Slides from an old class, part of my course on Social Innovation in Finance. Topics: Digital crypto currencies, bitcoin, and the blockchain.

1. Digital Currencies
(Bitcoin)ENT 470 Social Innovation in Finance
Alessandro Lanteri
alessandro.lanteri@faculty.hult.edu
HULT International Business School - Summer One 2016

2. Schedule
More or less…
Break
15 min9 am
Money
ca. 60 min.
10:30 pm
Blockchain
+ Bitcoin
ca. 60 min.
Mark Lamb
CEO & Co-Founder
CoinFloor
11:30 pm
Guest Lecturer
ca. 60 min.
12:30 pm
Wrap up

3. Digital Currencies
vs. Money

4. Paul Kemp Robertson
Contagious Communications
http://www.ted.com/talks/paul_kemp_robertson_bitcoin_sweat_tide_meet_the_future_of_branded_currency
Bitcoin. Sweat.
Tide. Meet the
future of branded
currency.
Private Money
the daring and fascinating alternatives to government-backed currencies
w
atch
at
hom
e ENT 470

5. ECB(2012);Alietal.(2014)
A history of Money
(very, very, very brief)
commodities
goods with intrinsic value
cows, pottery, shells, grains…
commodity-backed
items representing underlying
commodities with intrinsic value
gold certificates…
fiat money
legal tender issued by a central
(trusted) authority
USD, GBP…
trust is very important
(e.g., dollarization)
ENT 470

6. Alietal.(2014)
The functions of Money
Classical theory of money
NOTE: money with such functions is not necessarily legal tender
(ex. gold, diamonds…)
Store of value
money can be saved and
retrieved in the future.
Medium of exchange
money is used as an
intermediary in trade to avoid
the inconveniences of a barter
system, i.e. the need for a
coincidence of wants between
the two parties involved in the
transaction.
Unit of account
money acts as a standard
numerical unit for the
measurement of value and
costs of goods, services, assets
and liabilities.
example: trading cards, hours…example: houses… example: cigarettes…
ENT 470

7. Alietal.(2014)
The functions of Money
Hierarchy of functions
Unit of account
Medium of exchange
Store of value
money is a social convention
as such, it evolves over time
not all the functions must be
present at all times and for all
constituencies
ENT 470

8. ECB(2012)
Types of currencies
formats and legal status
ENT 470

9. ECB(2012)
Types of virtual currencies
with respect to their relationship with legal tender and real goods
Closed virtual currencies
Almost no link to the real economy
and sometimes called “in-game
only” schemes. Users usually pay a
subscription fee and then earn
virtual money based on their online
performance.
The virtual currency can only be
spent by purchasing virtual goods
and services offered within the
virtual community and, at least in
theory, it cannot be traded outside
the virtual community.
Unidirectional flow
The virtual currency can be
purchased directly using real
currency at a specific exchange
rate, but it cannot be exchanged
back to the original currency.
The currency is used to purchase
virtual goods and services, but
some may also allow their
currencies to be used to purchase
real goods and services..
Bidirectional flow
Users can buy and sell virtual
money according to the exchange
rates with their currency.
The virtual currency is similar to
any other convertible currency with
regard to its interoperability with
the real world. These schemes
allow for the purchase of both
virtual and real goods and services.
example: Facebook Credit,
air miles…
example: WoW Gold…
example: Linden Dollars,
Bitcoin…
ENT 470

10. ECB(2012)
Types of virtual currencies
with respect to their relationship with legal tender and real goods
ENT 470

11. ECB(2012)
Electronic vs Virtual Money
Types of money schemes
digital
electronic virtual
digital
traditional currency
‘universal’
legal money inst.
fixed
invented currency
within a community
non-fin. company
determined by issuer
money format
unit of account
acceptance
issuer
supply
guaranteed not guaranteedredeemability
ENT 470

12. ECB(2012)
Virtual Currencies
A definition
A virtual currency is a type of
unregulated, digital money, which is
issued and usually controlled by its
developers, and used and accepted
among the members of a specific
virtual community.
//
//
unregulated
community
based
issuer
determined
private
issuer
digital
ENT 470

13. Andreas Antonopoulos
Bitcoin Foundation
https://www.youtube.com/watch?v=c2CsJ2HMA2I
Disrupt
Bitcoin
the first virtual currency
ENT 470
w
atch
at
hom
e

14. Time for a BREAK
Please be back in 15 minutes

15. Bitcoin basics

16. How to store bitcoin
an intro
ENT 470
HOT wallets
are online
allow for instantaneous
transfer of funds
greater ease of use but
more vulnerable to
hacking
Wallets are where bitcoins
are virtually stored and
are used to make
transactions.
COLD wallets
are offline
more secure
payment process is
slower and more
cumbersome

17. How to obtain bitcoin
an intro
EARN
Like any currency, Bitcoin can be obtained in
exchange for goods and services rendered.
ATM’s
ATM users first verify their bitcoin wallet by
scanning a QR code on their smartphone.
They then insert cash into the ATM and
submit to complete the transaction. The
appropriate amount of bitcoins are credited
to their wallet (at current exchange rate).
DIGITAL EXCHANGE
Digital currency exchanges allow buying and
selling Bitcoin at the current market rates.
MINING
Miners are the backbone of the Bitcoin
ecosystem, providing services that help
secure the network and keep it running.
Miners are rewarded for their services with
Bitcoin payments.
ENT 470

18. How to spend bitcoin
an intro
PURCHASES
A growing number of merchants are
accepting bitcoin as a form of payment.
P2P PAYMENTS
Bitcoins’ fast transfer times, lower fees and
absence of transaction limits make them an
attractive option for micro-payments.
INVESTING
Bitcoins are frequently traded on digital
currency exchanges.
CHARITY
Bitcoins offer a faster and safer way to give
to charities in the developing countries
marred by social and political unrest.
ENT 470

19. Intro to Bitcoin

20. Bitcoin transactions
(in a nutshell)
ENT 470

22. www.blockchain.info(2015)
The blockchain
Miners worldwide
ENT 350
USA EUROPE

23. Life inside a secret
Chinese Bitcoin
mine
Inside a Bitcoin Mine
the physical making of digital currencies
ENT 470
https://www.youtube.com/watch?v=K8kua5B5K3I

24. Alietal.(2014)
Some features of bitcoin
Mainly, its strengths
Decentralised Stable
Transparent
Fast, Cheap
PrivateBUT
The decentralized nature of Bitcoins
eliminates the prospect of
government control or ownership.
The blockchain is a permanent public
record of all confirmed transactions
that occur in the system and an
integral part of the Bitcoin
ecosystem. The blockchain helps
promote order and transparency
while prevent counterfeiting.
Digital payments to individuals and merchants can occur at
anytime and are processed faster with lower fees. This is
due in large part to removing banks from the transaction
processing equation.
Only a finite amount of bitcoin is
available. Thus, no entity can
manipulate bitcoin value through an
increase or decrease in currency
production. This leaves bitcoin value
largely to the laws of natural supply
and demand economics.
Although all Bitcoin transaction
details are stored publicly, the
identities of the users involved
remain relatively anonymous.
These benefits extend to payments ranging from basic P2P
transfers to remittances.
Remittances are instantaneous and inexpensive, < 1% fee.
FX fees are eliminated.
ENT 470

25. The blockchain
The true social innovation in bitcoins
permanent chronologicalcompletepublic
A blockchain is a public ledger of all Bitcoin
transactions that have ever been executed. It is
constantly growing as 'completed' blocks are
added to it with a new set of recordings. The
blocks are added to the blockchain in a linear,
chronological order. //
//
ENT 470

26. The blockchain
The true social innovation in bitcoins
miners confirm the
validity of transactions
and add them to the
blockchain
A blockchain is a public ledger of all Bitcoin
transactions that have ever been executed. It is
constantly growing as 'completed' blocks are
added to it with a new set of recordings. The
blocks are added to the blockchain in a linear,
chronological order. //
//
the blockchain
publicly records the
transactions between
sender and recipient
and allows verification
the blockchain
ensures each BTC is
uniquely coded and
therefore can only be
spent once
the systems allow the
elimination of
intermediaries (e.g.,
banks), creating new
possibilities beyond
the currency
ENT 470

27. Nakamoto(2008)
The blockchain
The true social innovation in bitcoins
Blockchain technology is arguably
the greatest innovation of the
Bitcoin system.
The blockchain is a constantly
updated public ledger of all
transactions that have occurred.
It provides transparency across the
Bitcoin system, allowing
transactions to be processed in a
decentralized, trustless manner.
ENT 470

28. Nakamoto.(2008)
The blockchain
The true social innovation in bitcoins
identities transactions
trusted
third party
counterparty public
identities transactions public
traditional
privacy
model
new
privacy
model
ENT 470

29. Nakamoto(2008)
The blockchain
The true social innovation in bitcoins
Blockchain technology is arguably
the greatest triumph of the Bitcoin
system.
The blockchain is a constantly
updated public ledger of all
transactions that have occurred.
It provides transparency across the
Bitcoin system, allowing
transactions to be processed in a
decentralized, trustless manner.
ENT 470

30. BankofAmerica-MerrilLynchGlobalResearch
The supply of Bitcoin
million BTC, since launch
ENT 470

31. Bitcoin as money

32. Alietal.(2014)
Is Bitcoin money?
According to the classical theory of money
it is, but for limited numbers of users.
can it become more widespread?
Store of value
average transactions per wallet
USD 0.02/day
encouraged by deflationary
nature
penalised by high volatility
Medium of exchange
currently little used
in the long run, transaction
costs will likely increase
(end of mining)
Unit of account
little evidence of use
merchants who accept BTC use
USD as unit of account
ENT 470

33. www.blockchain.info
The market price of Bitcoin
in USD, since launch
price
volatility
ENT 470

34. www.blockchain.info
Bitcoin transactions
value in USD, per day
(USD daily transactions are > $ 5 trillion)
low
value
of
transactions
ENT 470

35. www.blockchain.info
Bitcoin transactions
number, per day
possibly
overstated
ENT 470

36. www.blockchain.info
Bitcoin transactions
days destroyed
still
im
perfect
ENT 470

37. Time for a BREAK
Please be back in 15 minutes

38. (some) Bitcoin
business models

39. NO In-Class Quiz TODAY ENT 470

40. Case Study: BitGold
BitGold vs Bitcoin (video)
www.bitgold.com
https://www.youtube.com/watch?v=l4d612am7ZQ
ENT 470

41. Juan Llanos
EVP Bitreserve
https://www.youtube.com/watch?v=0GL9PTQiqxw
Digital currencies
like bitcoin are
coming (and it's a
good thing)
The risks of virtual currencies
everything is not so bad
w
atch
at
hom
e ENT 470

42. The main Bitcoin ‘operators’
actors in the bitcoin ecosystem
wallets payment
processors
exchanges
lenders investment
vehicles
hardware &
equipment
remittances others
• software wallets
• web & mobile wallets
• payment service providers
• payment networks
• OTC bitcoin exchanges
• spot & forward exchanges
• P2P lending
• bank-like borrowing
•BTC hedge funds
•BTC venture funds
• BTC casinos
• BTC binary options
•BTC mining hardware
•BTC ATMs
• BTC int’l transfers
• BTC mobile payments
ENT 470

43. The main Bitcoin ‘operators’
actors in the bitcoin ecosystem
wallets
Although a necessary part of the Bitcoin infrastructure,
most of the reputable Bitcoin wallets are not monetized
per se. Additional services, like currency exchange or
merchant tools, provide revenue generating capabilities.
Safety of a wallet is a prime concern for a user.
ENT 470

44. The main Bitcoin ‘operators’
actors in the bitcoin ecosystem
payment
processors
Payment processing appears to be an attractive business
model due to a large volume of transactions daily and a
growing number of merchants accepting Bitcoin. Ability
to acquire merchants is the key to success.
Competition, however puts downward pressure on fees.
ENT 470

45. The main Bitcoin ‘operators’
actors in the bitcoin ecosystem
exchanges
Startups see a lot of space to innovate with additional
trading services, exchange pairs (both currency and
precious metals), and financial instruments (forwards,
shares). However, market leaders process 75+%
transactions.
A novel unilateral exchange model is through ATM’s.
ENT 470

46. The main Bitcoin ‘operators’
actors in the bitcoin ecosystem
hardware &
equipment
Hardware and equipment, built specifically for bitcoin,
represent a recent development in the value chain.
Despite the potentially capped demand for mining
equipment (due to the capped bitcoin supply), the
demand exceeds supply.
ENT 470

47. The main Bitcoin ‘operators’
actors in the bitcoin ecosystem
investment
vehicles
ETF and mutual find-like investment vehicles are yet to
gain popularity due to the volatility of BTC and potential
of large players to influence the price.
Prominent venture capital investors increasingly fund
companies in the Bitcoin ecosystem. BTC Hedge Fund
launched in Malta.
ENT 470

48. The main Bitcoin ‘operators’
actors in the bitcoin ecosystem
lenders
Lending platforms represent a great potential (with
Bitcoin credit cards being a part of it). The operators
release themselves of the liability for the loan repayment
and from the guarantees on deposit investments.
ENT 470

49. The main Bitcoin ‘operators’
actors in the bitcoin ecosystem
remittances
Remittances are a $500 bil / year market.
New BTC operators are entering the space (e.g., Kipochi
integrated with M-Pesa, BitPesa…).
ENT 470

50. The main Bitcoin ‘operators’
actors in the bitcoin ecosystem
Miner Lease – Bitcoin mining contracts for investment;
BTC Levels – platform allowing a user to profit from correct prediction of the BTC price
forecasts;
Satoshi dice – leading Bitcoin gaming site;
Coinster – cryptocurrency search engine;
BTCVoip – provides VOIP services at low prices for BTC only;
BitcoinGet – allows earning bitcoins by watching the videos and completing simple
tasks;
Cryptcard - international prepaid Bitcoin loadable virtual MasterCard to get money to
the people, who do not accept bitcoins.
others
ENT 470

51. Guest Lecturer: Mark Lamb
CEO & Co-Founder of CoinFloor
www.coinfloor.com
ENT 470