2. An Introduction to Bitcoin
Table of Contents
October 2013
Buzz of Bitcoin – What People Are Saying? …………………………... Page 1
What is Bitcoin? …………………………………………………………….……... Page 2 - 3
What is the USD Conversion Rate? ……………………..………………… Page 4
Why Do Bitcoin Have Value? ……………….………………………………… Page 5
How are Bitcoins Tracked? ………………….……………………………….… Page 6
What is Bitcoin Mining? ………………………………………………………… Page 7 - 8
Bitcoin versus Gold ……………………………………………………………….. Page 9
Who Accepts Bitcoin and Who Invests? ………………………….……. Page 10
Risks of Bitcoin ………………………………………………………………………. Page 11 - 12
How to Get Bitcoins ………………………………………………………………. Page 13
Bitcoin Online Gambling ……………………………………………………..... Page 14
Future of Bitcoin ………………………………………………………………….... Page 15
4. 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.
2
5. What is Bitcoin? continued
.
• 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)
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
3
6. What is the USD Conversion Rate?
Market Capitalization (billions)
2.75
2.50
4
2
2.25
2.00
3
1.75
1
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
1.
2.
3.
4.
Nov 12 – Feb 13: Consistent Bitcoin price from early adopters
Feb 13 – Jun 13: First media attention and Cyprus banking crisis led to large price increase and drop
Jun 13 – Aug 13: Stable, but still volatile, market price with Government debates and new company announcements
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
4
7. Why Do Bitcoins Have Value?
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
5
8. How are Bitcoins Tracked?
•
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 Transactions Work Through the Chain
0.5 BTC
one new bitcoin
is created
original owner’s
current amount
seller receives payment,
new chain is created
0.25 BTC
0.125 BTC
1 BTC
0.125 BTC
0.5 BTC
Black squares represent the
original holder’s transactions
Grey squares represent
merchants receiving payment
0.25 BTC
two merchants receive
bitcoin as payment
Source: themisecircle.org
6
9. 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.
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
7
10. What is Bitcoin Mining? continued
•
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
Bitcoins in Circulation (millions)
21
18
15
12
currently 21 million bitcoins (55% of total) has been mined
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
Source: Quartz.com
8
11. Bitcoin as an Investment
vs
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
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
9
12. 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?
10
13. How to Get Bitcoins
Buy In-Person
• 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
Buy On a Currency Exchange
• 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
11
14. 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
12
15. 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
.
13
16. 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
14
17. Future of Bitcoin
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
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