1. Bitcoin and the Future of Money
The emergence of the first global, decentralized, digital cryptocurrency
Sveinn Valfells, PhD
linkd.in/wtaHi5
Bitcoin Scotland
August 23, 2014
Sveinn Valfells, PhD (linkd.in/wtaHi5) Bitcoin and the Future of Money Bitcoin Scotland August 23, 2014 1 / 19

2. Outline
1 Money and Modern Civilisation
2 The Economic Consequences of Bitcoin
3 About the Author
Sveinn Valfells, PhD (linkd.in/wtaHi5) Bitcoin and the Future of Money Bitcoin Scotland August 23, 2014 2 / 19

3. Money and Modern Civilisation
Outline
1 Money and Modern Civilisation
2 The Economic Consequences of Bitcoin
3 About the Author
Sveinn Valfells, PhD (linkd.in/wtaHi5) Bitcoin and the Future of Money Bitcoin Scotland August 23, 2014 3 / 19

4. Money and Modern Civilisation
Money and Modern Civilisation: A Brief History
Money serves as store of value, medium of exchange, unit of account
“The ascent of money has been essential to the ascent of man”
— Niall Ferguson [1]
600 BC – 1971 AD
Croesus mints first gold coins around
600 BC in Sardis (Asia Minor).
Distinctive colour, easy to work with,
useless for tools and weapons.
Used by Roman Empire, in Middle
Ages, by British Empire and by United
States.
President Nixon suspends convertibility
of USD into Gold, 1971 AD.
Fungible, divisible, impossible to
counterfeit, supply constrained only by
mining. Figure: Croesus and gold coin from Sardis
(top); Nixon and USD gold note (bottom).
Sveinn Valfells, PhD (linkd.in/wtaHi5) Bitcoin and the Future of Money Bitcoin Scotland August 23, 2014 4 / 19

5. Money and Modern Civilisation
Fiat (Paper) Money Is A Government Backed IOU
Fiat money is not backed by physical commodity
“Money is a special kind of IOU that is universally trusted.”
— Bank of England [2]
Figure: Fiat money is created in
transactions between central banks,
commercial banks and bank customers [2].
Sveinn Valfells, PhD (linkd.in/wtaHi5) Bitcoin and the Future of Money Bitcoin Scotland August 23, 2014 5 / 19

6. Money and Modern Civilisation
Great Thinkers Agree on Basic Role of Money
Function of money is to store value and transmit between unrelated parties over distance and time
Money is a crystal formed of necessity in the course of the
exchanges.
— Karl Marx [3]
The importance of money flows from it being a link between the
present and the future.
— John M. Keynes [4]
The very performance of its central function requires money to
be generally acceptable and to pass from hand to hand. As a
result, individuals may be led to enter into contracts with persons
far removed in space and acquaintance, and a long period may
elapse between the issue of a promise and the demand for its
fulfilment.
— Milton Friedman [5]
Sveinn Valfells, PhD (linkd.in/wtaHi5) Bitcoin and the Future of Money Bitcoin Scotland August 23, 2014 6 / 19

7. Money and Modern Civilisation
Great Scottish Thinkers Understood the Nature of Money
Mercantilists hoard money; fractional banking inflates money supply; governments debase money.
[B]anks, funds, and paper credit, with which we are in the
kingdom so much infatuated . . . render paper equivalent to
money, circulate it throughout the whole state, make it
supply the place of gold and silver . . . no bank could be more
advantageous, than such alone as locked up all the money it
received, and never augmented the circulating coin.
— David Hume [6]
For in every country of the world, I believe, the avarice and
injustice of princes and sovereign states, abusing the
confidence of their subjects, have by degrees diminished the
real quantity of metal, which had been originally contained
in their coins.
— Adam Smith [7]
Sveinn Valfells, PhD (linkd.in/wtaHi5) Bitcoin and the Future of Money Bitcoin Scotland August 23, 2014 7 / 19

8. The Economic Consequences of Bitcoin
Outline
1 Money and Modern Civilisation
2 The Economic Consequences of Bitcoin
3 About the Author
Sveinn Valfells, PhD (linkd.in/wtaHi5) Bitcoin and the Future of Money Bitcoin Scotland August 23, 2014 8 / 19

9. The Economic Consequences of Bitcoin
Bitcoin Is a Token AND a Network
Fungible, divisible, impossible to counterfeit, prescribed supply, tested governance model
Figure: Private–public key public used for
authentication (top); transactions cleared on
a peer-to-peer network (bottom).
Figure: The chain of blocks of transactions
is updated every 10m [8].
Sveinn Valfells, PhD (linkd.in/wtaHi5) Bitcoin and the Future of Money Bitcoin Scotland August 23, 2014 9 / 19

10. The Economic Consequences of Bitcoin
Bitcoin Has Large Addressable Markets
Bitcoin can serve as store of value, medium of exchange and unit of account
“In an extreme case, virtual currencies could have a substitution effect
on central bank money if they become widely accepted.”
— ECB [9]
Global asset classes (value storage)
Private investment in gold >$1T [10].
London housing stock >£1T [11].
Global payment streams (value transmission)
Growth in global electronic payments ≈7% [12].
Non-bank market share from 6% to 21% during 2009-13 [12].
Global non-bank payments in major economies >$609B (2011) [13].
Global m-payments ≈ $300B (est. 2013) [14].
PayPal 25% YOY increase in payment volume to $180B in 2013 [15].
Sveinn Valfells, PhD (linkd.in/wtaHi5) Bitcoin and the Future of Money Bitcoin Scotland August 23, 2014 10 / 19

11. The Economic Consequences of Bitcoin
Bitcoin Is Growing Like Bacteria in a Petri-Dish
Money will rotate into cryptocurrencies from traditional assets, payment streams [16, 17]
Cryptocurrency economics
Endstate is one dominant
network, 2–3 runners-up.
Fast growth (+2σ)
Fast rotation into Bitcoin
from assets, payments.
Steady growth
Steady rotation into Bitcoin
from assets, payments
(expected case).
Contraction (−2σ).
Bitcoin stagnates, money
leaks out.
Figure: Growth of Bitcoin market cap modelled as
Geometric Brownian motion (µ = 50%, σ = 50%).
Sveinn Valfells, PhD (linkd.in/wtaHi5) Bitcoin and the Future of Money Bitcoin Scotland August 23, 2014 11 / 19

12. The Economic Consequences of Bitcoin
Bitcoin Ecosystem Is Rapidly Evolving
Developed countries lead Bitcoin adoption [19, 20, 21]
Milestones to date (2009–14):
Bitcoin foundation established.
>5M downloads of official client.
5M active hosted wallets.
Accepted by 70,000 merchants.
$20B annual transaction volume.
$6B annual exchange volume.
$250M in venture funding from
leading VCs.
Ecosystem of exchanges, payment
processors, ATMs, payment cards,
wallets, miners, vault storage, PtP
lending.
$7B market cap.
150Petahash computing power.
Figure: Bitcoin client downloads (per
capita) [18].
Sveinn Valfells, PhD (linkd.in/wtaHi5) Bitcoin and the Future of Money Bitcoin Scotland August 23, 2014 12 / 19

13. The Economic Consequences of Bitcoin
Many Governments Recognize Bitcoin
Regulatory framework for cryptocurrencies is falling into place [22, 23]
[Virtual currencies] may hold long-term promise, particularly if the
innovations promote a faster, more secure and more efficient payment
system.
— Ben Bernanke, November, 2013
Relevance Regulatory situation
US Largest
economy
Conflicting approach of financial and tax
authorities. Bill in Congress to define
cryptocurrencies as money.
CN 2nd largest
economy
Credit bubble, FX controls in place, authorities
effectively shutting down Bitcoin exchanges.
DE Largest EU
economy
Recognized as “private money”.
UK Largest
FX/gold
markets
Same treatment as FX and investment gold.
Sveinn Valfells, PhD (linkd.in/wtaHi5) Bitcoin and the Future of Money Bitcoin Scotland August 23, 2014 13 / 19

14. The Economic Consequences of Bitcoin
Bitcoin Is Not Fully De-Risked
Mainstream adoption faces hurdles
For
Strong brand recognition.
5+ years of development.
Diverse community of committed
participants.
Rapidly growing market cap,
turnover.
Rapidly growing ecosystem.
Regulatory acceptance in many key
jurisdictions.
Against
Consumer adoption still limited.
Market cap small, liquidity low.
Ecosystem immature.
Conflicting regulatory approaches.
Concentrated ownership.
Potential for market manipulation,
collusion.
Sveinn Valfells, PhD (linkd.in/wtaHi5) Bitcoin and the Future of Money Bitcoin Scotland August 23, 2014 14 / 19

15. The Economic Consequences of Bitcoin
Scotland Can Establish and Attract Bitcoin Businesses
Bust in finance and IT provides opportunity for innovation in FinTech, including Bitcoin [24]
Financial services
5th largest export industry (£1.4B).
>400yr tradition in finance.
Post-2008, need for reinvention.
Silicon Glen
7th largest export industry (£1.1B).
>50yr tradition of IT design and manufacture.
In decline since early 2000s, need for reinvention.
Creative thinkers & doers
David Livingstone
James Clerk Maxwell
Annie Lennox . . .
Figure: Henry Duncan.
Sveinn Valfells, PhD (linkd.in/wtaHi5) Bitcoin and the Future of Money Bitcoin Scotland August 23, 2014 15 / 19

16. The Economic Consequences of Bitcoin
Bitcoin Is A Leap In The Ascent of Money
Bitcoin pioneers a new category of global, digital, decentralized money
Key themes in near- and middle term are:
Adoption Bitcoin will continue to gain adoption as (i) a global digital
payments network and (ii) an asset class similar to gold.
Drivers Potential drivers include international cash remittance,
micropayments, global inflation.
Price Price will continue to rise if turnover increases faster than supply.
Leaders Democratic countries with (relatively) stable, open financial
systems will extend regulation to Bitcoin (Brazil, Canada, EU, US).
Laggards Autocratic countries with (relatively) vulnerable, closed financial
systems may limit or ban use of Bitcoin (China, Russia).
Threats A better cryptocurrency; regulatory clampdown across G20; global
deflation; market manipulation of BTC price; collusion of key BTC
stakeholders.
Surprises New usecases, new companies not anticipated to date.
Sveinn Valfells, PhD (linkd.in/wtaHi5) Bitcoin and the Future of Money Bitcoin Scotland August 23, 2014 16 / 19

17. About the Author
Outline
1 Money and Modern Civilisation
2 The Economic Consequences of Bitcoin
3 About the Author
Sveinn Valfells, PhD (linkd.in/wtaHi5) Bitcoin and the Future of Money Bitcoin Scotland August 23, 2014 17 / 19

18. About the Author
About Sveinn Valfells, PhD
linkd.in/wtaHi5
Some relevant previous remarks:
Bitcoin is potential dynamite waiting to be ignited.
— Communication with Teddy Shalon, August, 2011
Bitcoin can easily be projected to rise to $20 – $120 within three years.
— Communication with Pamir Gelenbe, January, 2013
I encourage people to do their own research and only risk as much as
they are willing to lose in Bitcoin or any other virtual currency.
— BBC Newsnight, November, 2013
MtGox failure is not systemic . . . trend of Bitcoin will continue upwards
but will be interspersed with price spikes and corrections.
— BBC World News & BBC World Business Edition, February, 2014
Sveinn Valfells, PhD (linkd.in/wtaHi5) Bitcoin and the Future of Money Bitcoin Scotland August 23, 2014 18 / 19

19. About the Author
References
[1] Niall Ferguson. The ascent of money. London: Allen Lane. 2008.
[2] Amar Radia Michael McLeay and Ryland Thomas. Money in the modern economy. http://www.bankofengland.co.uk. Quarterly Bulletin, Q1 2014.
[3] Karl Marx. Das kapital. Hamburg: Verlag von Otto Meisner. 1867.
[4] John Maynard Keynes. The general theory of employment, interest and money. London: Palgrave Macmillan. 1934.
[5] Milton Friedman. A program for monetary stability. New York: Fordham University Press. 1960.
[6] David Hume. Political Discourses. Kincaid & Donaldson. 1752.
[7] Adam Smith. The Wealth of Nations. W. Strahan and T. Cadell, London. 1776.
[8] Scotch Branwell. Assembling the bitcoin block chain. http://bitwriters.blogspot.co.uk/. December 2, 2013.
[9] European Central Bank. Virtual Currency Schemes. http://www.ecb.europa.eu. October, 2012.
[10] Wikipedia. Gold reserve. http://en.wikipedia.org/wiki/Gold_reserve. Retrieved June, 2013.
[11] Savills. UK Housing Stock Climbs [to] £5T. http://www.savills.co.uk. February, 2013.
[12] CapGemini, Efma, RBS. The 8th Annual World Payments Report 2012. http://www.capgemini.com. October 9, 2012.
[13] Global Finance. Payments Volumes Worldwide. http://www.gfmag.com. Based on BIS report published January, 2013.
[14] Eileen Yu. Global mobile payment transactions to surpass $235B. http://www.zdnet.com. June 4, 2013.
[15] Ed Parry. Financials. https://www.paypal-media.com/about. Retrieved, April 2014.
[16] Wikipedia. Network effect. http://en.wikipedia.org/wiki/Network_effect. Retrieved June, 2013.
[17] Wikipedia. Geometric Brownian motion. http://en.wikipedia.org/wiki/Geometric_Brownian_motion. Retrieved June, 2013.
[18] John Nelson. The united nations of bitcoin. http://uxblog.idvsolutions.com. October 22, 2013.
[19] Sourceforge. Bitcoin. http://sourceforge.net. Retrived April, 2014.
[20] CoinDesk. State of Bitcoin 2014 . http://www.coindesk.com. February 24, 2014.
[21] blockchain.info. Blockchain.info – charts. http://blockchain.info. Retrieved, April 2014.
[22] Wikipedia. Legality of Bitcoins by country. http://en.wikipedia.org/wiki/Legality_of_Bitcoins_by_country. Retrieved April, 2014.
[23] Stan Higgins. US Congressman to Submit Bitcoin Tax Bill. http://blockchain.info. April 8, 2014.
[24] Various sources incl. Central Bank of Iceland, Statistics Iceland.
Sveinn Valfells, PhD (linkd.in/wtaHi5) Bitcoin and the Future of Money Bitcoin Scotland August 23, 2014 19 / 19