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Bitcoin
The future money, or a scam?

Cronos, 17/12/2013
Contents
•
•
•
•
•
•

A quick overview
How it works
What is it worth?
Open source
Is it safe?
Other cryptocurrencies

17/1...
A QUICK OVERVIEW
17/12/2013

Archimiddle

3
Bitcoin is money

Bitcoin.org

17/12/2013

Archimiddle

4
Cryptocurrency
•
•
•
•
•

17/12/2013

Peer-to-peer
Decentralized
Digital
Cryptography
Transactions

Archimiddle

5
Inform Yourself
Volatile

Irreversible
Not anonymous

Instant

Experimental
17/12/2013

Archimiddle

6
The Wallet
Software wallet
Mobile wallet
Web wallet

17/12/2013

Archimiddle

7
Secure The Wallet
Regularly backup

17/12/2013

Archimiddle

Encrypt

8
Obtaining Bitcoins
Buying

17/12/2013

Services

Archimiddle

Mining

9
Buying
Exchange
Mt. Gox
Bitcoin.de
Etc.

17/12/2013

TRUST
Cash / Money Transfer

Archimiddle

10
Services
Deliver services for BTC

17/12/2013

Archimiddle

11
Mining
Just like gold
mining, but using
computers
Maximum # BTC is 21 M

17/12/2013

Archimiddle

12
Spending Bitcoins
Still fairly limited

17/12/2013

Archimiddle

13
First ATM
Vancouver
October 2013
Within 1 month > 106 CND

17/12/2013

Archimiddle

14
HOW IT WORKS
17/12/2013

Archimiddle

15
The Origins
•

November 2008: paper published by Satoshi Nakamoto
– You can find it here: http://bitcoin.org/bitcoin.pdf

...
A definition
A ledger is the principal book or computer
file for recording and totalling monetary
transactions by account,...
A definition
The block chain is a shared public ledger on
which the entire Bitcoin network relies.
A transaction is a tran...
Peer-to-peer

Transaction
wallet
BTC address

wallet
BTC address

Block chain

17/12/2013

Archimiddle

19
No Bank

17/12/2013

Archimiddle

20
Transactions
A coin is a chain of digital
signatures.
Transfer BTC by signing a
hash of previous tx and
public key of next...
Avoiding double spending
•

Traditionally: introduce a central ledger/mint
– You have to trust these

17/12/2013

Archimid...
Avoiding double spending
•

Alternatively: announce each transaction publicly
– Everyone can now be aware of all (previous...
The Block chain
•
•
•
•
•
•
•

•
•

Contains the “Proof-of-Work” (Pow)
Each tx is broadcast to all nodes
Each node collect...
Mining
•

Incentive for block calculations:
– Each first transaction in a block is a new coin!
– This makes it worthwhile ...
Mining hardware

17/12/2013

Archimiddle

26
Mining in the Cloud

17/12/2013

Archimiddle

27
Mining rate

17/12/2013

Archimiddle

28
Compare
Bitcoin
•
•
•

Gold

21 million coins
Spend only once
Mining slows down

•
•
•

EUR/GBP/USD/SFR/…

21 m3
Spend onl...
WHAT IS BITCOIN WORTH?
17/12/2013

Archimiddle

30
The BTC value
•
•

November 2008:
May 2010: Laszlo buys 2 pizza’s for BTC 10,000.– First BTC transaction
– Value BTC 1 < U...
The BTC value

17/12/2013

Archimiddle

32
BTC reaches Gold price

17/12/2013

Archimiddle

33
Bubble?

17/12/2013

Archimiddle

34
1637

?

17/12/2013

Archimiddle

35
What is it worth?
•
•

Of course, what a fool is willing to give for it
Simple math:
– BTC 21 106 maximum
–
EUR 1012 exist...
BTC IS OPEN SOURCE
17/12/2013

Archimiddle

37
Bitcoin addresses
•
•
•

A Bitcoin address is unique, but not private!
A wallet manages addresses
Blockchain.info

17/12/2...
Examining a transaction

17/12/2013

Archimiddle

39
Examining the network

17/12/2013

Archimiddle

40
Examing a BTC address

17/12/2013

Archimiddle

41
Your BTC balance is public
Protect your privacy!
Make it hard for others to track your BTCs
If you publish your address on...
IS YOUR BITCOIN SAFE?
17/12/2013

Archimiddle

43
The wallet
•
•
•
•
•

You can loose your wallet
You can forget your password
It can get stolen, but without password, the ...
Oops, no backup?

17/12/2013

Archimiddle

45
Robbing the Bank
•

Several Bitcoin exchanges have already been robbed!
– Millions worth of bitcoins have been stolen on-l...
Money laundering
•
•
•
•

Bitcoin cannot avoid money laundering
Bitcoin addresses can be disposed off easily
Bitcoins can ...
Paying taxes
•
•
•
•

Is bitcoin the perfect currency to avoid paying taxes?
All transactions are public
Complex to follow...
Buying drugs
Shut down by FBI in
October 2013

17/12/2013

Archimiddle

49
Gambling

17/12/2013

Archimiddle

50
Liquidity
•
•

Well, there is no bank!
When lending bitcoin, hmm, liquidity can rapidly be an issue if the
rate falls
– Wh...
Charles Ponzi
•
•
•
•
•
•

From Italy
1920
“Make money fast”
Fraudulent investment
Related to pyramid schemes
Ends in liqu...
Satoshi Nakamoto
From where?
2009
“Make money fast”
Fraudulent investment? Is it worth anything?
Related to pyramid scheme...
OTHER CRYPTOCURRENCIES
17/12/2013

Archimiddle

54
Litecoin
Based on Bitcoin, but uses faster
block rates, and the total number is
four times that of Bitcoin.
Two blocks wer...
Freicoin

Similar to Bitcoin, but it slowly
looses value if you hold onto it.
So you should spend it!

17/12/2013

Archimi...
Other coins
•
•
•
•

PeerCoin
NameCoin
QuarkCoin
…

17/12/2013

Archimiddle

57
Will Bitcoin survive?
No, of course not!
But hey, it’s fun, and you get to learn
some interesting stuff!

17/12/2013

Arch...
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Bitcoin: the future money, or a scam?

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Overview of what Bitcoin is, how it works, and what it's worth

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Bitcoin: the future money, or a scam?

  1. 1. Bitcoin The future money, or a scam? Cronos, 17/12/2013
  2. 2. Contents • • • • • • A quick overview How it works What is it worth? Open source Is it safe? Other cryptocurrencies 17/12/2013 Archimiddle 2
  3. 3. A QUICK OVERVIEW 17/12/2013 Archimiddle 3
  4. 4. Bitcoin is money Bitcoin.org 17/12/2013 Archimiddle 4
  5. 5. Cryptocurrency • • • • • 17/12/2013 Peer-to-peer Decentralized Digital Cryptography Transactions Archimiddle 5
  6. 6. Inform Yourself Volatile Irreversible Not anonymous Instant Experimental 17/12/2013 Archimiddle 6
  7. 7. The Wallet Software wallet Mobile wallet Web wallet 17/12/2013 Archimiddle 7
  8. 8. Secure The Wallet Regularly backup 17/12/2013 Archimiddle Encrypt 8
  9. 9. Obtaining Bitcoins Buying 17/12/2013 Services Archimiddle Mining 9
  10. 10. Buying Exchange Mt. Gox Bitcoin.de Etc. 17/12/2013 TRUST Cash / Money Transfer Archimiddle 10
  11. 11. Services Deliver services for BTC 17/12/2013 Archimiddle 11
  12. 12. Mining Just like gold mining, but using computers Maximum # BTC is 21 M 17/12/2013 Archimiddle 12
  13. 13. Spending Bitcoins Still fairly limited 17/12/2013 Archimiddle 13
  14. 14. First ATM Vancouver October 2013 Within 1 month > 106 CND 17/12/2013 Archimiddle 14
  15. 15. HOW IT WORKS 17/12/2013 Archimiddle 15
  16. 16. The Origins • November 2008: paper published by Satoshi Nakamoto – You can find it here: http://bitcoin.org/bitcoin.pdf 17/12/2013 Archimiddle 16
  17. 17. A definition A ledger is the principal book or computer file for recording and totalling monetary transactions by account, with debits and credits in separate columns and a beginning balance and ending balance for each account. Source: Wikipedia 17/12/2013 Archimiddle 17
  18. 18. A definition The block chain is a shared public ledger on which the entire Bitcoin network relies. A transaction is a transfer of value between Bitcoin wallets that gets included in the block chain. Source: Bitcoin.org 17/12/2013 Archimiddle 18
  19. 19. Peer-to-peer Transaction wallet BTC address wallet BTC address Block chain 17/12/2013 Archimiddle 19
  20. 20. No Bank 17/12/2013 Archimiddle 20
  21. 21. Transactions A coin is a chain of digital signatures. Transfer BTC by signing a hash of previous tx and public key of next owner. Add this to the coin. Issue: avoid double spending! 17/12/2013 Archimiddle 21
  22. 22. Avoiding double spending • Traditionally: introduce a central ledger/mint – You have to trust these 17/12/2013 Archimiddle 22
  23. 23. Avoiding double spending • Alternatively: announce each transaction publicly – Everyone can now be aware of all (previous) transactions, so you can know about double spending – A single history of order of transactions is required • Timestamping, vector clocks – The receiver of a BTC needs proof of his transaction being the first one. This can be given once the majority of nodes agree upon this. 17/12/2013 Archimiddle 23
  24. 24. The Block chain • • • • • • • • • Contains the “Proof-of-Work” (Pow) Each tx is broadcast to all nodes Each node collects txs into a block Each node works on the PoW for its block If PoW is found, the block is broadcast to all nodes Block is only accepted if all txs are valid and no double spending is detected If accepted, all nodes start working on the next block, using the hash of the accepted block If two different blocks are finished simultaneously, the longest one survives January 2009: the Genesis Block (http://blockexplorer.com/b/0) 17/12/2013 Archimiddle 24
  25. 25. Mining • Incentive for block calculations: – Each first transaction in a block is a new coin! – This makes it worthwhile to add nodes to the network • Calculations cost money (hardware + electricity) – Earning Bitcoins makes up for that cost – Charging transaction costs could also be considered • • October 2013: 57% of all Bitcoins are mined The algorithm becomes progressively more complex – This slows down mining efforts • Last Bitcoin is expected for mining in the year 2140 – 21 million Bitcoins reached 17/12/2013 Archimiddle 25
  26. 26. Mining hardware 17/12/2013 Archimiddle 26
  27. 27. Mining in the Cloud 17/12/2013 Archimiddle 27
  28. 28. Mining rate 17/12/2013 Archimiddle 28
  29. 29. Compare Bitcoin • • • Gold 21 million coins Spend only once Mining slows down • • • EUR/GBP/USD/SFR/… 21 m3 Spend only once Mining slows down Scarcity has a cost 17/12/2013 • • • Just make some more Just make some more Just make some more Scarcity has no cost Archimiddle 29
  30. 30. WHAT IS BITCOIN WORTH? 17/12/2013 Archimiddle 30
  31. 31. The BTC value • • November 2008: May 2010: Laszlo buys 2 pizza’s for BTC 10,000.– First BTC transaction – Value BTC 1 < USD 0,01 – https://blockchain.info/address/17SkEw2md5avVNyYgj6RiXuQKNwkXaxFyQ • • April 2011: BTC 1 = USD 1 June 2011: BTC 1 = USD 31 – First bubble explodes • • June 2013: BTC 1 = USD 100.November 2013: BTC 1 = USD 1,000.- 17/12/2013 Archimiddle 31
  32. 32. The BTC value 17/12/2013 Archimiddle 32
  33. 33. BTC reaches Gold price 17/12/2013 Archimiddle 33
  34. 34. Bubble? 17/12/2013 Archimiddle 34
  35. 35. 1637 ? 17/12/2013 Archimiddle 35
  36. 36. What is it worth? • • Of course, what a fool is willing to give for it Simple math: – BTC 21 106 maximum – EUR 1012 exist in actual bank notes – Potentially: BTC 1 can reach EUR 106 ! – Therefore, you can do business with 1 millionth of BTC, called a Satoshi • • • • • • But if there is no fool, BTC 1 is worth nothing: BTC is volatile! Businesses require some stability in the value of their assets So we need people to trust BTC and to hold on to them for a while If businesses accept BTC as payment, personnel must accept being paid in BTC as well Wide adoption and trust is required, as well as a stable rate THIS IS NOT THE CASE TODAY! 17/12/2013 Archimiddle 36
  37. 37. BTC IS OPEN SOURCE 17/12/2013 Archimiddle 37
  38. 38. Bitcoin addresses • • • A Bitcoin address is unique, but not private! A wallet manages addresses Blockchain.info 17/12/2013 Archimiddle 38
  39. 39. Examining a transaction 17/12/2013 Archimiddle 39
  40. 40. Examining the network 17/12/2013 Archimiddle 40
  41. 41. Examing a BTC address 17/12/2013 Archimiddle 41
  42. 42. Your BTC balance is public Protect your privacy! Make it hard for others to track your BTCs If you publish your address once, the graph of related transactions can be followed forever! 17/12/2013 Archimiddle 42
  43. 43. IS YOUR BITCOIN SAFE? 17/12/2013 Archimiddle 43
  44. 44. The wallet • • • • • You can loose your wallet You can forget your password It can get stolen, but without password, the money cannot be spent Bitcoin is lost Your wallet can be hacked once your password is known – Easy to steal the money in this case • Make backups, store them in several places, encrypt them 17/12/2013 Archimiddle 44
  45. 45. Oops, no backup? 17/12/2013 Archimiddle 45
  46. 46. Robbing the Bank • Several Bitcoin exchanges have already been robbed! – Millions worth of bitcoins have been stolen on-line 17/12/2013 Archimiddle 46
  47. 47. Money laundering • • • • Bitcoin cannot avoid money laundering Bitcoin addresses can be disposed off easily Bitcoins can be transferred using bots Laundering will be very difficult to trace – Or will it? All transactions are public and can be traced in real time • It’s no different with cash, though, and you still have to buy the bitcoins somehow – Not easy for large amounts 17/12/2013 Archimiddle 47
  48. 48. Paying taxes • • • • Is bitcoin the perfect currency to avoid paying taxes? All transactions are public Complex to follow transactions Bitcoin addresses are anonymous – Coupled to a wallet, not a person – Who owns the wallet? • • • Cash is also anonymous, but still taxed, so why not Bitcoin? Bitcoin is not backed by any government Mining may legally be different because it creates Bitcoin – US guidelines March 2013 17/12/2013 Archimiddle 48
  49. 49. Buying drugs Shut down by FBI in October 2013 17/12/2013 Archimiddle 49
  50. 50. Gambling 17/12/2013 Archimiddle 50
  51. 51. Liquidity • • Well, there is no bank! When lending bitcoin, hmm, liquidity can rapidly be an issue if the rate falls – What is it worth anyway? 17/12/2013 Archimiddle 51
  52. 52. Charles Ponzi • • • • • • From Italy 1920 “Make money fast” Fraudulent investment Related to pyramid schemes Ends in liquidity problems and disappearance of the person on the top 17/12/2013 Archimiddle 52
  53. 53. Satoshi Nakamoto From where? 2009 “Make money fast” Fraudulent investment? Is it worth anything? Related to pyramid schemes? Ends in liquidity problems and disappearance of the person on the top? • Satoshi took the easy early bitcoins and is cashing them for real money? • Who is Satoshi anyway? • Are we mere idiots who make Satoshi rich? • • • • • • 17/12/2013 Archimiddle 53
  54. 54. OTHER CRYPTOCURRENCIES 17/12/2013 Archimiddle 54
  55. 55. Litecoin Based on Bitcoin, but uses faster block rates, and the total number is four times that of Bitcoin. Two blocks were pre-mined. 17/12/2013 Archimiddle 55
  56. 56. Freicoin Similar to Bitcoin, but it slowly looses value if you hold onto it. So you should spend it! 17/12/2013 Archimiddle 56
  57. 57. Other coins • • • • PeerCoin NameCoin QuarkCoin … 17/12/2013 Archimiddle 57
  58. 58. Will Bitcoin survive? No, of course not! But hey, it’s fun, and you get to learn some interesting stuff! 17/12/2013 Archimiddle 58

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