This document provides an overview of Bitcoin including: - Its history beginning in 2008 with Satoshi Nakamoto's paper introducing Bitcoin. - How it functions as a digital currency without a central authority using cryptography and a peer-to-peer network. - Perspectives on Bitcoin from technologists, economists, investors and governments who have varying views from seeing its potential to believing it is a bubble. - The advantages it provides for payments including low costs, security, and lack of regulation but also weaknesses like its susceptibility to speculation and attracting criminal use due to pseudonymity.

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What is
Bitcoin?
-- GEP, NHH – 26.03.2014
-- Svein Ølnes, Vestlandsforsking

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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: sol@vestforsk.no
 Twitter: @sveinol
 Blog: sveino.blogspot.com