make purchases if they know

the value will increase o Fear a hoarder society instead of consumer

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Risks of Bitcoin continued .

What are US Regulators Saying?

• Texas federal judge rules ‘Bitcoin is a currency’ • 22 bitcoin companies in New York were subpoenaed for information about their AML practices • The US Treasury’s Financial Crimes and Enforcement Network (FinCEN) and states debate regulation

“the Federal government has taken an active interest in understanding bitcoin.“ – Bitcoin Foundation

“Digital currencies are just a financial service and those who deal in them are a financial institution.”

“…Not only are we going to be transparent [with regulatory discussions], but we're going to introduce

you to the whole regulatory community.” – FinCEN Rep

What are International Regulators Saying?

• Germany recognizes bitcoin as “private money”, is now legal tender • Chinese government’s TV network ran two bitcoin documentaries

• China Banking Commission said “We have…no plans to introduce regulatory policies for bitcoin.” • India’s central bank says it is ”watching”, has no intention of regulating the currency now • Canada’s FINTRAC sent letters to bitcoin exchanges confirming they are not money service

businesses and explaining they are exempt from strict money-laundering laws

Sources (in order): NBC News, Forbes, Washington Post, CoinDesk, CNBC, Chinese Television Network, finance.sina.com.cn, The Economic Times, theregister.co.uk .

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Bitcoin Online Gaming • Gambling online with bitcoins is similar to unrated cash handle in slot machines

o Simple, immediate results, and anonymous o Circumvents a player’s tax and domestic law requirements

• Online gambling historically contributed %50 of total bitcoin transactions by volume • Online gambling websites prove fairness through the Blockchain (transfers are public)

o Anyone can calculate total bets, win, and loss o Gaming sites distribute free earnings reports

• Started with the launch of SatoshiDice o Company sold for $11.5 million (126K BTC) to an anonymous buyer o Generated $50K - $200K per month in revenue with 183% average monthly growth

• Competitor JustDice reported 2,800K BTC earned in August ($400K) • There are currently over 100 bitcoin online gambling websites

Sources (in order): Forbes, Blockchain.info, CalvinAyre.com, Bitcoin Magazine

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Potential Effects

1. Bitcoin’s future depends on regulatory decisions, mass adoption, and practical uses

2. Take market share away from credit card companies, ATM machines, purchases made online, and other investment opportunities

3. Venture capital and entrepreneur involvement 4. Automated departments within corporations

from digital software and development 5. Increase individual’s financial privacy, rights,

and security 6. Free bank accounts to the over 50% of Earth’s

population that doesn’t have one 7. Cost savings from decreased work load 8. Preferred method of international trade,

internet purchasing, and money remittance

Bitcoin helps ordinary people

• Argentina’s mismanagement of its currency has led to inflation, capital controls, and the destruction of family savings

• People are using “old Android phones” to acquire and store bitcoins

Source: Gigaom.com

Probable Effects

• Bitcoin will promote more digital currencies, new competition for banks and Government issued fiat currency

• More markets will learn about bitcoin and spike the price, it will remain volatile

• Entrepreneurs will use bitcoin to solve issues and more investors will enter

• US government will have the harshest law set pertaining to digital currency

Future of Bitcoin

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