© Stefano Grazioli - Ask for permission for using/quoting: Stefano Grazioli

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3 “I did not create, invent or otherwise work on Bitcoin” -Dorian Satoshi Nakamoto, 2014

Mt. Gox bankrupt Nov.08 Satoshi Nakamoto paper German finance ministry recognizes BTC as a unit of account Silk Road shut down by the FBI ‘09 BTC trades at $0.14 Jan.09 Bitcoin (BTC) is launched IRS recognizes BTC as property

In 2016 there are about 12 million Bitcoins. 21 million fixed total will be reached by approx. 2040

8 ‘Block Chain’

9 RHONDA the merchant Account XYZ678 “I accept BitCoin Payment 12 roses = 0.1 BTC Account: XYZ678” “Please send 12 roses to 839 Hilton Rd., Cville, VA. I am sending a transaction from account ABC123” SAM the consumer Account ABC123 with secret key Secret123 The double spending problem

10 SAM the consumer Account ABC123 with secret key Secret123 RHONDA the merchant Account XYZ678 Proof of BTC ownership Sender: RST234 Transfer to: ABC123 Amount: 5 BTC Digital Signature: 973sdskhu9dft Transaction Transfer of funds Sender: ABC123 Transfer to: XYZ678 Amount: 0.1 BTC

11 Transaction Transfer of funds Proof of ownership Digital Signature BitCoin P2P client network Transfer of funds Proof of ownership Digital Signature Transfer of funds Proof of ownership Digital Signature Transfer of funds Proof of ownership Digital Signature Transfer of funds Proof of ownership Digital Signature Transfer of funds Proof of ownership Digital Signature Transfer of funds Proof of ownership Digital Signature Transfer of funds Proof of ownership Digital Signature Transfer of funds Proof of ownership Digital Signature SAM the consumer Account ABC123 RHONDA the merchant Account XYZ678

12 Transfer of funds Proof of ownership Digital Signature Unverified transactions Verified transactions Transfer of funds Proof of ownership Digital Signature ‘Locked’ into the next block of the Block Chain ‘Block Chain’ of verified transactions BitCoin P2P client network Transfer of funds Proof of ownership Digital Signature Transfer of funds Proof of ownership Digital Signature Transfer of funds Proof of ownership Digital Signature Check Transfer of funds Proof of ownership Digital Signature Transfer of funds Proof of ownership Digital Signature Transfer of funds Proof of ownership Digital Signature

13 RHONDA the merchant Account XYZ678

© Stefano Grazioli - Ask for permission for using/quoting: Network Effects Analysis 14

15 BitCoin Platform UsersUsers MerchantsMerchants MinersMiners Services: Wallets & Exchanges

Low Transaction Costs Semi-anonymous Irreversible 10-minute confirmation Volatile Difficult legal remediation Taxed as property 16 RHONDA the merchant SAM the consumer

Low Transaction Costs Semi-anonymous Irreversible 10-minute confirmation Volatile Difficult legal remediation Taxed as property 17 FBI agrees, researchers disagree

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20 BitCoin Platform UsersUsers MerchantsMerchants MinersMiners Services: Wallets & Exchanges

21 Transfer of funds Proof of ownership Digital Signature Unverified transactions Verified transactions Transfer of funds Proof of ownership Digital Signature ‘Block Chain’ of verified transactions BitCoin P2P client network Transfer of funds Proof of ownership Digital Signature Transfer of funds Proof of ownership Digital Signature Transfer of funds Proof of ownership Digital Signature Miner’s Check Transfer of funds Proof of ownership Digital Signature Transfer of funds Proof of ownership Digital Signature Transfer of funds Proof of ownership Digital Signature Transfer of funds Proof of ownership Digital Signature Transfer of funds Proof of ownership Digital Signature Transfer of funds Proof of ownership Digital Signature Transfer of funds Proof of ownership Digital Signature Transfer of funds Proof of ownership Digital Signature Newly minted BTC that is owned by the miner

22 Transfer of funds Proof of ownership Digital Signature Unverified transactions Verified transactions Transfer of funds Proof of ownership Digital Signature ‘Block Chain’ of verified transactions BitCoin P2P client network Transfer of funds Proof of ownership Digital Signature Transfer of funds Proof of ownership Digital Signature Transfer of funds Proof of ownership Digital Signature Miner’s Check Transfer of funds Proof of ownership Digital Signature Transfer of funds Proof of ownership Digital Signature Transfer of funds Proof of ownership Digital Signature Transfer of funds Proof of ownership Digital Signature Transfer of funds Proof of ownership Digital Signature Transfer of funds Proof of ownership Digital Signature Transfer of funds Proof of ownership Digital Signature Transfer of funds Proof of ownership Digital Signature Miner’s Check Transfer of funds Proof of ownership Digital Signature

Application Specific Integrated Circuit 1 ASIC = 70,000 Intel CPUs 23 Source: HashFast

“Printing money” Rewards ingenuity Rapid depreciation 24

25 BitCoin Platform UsersUsers MerchantsMerchants MinersMiners Services: Wallets & Exchanges

 1,100,000 consumer wallets (2014)  U.S. banks integration  39,000 merchants 26 Source: coinbase.com Jun 2015

27 Source: The wayback machine

28 Mark Karpeles, CEO of Tibanne Co.

 Sheep Marketplace lost $6 mil  Black Market Reloaded lost 200 BTCs  Silk Road 2.0 lost $2-6 mil  Flexcoin forced to close after hackers stole $590,000  Inputs.io (storage) was compromised and hackers stole 4,100 bitcoins ($1.2 million) in two separate attacks.  MyBitcoin and Instawallet, have both shut down due to thefts 29

Low transaction costs Semi-anonymous Irreversible Security Volatile Difficult legal remediation Taxed as property 30 Exchange s Wallet Services

31 Definition of N.E.: a change in value of a product/service caused by how many others have also adopted it Network effect for UsersMerchantsMiners Wallets and Exchanges Growth for Users Strong positive -- Merchants Strong positive -- Strong positive -- Miners -- Strong negative -- Wallets and Exchanges -- Strong negative

32 Services: Wallets & Exchanges BitCoin Platform UsersUsers MerchantsMerchants MinersMiners

33 Services: Wallets & Exchanges BitCoin Platform UsersUsers MerchantsMerchants MinersMiners

34 Services: Wallets & Exchanges BitCoin Platform UsersUsers MerchantsMerchants MinersMiners

© Stefano Grazioli - Ask for permission for using/quoting: “Stay Away!” – Warren Buffett 35

“The central problem with Bitcoin … is that it doesn’t really solve any sensible economic problem.” 36 Robert J. Shiller, Professor of Economics at Yale

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 Bitcoin: What is it?  What is its business value? 40

41 Jevons’ Functions of Money US D BT C Ideal crypto currency Medium of exchange - recognized / accepted Store of value - constant intrinsic value, or linked to a basket of goods - safe Unit of account - standard unit of measurement for the value of goods, services, or assets (e.g., Euro , UF in Chile) Standard of payment - enforceable legal tender

 Avalon ASIC Miner  75 GigaHash/sec  Network speed: 140 TeraHash  0.05% of BTC network  0.05% of 3600 BTC /day = 1.8 BTC /day  $200/day 42 Source: Dec data self-reported by a miner

“The system is secure as long as honest nodes collectively control more CPU power than any cooperating group of attacker nodes” – Satoshi Nakamoto 43 Hashrate distribution from BitcoinX.com, Apr. 2014

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45 Source: Wikipedia Total Coins In Millions 2033: 21 Mil. 2014: 12 Mil.

 Butterfly Labs Bitcoin Miner, $274  5.5 GH/s on average  Eclipse Mining Consortium  2 BTC in 10 days. Source: Wired May 2013 report 46

Dominic Wilson, Chief markets economist at Goldman Sachs

 High volatility  Market inefficiencies manifested as persistent forex arbitrage opportunities 48

 Exchange A: BTC = $1,000  Exchange B: BTC = $1, Purchase 10 BTCs in Exchange A for $10, Immediately sell 10 BTCs in Exchange B for $11,000 49

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“Any transaction issued with Bitcoin cannot be reversed, they can only be refunded by the person receiving the funds. That means you should take care to do business with people and organizations you know and trust, or who have an established reputation. ” – BitCoin Website 51

 Better articulation of CVP with users  Fostering trust in the face of high technical complexity  Credit and interest require legal framework (regulation)  Weeding out illegal uses of currency  Required 10-minutes delay in transaction confirmation  Deflationary and recessionary effects of fixed monetary bases  “Fatal flaw” of the verification schema 52

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 “electronic payment system based on cryptographic proof instead of trust  allowing parties to transact directly with each other without the need for a trusted third party  Transactions that are computationally impractical to reverse protect sellers, and routine escrow mechanisms protect buyers.  peer-to-peer distributed timestamp server to generate computational proof of the chronological order of transactions.  The system is secure as long as honest nodes collectively control more CPU power than any cooperating group of attacker nodes” 54

55 [Source] 10 BTC to Paul15 I give 10 BTC to Bob34, signed: Paul15 I give 5 BTC to Mary82, signed: Bob34 I give 5 BTC to Ellen23, signed: Mary 82 …..

 Mediation increase transaction costs  Small transactions impractical  Mediated transactions are reversible  Increases fraud  Reversibility requires trust 56

57 Source: Satoshi Nakamoto 08

58 Source: Satoshi Nakamoto 08

59 Source: Satoshi Nakamoto 08

60 Source: Satoshi Nakamoto 08

1) New transactions are broadcast to all nodes. 2) Each node collects new transactions into a block. 3) Each node works on finding a difficult proof-of-work for its block. 4) When a node finds a proof-of-work, it broadcasts the block to all nodes. 5) Nodes accept the block only if all transactions in it are valid and not already spent. 6) Nodes express their acceptance of the block by working on creating the next block in the chain, using the hash of the accepted block as the previous hash. 61

62 Source: Satoshi Nakamoto 08

 Dread Pirate Roberts in jail  Utopia closed after nine days in D and NL  Charlie Shrem (24) founder of Bitinstant.com arrested for recycling BTCs 63

 “the first transaction in a block is a special transaction that starts a new coin owned by the creator of the block”  “analogous to gold miners”  Transaction fees also possible 64

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 US Treasury secretary Jack Lew said that he has decided [on ] a wait-and-see strategy.  “From the government’s perspective, we have to make sure it does not become an avenue to funding illegal activity or to funding activities that have malign purposes like terrorist activities. You know, it is an anonymous form of transaction, and it offers places for people to hide.” 66

 In March 2013, the Financial Crimes Enforcement Network, a part of the Treasury Department known as FinCen, issued guidance stating that anyone operating an exchange for virtual currencies would be considered to be running a money transmitting business.  That designation means exchanges must collect information about customers, as required under Bank Secrecy Act regulations, which are intended to prevent transactions through anonymous accounts. FinCen went a step further in its guidance by including any person who puts into circulation a virtual currency, which means that the so-called Bitcoin miners are also subject to the regulations. (FinCen last week issued a letter clarifying that users mining Bitcoins for their own purposes would not be considered money transmitters under the Bank Secrecy Act).  individuals and merchants who use Bitcoin like cash do not need to comply with the regulations imposed on those operating exchanges. 67

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 ASIC-based hardware  the kit paid for itself within three days  Between July and mid-November 2013 the computational capacity of the Bitcoin network increased 25-fold, from 200 trillion to 5 quadrillion hashes per second.  Newer generation of more efficient ASICs in November  Hashing capacity has increased so rapidly in 2013 that the practice of hijacking thousands of PCs and using them for mining is no longer worth the effort 73

 As the rate of transactions increases, squeezing all financial activity into the preset size limit for each block has started to become problematic. The protocol may need to be tweaked to allow more transactions per block, among other changes. A further problem relates to the volunteer machines, or nodes, that allow Bitcoin to function. These nodes relay transactions and transmit updates to the block chain. But, says Matthew Green, a security researcher at Johns Hopkins University, the ecosystem provides no compensation for maintaining these nodes—only for mining. The rising cost of operating nodes could jeopardize Bitcoin’s ability to scale 74

 Bitcoin’s growing popularity is having other ripple effects. Every participant in the system must keep a copy of the block chain, which now exceeds 11 gigabytes in size and continues to grow steadily. This alone deters casual use. Bitcoin’s designer proposed a method of pruning the chain to include only unspent amounts, but it has not been implemented.  As the rate of transactions increases, squeezing all financial activity into the preset size limit for each block has started to become problematic. The protocol may need to be tweaked to allow more transactions per block, among other changes. 75

 The original paper that sparked the creation of Bitcoin has since been supplemented by layers of agreed-upon protocol, updated regularly by the system’s participants. The protocol, like the currency, is a fiction they accept as real, because rejection by a large proportion of users—be they banks, exchanges, speculators or miners—could cause the whole system to collapse. Mr. Hearn notes that he and other programmers who work on Bitcoin’s software have no special authority in the system. Instead, proposals are floated, implemented in software, and must then be taken up by 80% of nodes before becoming permanent—at which point blocks from other nodes are rejected. “The rules of the system are not set in stone,” he says. The adoption of improvements is up to the community. Bitcoin is thus both flexible and fragile. 76

Psychological and Sociological reasons  Alignment with libertarianism and anarchism  No trust required  Qualified anonymity  Speculative greed  Technological novelty  Geek factor 77

Economics & Business reasons  Low transaction costs  Ecosystem  Network effects  Fraud resistance (maybe)  Irreversibility (maybe) 78