Richard Bove on Bitcoin Letter 1 - Bitcoin revisited

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On August 12, 2013, Rafferty Capital Markets released an initial report on Bitcoins entitled Reserve Currency/Bitcoin and Babel. The thrust of that comment was that despite the numerous problems with …

On August 12, 2013, Rafferty Capital Markets released an initial report on Bitcoins entitled Reserve Currency/Bitcoin and Babel. The thrust of that comment was that despite the numerous problems with Bitcoins, the cryptocurrency continued to grow.

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  • 1. Monday, December 02, 2013 Bitcoin Revisited Still Struggling to Understand Richard X. Bove Vice President Equity Research Financial Sector 813.388.2900 Price Explosion On August 12, 2013, Rafferty Capital Markets released an initial report on Bitcoins entitled Reserve Currency/Bitcoin and Babel. The thrust of that comment was that despite the numerous problems with Bitcoins, the cryptocurrency continued to grow. Therefore, it was assumed that there were compelling reasons for this currency to exist and that it would continue to grow in usage. At the time the report was released Bitcoins were reported as selling on the Mt. Gox Exchange at an average weighted price of $106.09 per coin. On Friday, the reported average weighted price, per coin, on the Mt. Gox exchange was $1,155.30. The price had increased by 989% in three and one-half months. 11/17/2013 9/17/2013 10/17/2013 8/17/2013 7/17/2013 6/17/2013 5/17/2013 4/17/2013 2/17/2013 3/17/2013 1/17/2013 12/17/2012 11/17/2012 9/17/2012 10/17/2012 8/17/2012 7/17/2012 6/17/2012 5/17/2012 4/17/2012 3/17/2012 2/17/2012 1/17/2012 12/17/2011 11/17/2011 9/17/2011 10/17/2011 8/17/2011 7/17/2011 6/17/2011 5/17/2011 4/17/2011 2/17/2011 3/17/2011 1/17/2011 12/17/2010 11/17/2010 9/17/2010 10/17/2010 8/17/2010 $1,200.00 $1,100.00 $1,000.00 $900.00 $800.00 $700.00 $600.00 $500.00 $400.00 $300.00 $200.00 $100.00 $0.00 7/17/2010 Dollars Weighted Bitcoin Prices as Reported by the Mt. Gox Exchange Reducing the Unknowns This literal price explosion suggested taking another look at this currency to determine what is driving its success. I still find that what I do not know or understand about this currency and the cryptocurrency phenomenon far outweighs what I do know. Therefore this report will segregate the two issues, what I know and what I do not know, in an attempt to provide at least some information concerning what is happening here. What I Think I Know Cryptocurrencies Cryptography has a number of meanings depending on which dictionary one chooses. Merriam Webster defines it as: “the process of writing or reading secret messages or codes.” The cryptocurrency glossary written by CoinDesk broadens the definition. “[Cryptography is] the use of mathematics to create codes and ciphers that can be used to conceal information. It is used as the basis for mathematical problems to verify and secure Bitcoin transactions.” In sum, cryptography is used to create crypto currencies. And, as shown on the following page, there are a large number of these currencies in place; although, only one has developed a universal position – i.e., the Bitcoin. The listing shown here is from Wikipedia but there are many such listings available. PLEASE SEE IMPORTANT DISCLOSURE AND ANALYST CERTIFICATION LOCATED IN THE APPENDIX OF THIS REPORT. Page 1
  • 2. Monday, December 02, 2013 Bitcoin Revisited Cryptocurrency Market (November 2013) Cryptocurrency Bitcoin Litecoin Peercoin Infinitecoin Namecoin Novacoin Primecoin Feathercoin WorldCoin CopperLark TagCoin Devcoin MinCoin Megacoin Ixcoin DigitalCoin Terracoin Freicoin Goldcoin Anoncoin BBQcoin Fastcoin YACoin Bytecoin Franko Bitbar Phoenixcoin Timekoin Rucoin Solidcoin I0coin Extremecoin CHNcoin Betacoin Royalcoin wikicoin Geist Geld Tenebrix Fairbrix Coiledcoin Liquicoin Smallchange MMMcoin Junkcoin Weeds (currency) Code BTC LTC PPC IFC NMC NVC XPM FTC WDC CLR TAG DVC MNC MEC IXC DGC TRC FRC GLD ANC BQC FST YAC BTE FRK BTB PXC TK RUC SC I0C EXC CNC BET RYC WPC GG TBX FBX CLC LQC MMM JKC Est. 2009 2011 2012 2013 2011 2013 2013 2013 2013 2013 2013 2011 2013 2013 2011 2013 2012 2012 2013 2013 2012 2013 2013 2013 2013 2013 2010 2011 2011 2011 2013 2013 2013 2004 2011 2011 2011 2012 2012 2013 Founder Satoshi Nakamoto Coblee Sunny King fisheater Vinced Balthazar Sunny King Peter Bushnell Mark Vernon & Tagbond Unthinkbit SandyCohen Nasakioto baritus maaku, jtimon Gldcoin & Akumaburn Meeh Cubox Christopher Tao pocopoco bryanmills PCS Network KnightMB CoinHunter CaptChadd betacoindev anonymous Lolcust ArtForz, Lolcust coblee makomk Nicksasa lightenup Sergei Mavrodi Active Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes No No No No No No No No No No Website Market Cap $9,300,000,000 $1,000,000,000 $43,300,000 $6,600,000 $4,700,000 $2,500,000 $2,200,000 $2,000,000 $1,500,000 $710,000 $450,000 $450,000 $350,000 $310,000 $273,000 $230,000 $220,000 $190,000 $150,000 $140,000 $53,000 $32,000 $25,000 $12,300 $10,000 $8,700 $5,000 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A $3,000 N/A Comments Decentralized ledger currency;SHA-256 proof-of-work Scrypt proof-of-work SHA-256 proof-of-work/proof-of-stake Scrypt proof-of-work; 30 second goal SHA-256 proof-of-work; decentralized DNS Scrypt proof-of-work/proof-of-stake Scientific use proof-of-work Scrypt proof-of-work Scrypt proof-of-work; target 30 seconds SHA-3 (512 bit keccak) proof-of-work Scrypt proof-of-work/proof-of-stake; 4-minute blocks 80% developers; 10% to administrators; 10% miners Scrypt based Target 20 seconds SHA-256 proof-of-work Uses demurrage (5% per year); 80% to Freicoin Foundation Scrypt proof-of-work Scrypt proof-of-work; Users anonymous Scrypt based Scrypt proof-of-work Scrypt chcha proof-of-work;proof-of-stake Copy of Bitcoin Scrypt proof-of-work Novacoin scarce clone Scrypt proof-of-work Temporal based, pooled currency production Russian 10Coin clone Scrypt proof-of-work Goal 32 million units; then 0.39% growth Scrypt based; Canadian Proo-of-concept Scrypt proof-of-work Tenebrix clone Proof-of-concept coin Proof-of-concept coin Proof-of-concept project 10T coins premined Offline Proof-of- These currencies can be mined directly for those with a knowledge of programming and access to computers with enormous capacity. However, the currencies are also traded through exchanges literally in every region of the world and in every major fiat currency. Buying them in the open market is not terribly difficult. Note the listing of exchanges on the next page derived from Bitcoin Charts. PLEASE SEE IMPORTANT DISCLOSURE AND ANALYST CERTIFICATION LOCATED IN THE APPENDIX OF THIS REPORT. Page 2
  • 3. Monday, December 02, 2013 Bitcoin Revisited Active Markets ARS - Argentina: Pesos localbtcARS (LocalBitcoins) AUD - Australia: Dollars btcmarketsAUD (btcmarkets) localbtcAUD (LocalBitcoins) mtgoxAUD (Mt. Gox) weexAUD (WeExchange) By Country Inactive Markets AUD - Australia: Dollars bitmarketAUD ( wbxAUD (World Bitcoin Exchange) Active Markets GBP - United Kingdoan: Pounds intrsngGBP (Intersango) localbtcGBP (LocalBitcoins) mtgoxGBP (Mt. Gox) By Country Inactive Markets GBP - United Kingdoan: Pounds bitmarketGBP ( HKD - Hong Kong: Dollars btchkexHKD (Bitcoin HK Exchange) ILS - Isreal: New Shekels bit2cILS (Bit2C) BRL - Brazil: Reais localbtcBRL (LocalBitcoins) mrcdBRL (Mercado Bitcoin) HKD - Hong Kong: Dollars anxhkHKD (Asia Nexgen) localbtcHKD (LocalBitcoins) mtgoxHKD (Mt. Gox) ILS - Isreal: New Shekels localbtcILS (LocalBitcoins) CAD - Canada: Dollar CAD - Canada: Dollar localbtcCAD (LocalBitcoins) lybitCAD (LibertyBit) mtgoxCAD (Mt. Gox) virtexCAD (Canadian Virtual Exchange) weexCAD (WeExchange) INR - India: Rupees localbtcINR (LocalBitcoins) CHF - Switzerland: Swiss Franc localbtcCHF (LocalBitcoins) mtgoxCHF (Mt. Gox) MXN - Mexico: Pesos localbtcMXN (LocalBitcoins) CNY - China: Yuan, Renminbi anxhkCNY (Asia Nexgen) btcnCNY (BTC China) mtgoxCNY (Mt. Gox) CNY - China: Yuan, Renminbi rmbtbCNY (RMBTB) CZK - Czech Republic: Koruna bitcashCZK ( localbtcCZK (LocalBitcoins) DKK - Denmark: Kroner localbtcDKK (LocalBitcoins) mtgoxDKK (Mt. Gox) Eur - European Union: Euro Eur - European Union: Euro bitcurexEUR (Bitcurex) bitmarketEUR ( btcdeEUR ( rippleEUR (Ripple) btceEUR (btc·e) crytrEUR (Crypto-Trade) intrsngEUR (Intersango) justEUR (Justcoin) localbtcEUR (LocalBitcoins) mtgoxEUR (Mt. Gox) rockEUR (The Rock Trading Company) vcxEUR (Vircurex) Active Markets SEK - Sweden: Kronor fybseSEK (FYB-SE) kptnSEK (Kapiton) localbtcSEK (LocalBitcoins) mtgoxSEK (Mt. Gox) By Country Inactive Markets By Cryptocurrency Inactive Markets XRP - Ripple justXRP (Justcoin) rippleXRP (Ripple) SGD - Singapore: Dollars fybsgSGD (FYB-SG) localbtcSGD (LocalBitcoins) mtgoxSGD (Mt. Gox) SLL - Sierra Leone: Leonean virwoxSLL (VirWox) Active Markets LTC - Litecoin bitmeLTC (bitme) justLTC (Justcoin) SLL - Sierra Leone: Leonean rockSLL (The Rock Trading Company) THB - Thailand: Baht localbtcTHB (LocalBitcoins) mtgoxTHB (Mt. Gox) JPY - Japan: Yen mtgoxJPY (Mt. Gox) NOK - Norwegian: Krone justNOK (Justcoin) localbtcNOK (LocalBitcoins) NZD - New Zealand: Dollars bitnzNZD (bitNZ) localbtcNZD (LocalBitcoins) mtgoxNZD (Mt. Gox) PLN - Poland: Zloty bidxtrmPLN (bid extreme) bitcurexPLN (Bitcurex) localbtcPLN (LocalBitcoins) mtgoxPLN (Mt. Gox) PLN - Poland: Zloty bitmarketPLN ( intrsngPLN (Intersango) RUN - Russia: Rubles btceRUR (btc·e) localbtcRUB (LocalBitcoins) mtgoxRUB (Mt. Gox) USD - United States: Dollars anxhkUSD (Asia Nexgen) bitkonanUSD (bitKonan) bitstampUSD (BitStamp) btceUSD (btc·e) cbxUSD (Camp BX) crytrUSD (Crypto-Trade) icbitUSD (ICBIT Stock Exchange) justUSD (Justcoin) localbtcUSD (LocalBitcoins) mtgoxUSD (Mt. Gox) rippleUSD (Ripple) rockUSD (The Rock Trading Company) vcxUSD (Vircurex) weexUSD (WeExchange) USD - United States: Dollars bitboxUSD (BitBox) bitmarketUSD ( intrsngUSD (Intersango) lybitUSD (LibertyBit) RUN - Russia: Rubles bitmarketRUB ( ZAR - South Africa: Rand bitxZAR (BitX) localbtcZAR (LocalBitcoins) PLEASE SEE IMPORTANT DISCLOSURE AND ANALYST CERTIFICATION LOCATED IN THE APPENDIX OF THIS REPORT. Page 3
  • 4. Monday, December 02, 2013 Bitcoin Revisited The table below provides some idea of the activity by Exchange based on the trading activity on November 29, 2013. Market btcnCNY mtgoxUSD btceUSD bitstamp USD mtgoxEUR mtgoxJPY btcdeEUR btceEUR btceRUR bitcurexPLN localbtcGBP virtexCAD mtgoxGBP mtgoxAUD localbtcEUR mtgoxPLN mrcdBRL virwoxSLL cbxUSD mtgoxCAD localbtcUSD localbtcAUD anxhkHKD rip p leXRP justNOK rockEUR fy bseSEK justEUR fy bsgSGD bitcurexEUR justLTC localbtcCAD bitnzNZD mtgoxSEK bitxZAR cry trUSD btcmarketsAUD mtgoxCHF localbtcNZD mtgoxDKK localbtcCHF localbtcHKD localbtcTHB kp tnSEK justUSD mtgoxHKD localbtcZAR mtgoxCNY justXRP rip p leUSD localbtcSGD mtgoxSGD localbtcNOK localbtcARS localbtcCZK localbtcSEK localbtcM XN bitkonanUSD localbtcPLN anxhkUSD localbtcBRL intrsngEUR localbtcINR mtgoxTHB localbtcDKK anxhkCNY rockUSD vcxUSD mtgoxRUB intrsngGBP cry trEUR localbtcRUB mtgoxNZD vcxEUR Last price 7041.12 1149 987.5 1080.95 838 116000 804.01 786.89 34395 3431 779.19 989 704.3059 1276.895 750.96 3463.2591 3000 276680 1025 1220.0911 1187.44 1462.88 8970 38000 6763 754 7400 839.99 1495.95 800 25.5 1281.92 1280 7660 12700 1000 1337 1034.8921 1500 6300 910.19 8916.31 33423.83 6800 1120 9168.9157 10990.08 6818.9424 33800 1100 1508.14 1425.9455 7585.97 10123.05 25315.58 8228.63 16836.34 1200 3473.03 1150 3472.12 591.5 64961.29 36500 6572.52 6747.9879 990 948.88 38244.7763 727 899.99 35192.68 1501.7451 700 Volume (24h) 83,471.93 49,133.34 26,760.27 24,274.03 4,628.26 2,101.20 1,555.43 1,296.15 943.93 925.88 672.4 581.1 518.05 501.19 307.79 284.93 225.01 222.57 193.99 162.11 160.55 140.45 132.61 120.86 81.96 74.44 72.06 61.27 47.94 47.15 42.61 41.05 40.56 37.53 27.96 25.91 23.99 23.95 22.83 20.94 19.65 18.27 17.8 15.75 13.57 12.92 12.13 11.42 10.73 9.35 9.07 8.59 8.56 7.06 6.2 5.18 3.92 3.8 3.5 3.47 3.1 2.52 2.02 2 1 0.94 0.88 0.73 0.39 0.07 0.03 0.03 0.02 0 Bid 7031.78 1149 981.41 1071.52 827 116000 835 776.95 33840 3431 984.33 963 704.31 1254.28 971.21 3463.26 2800 266001 1025.06 1199 4353.36 1653.95 8650 37050 6455 755 7480 797.3 1480 799.3 25.57 1368.59 1280 7499 12111 955 1300 1017.54 1358.87 6158.76 1037.28 8416.81 35611.65 6566.56 980 8701.09 12050.96 6837.75 33550 1100 1378.17 1409.27 6920 10745.01 23707.41 8459.12 15000 1181 3661.33 1108.97 3166.07 550 70421.49 36052.84 6083.66 6811.02 925 852 37200.19 486 575 35618.72 1376.32 576 Ask 7034.89 1149.87 982 1075 838 119000 831 783.32 33840.01 3439 137.4 976 710 1276.92 310.8 3600 3000 276698 1036.99 1234.83 847.42 1152.93 9088 38000 6763 785 7489.96 839.99 1495.95 800 30.68 1064.49 1300 7670.42 12700 1000 1337 1058.48 1299 6300 1008.02 8758.95 30345.39 6800 1120 9051.08 12628.91 7112.71 36800 1144 1344.01 1465.93 6836.16 10700.53 20549.71 7253.99 16514.41 1394.96 3226.51 1180.26 2597.59 591.5 67068.09 37503.03 5888.38 7212.7 1000 859 38696.99 727 779 35019.74 1412.9 700 High 7499 1242 1018.7 1097.49 893 127285.1 1200 804 35000 3550 1068.96 997.9 750 1360 1069.87 3740.15 3600 279894 1049.49 1295.24 2295.3 1499 9450 41450 6779 790 8000 850 1520 800 40.9 1683.47 1348.5 7933.09 16400 1000 1337 1100 1539.83 6646.62 1216.18 8979.29 45886.88 6800 1125 9591.23 17884.94 7550.43 44999 1125 1508.14 1532.97 7585.97 11715.76 27125.28 8264.87 18473.73 1400 4114.66 1200 3504.02 591.6 84030.29 36500 6572.52 6747.99 995 948.88 39676.88 785.86 899.99 35192.68 1501.75 700 Low 6600 1050 927 980 790 109657.97 415 715.35 31234.7 3333.1 597.19 935 644.57 1154.19 540 3315 2750 242005 974.31 1110 717.85 951.78 7850 33333.33 6126 730 6360 704.36 1345 740 5 894.9 1223 7166.3 10001 935 1150 995.07 1209.76 5917.52 900.23 8012.23 31682.89 5805.8 885 8422 10744.99 6740.9 28000 1005 1368.6 1425.95 6368.9 9128.02 16761.86 6260.46 13500.52 1150 3289.25 1012.82 2679.82 508 64961.29 36156.39 6572.52 6399.95 910 900 36658.21 363.4 899.99 35192.68 1417.65 700 PLEASE SEE IMPORTANT DISCLOSURE AND ANALYST CERTIFICATION LOCATED IN THE APPENDIX OF THIS REPORT. Page 4
  • 5. Monday, December 02, 2013 Bitcoin Revisited There are a few points to be derived from the two tables above: • • • • Crypto currencies are becoming universal; certainly the Bitcoin is. Bitcoins trade in every currency. If one multiplies the 200 million coins traded on Friday by the U.S. price on that day, the market turnover was $230 million. th If one annualizes the Friday volume, it becomes $50 billion; a big number but less than 1/1,000 of 1% of the world’s fiat currencies of $56 trillion by my calculation. So the Bitcoin is growing and it is sizable but it is yet to threaten any aspect of the fiat currencies of the world. Still it does require investigation given the apparent enthusiasm to own the currency. Starting Point Supposedly a gentleman named Satoshi Nakamoto created the Bitcoin in 2009 and then after never have being seen announced his retirement from the Bitcoin scene in 2011. Whether Mr. Nakamoto ever existed or not his creation the Bitcoin clearly does exist. It has some of the following characteristics: Creation • Bitcoins are created whenever a computer programmer or other individual, using any machine, solves a mathematical puzzle or algorithm. Anyone can try to solve the puzzle on any computer anywhere in the world. The problem however gets more and more complicated as time passes. For example, it is easy to solve a mathematical query asking for the first prime number. It st requires enormous computer power to solve the problem of supplying the 5,001 prime number. The University of Tennessee already has located the first 5,000. For those fortunate enough to solve the early algorithms, the reward was 50 Bitcoins. Every 210,000 blocks of issuance (or every four years if the Chicago Fed’s estimate is correct) the number if Bitcoins provided for solving the increasingly difficult algorithm is cut in half. At this rate, the maximum number of Bitcoins that will ultimately be produced will be 21 million (it is thought that 12 million are out today). If George Mason University’s Mercatus Center is correct the last Bitcoin will be produced in 2140. Each Bitcoin can be broken into 100,000,000 million “satoshis”. So if observers are correct by 2140 there will be 21 million Bitcoins outstanding or 2.1 quadrillion satoshis. • • • • Ownership • • • • • • Once someone acquires a Bitcoin s/he is actually obtaining an encrypted computer file called a wallet. The file has two methods of identification to the outside world: a public key and a private key. The existence of the new Bitcoins is ultimately recorded on the thousands of computers that have been involved in Bitcoin transactions in the past. When a Bitcoin is used by a holder to make a purchase or transfer funds, the transaction must be approved by a majority of the thousands of nodes (computers held by other Bitcoin owners) or the transaction will not go through. The transaction is recorded but the owner of the Bitcoin associated with the transaction is not; although s/he can be tracked if a governmental entity is determined to do so. Users of Bitcoins are able to effect transactions at much lower prices than if they use a credit or debit card, or if they were using Western Union to move cash from one place to another. For those who do not wish to make transactions in Bitcoins, but do want to participate in the capital gains being created by the rise in Bitcoin prices, there are Bitcoin investment trusts. Multiple Cryptocurrencies There are a number of reasons as to why there are so many other cryptocurrencies such as Litecoin, the only real competition to Bitcoin: • It may take 10 minutes for a Bitcoin transaction to be approved by the thousands of nodes involved. Therefore, there is a competition to develop a safe system that is much faster. Digital Coin is promising 20 seconds. PLEASE SEE IMPORTANT DISCLOSURE AND ANALYST CERTIFICATION LOCATED IN THE APPENDIX OF THIS REPORT. Page 5
  • 6. Monday, December 02, 2013 Bitcoin Revisited • • • • • • Despite the protections that Bitcoin has built into its systems, every element of the system has been successfully attacked in the past. This includes everything from Exchanges themselves, one at least was driven out of business, to individual wallets. A variety of proof-of-work and proof-of-stake systems are being experimented with. If a file or wallet is lost so is the currency associated with that wallet. It is similar to losing a $100 dollar bill. One can never get the “money” back. Paper wallets are being developed in place of digital only wallets. There is a desire for more anonymity. Anoncoin believes it is a leader here. There is an effort to unseat Visa and MasterCard in handling transactions. Visa is believed to handle 200,000 transactions per minute while Bitcoin is believed to be at 30. There is a big market to capture. Another real problem is the enormous amount of energy required to run thousands of nodes necessary to validate transactions. This is driving up the cost of the overall system. There is a great deal of profit to be obtained if one can actually get a successful cryptocurrency up an in use. Devcoin is maximizing the developers’ profits at the moment. Reasons for Use Initially, it was my belief that there were three core types of users for this product: • • • Criminals; Citizens in countries with unstable or potentially unstable fiat currencies; and First adopters in the technology world. I would now add three more users: • • • Individuals and companies seeking to lower the cost of transactions. Speculators seeking the opportunity to gain an investment profit. The country of China which may be seeking to gain control of the system to get control of transactions in this new currency. What I Know I Do Not Know Technology I do not understand any of the terminology related to the technology behind the cryptocurrencies such as: • • • • • • SHA-256 vs. SH-3; Proof-of-work vs. proof-of-stake vs. proof-of-concept; Scrypt based vs. non scrypt based or scrypt proof-of-work/proof-of-stake; Hash marks; Blocks; CPU vs. GPU vs. ASIC And that is just the beginning. In delving into cryptocurrencies there is a good deal of religion – i.e., faith that the systems actually work. It is unlikely that the average user or investor will ever understand how this system actually does work. Control As the number of transactions grows, the need to reduce the number of nodes seems apparent. Holders of Bitcoins cannot be expected to grow their computer systems to meet the need of validating what may at some point be thousands of transactions per minute. Once a single entity gains control of 51% of the transaction proofing, it is quite possible that the whole ethos of the Bitcoin system may collapse because now there will be a central user like a central bank controlling the system. It does appear that China may have reached this position. If this is true, Bitcoin has already become a Chinese entity. Pricing One of the great appeals that founder “Satoshi Nakamoto” outlined for Bitcoins is the low cost of facilitating transactions. If Bitcoins are trading as investment vehicles at $1,200 per coin, it is questionable if this is truly a low cost transaction vehicle. Moreover, it would appear that the pricing of the Bitcoin has become unusually erratic. This destroys the effective use of any currency and may PLEASE SEE IMPORTANT DISCLOSURE AND ANALYST CERTIFICATION LOCATED IN THE APPENDIX OF THIS REPORT. Page 6
  • 7. Monday, December 02, 2013 Bitcoin Revisited open the way for another non-Chinese controlled cryptocurrency to rise in value. This creates more volatility and less ability for holders to use any cryptocurrency. Conclusion The concept of creating a new currency that is limited in size and not controlled by any government has great appeal. Whether this can truly be done is open to question. However, maintaining some understanding of the developments in this sector is important particularly for financial analysts where currency is the raw material of the business. PLEASE SEE IMPORTANT DISCLOSURE AND ANALYST CERTIFICATION LOCATED IN THE APPENDIX OF THIS REPORT. Page 7
  • 8. Monday, December 02, 2013 Bitcoin Revisited Financial Analyst Institutional Sales Richard X. Bove Vice President Equity Research 813.388.2900 Joseph Bove Vice President Institutional Sales 646.572.3378 Appendix: Analyst Certification and Other Important Disclosures Ed Bugniazet Managing Director 646.572.3389 Ed Perley 646.572.3386 Analyst Certification I, Richard X. Bove, certify that with respect to each security or issuer that I covered in this report; (1) all of the views expressed accurately reflect my personal views about those securities or issuers; and (2) no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by me in this research report. Regulatory Disclosures Analyst Stock Ratings Definitions Rafferty Capital Markets’ (“RCM”) ratings, effective January 2, 2013, are defined as follows: Buy – A stock that at initiation displays projected Price-to-Book ratio less than 100% and projected Earnings Direction greater than zero. The rating may be maintained following initiation as long as it is deemed appropriate, notwithstanding price fluctuations that would cause the rating to fall outside of the above parameters. Hold – A stock that at initiation displays projected Price-to-Book ratio less than 100% and projected Earnings Direction less than zero; projected Price-to-Book ratio between 100% and 200% and projected Earnings direction less than 10%; or projected Price-to-Book ratio greater than 200% and projected Earnings Direction greater than 10%. Sell – A stock that at initiation displays Projected Price-to-Book ratio greater than 100% and projected Earnings Direction less than zero. The rating may be maintained following initiation as long as it is deemed appropriate, notwithstanding price fluctuations that would cause the rating to fall outside of the above parameters. Distribution of Ratings RCM must disclose in each research report the percentage of all securities rated by the member to which the member would assign a "buy", "neutral" or "sell" rating. The said ratings are updated on a quarterly basis. Below is the distribution of RCM’s research recommendations: Buy: 53.1% Hold: 43.8% Sell: 3.1% There are 32 stocks under coverage Market Ratings Negative – A 10% expected decline in S & P 500. Neutral – The S & P is expected to trade within 10% bounds up or down. Positive – A 10% expected rise in the S & P 500. Valuation and Risks The primary risks to achieving our target price include general market fluctuations, unexpected shifts in economic activities, and/or unexpected reversals in company fortunes. Additional Information is Available upon Request to Barbara Martens at Rafferty Capital Markets, LLC, 1010 Franklin Avenue, Garden City, NY 11530 or 516.535.3800 PLEASE SEE IMPORTANT DISCLOSURE AND ANALYST CERTIFICATION LOCATED IN THE APPENDIX OF THIS REPORT. Page 8
  • 9. Monday, December 02, 2013 Bitcoin Revisited Other Disclosures Rafferty Capital Markets ("RCM") is an institutional brokerage firm that does not engage in investment banking. RCM and its affiliates, including its principals, may own securities of the companies which are subject of this report but do not own 1% or more of any class of common equity securities of any subject company. The information and opinions presented in this report are provided for informational purposes only and are not to be used or considered as an offer or solicitation of an offer to buy or sell securities or other financial instruments. RCM has not taken any steps to ensure that the securities referred to in this report are suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about any such investment. Information and opinions presented in this report have been obtained or derived from sources believed by RCM to be reliable, but RCM makes no representation as to their accuracy, timeliness or completeness. RCM accepts no liability for loss arising from the use of the information presented in this report. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information and opinions contained in this report reflect a judgment at its original date of publication by RCM and are subject to change without notice. RCM may have issued, and may in the future issue, other reports that are inconsistent with, and reach different conclusions from, the information presented in this report. Those reports reflect the different assumptions, views and analytical methods of the analysts who prepared them and RCM is under no obligation to insure that such other reports are brought to the attention of any recipient of this report. This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject RCM to any registration or licensing requirement within such jurisdiction. All material presented in this report is the property of RCM and is under copyright to RCM. This report may not be reproduced, distributed or published by any person for any purpose without the prior express written consent of RCM. PLEASE SEE IMPORTANT DISCLOSURE AND ANALYST CERTIFICATION LOCATED IN THE APPENDIX OF THIS REPORT. Page 9