Staci Warden

March 21, 2018

Bitcoin and the Blockchain:

Great hope or great hype?

Satoshi Nakamoto

“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… With e-currency based on cryptographic proof, without the need

to trust a third-party middleman, money can be secure and transactions

effortless.”

2

What’s wrong with a using a Central Counterparty for making payments?

Access is regulated (barriers to entry can be high)

You have to trust that counterparty (credit risk)

Your account can be frozen, taxed, or confiscated

Your counterparty could refuse to make your payment

Your payment could be reversed

Money transfer takes time

Somebody (not you) is keeping that float

Money transfer is costly

Payment and transaction banking revenue $524 billion last year (BCG)

Fees 2-3 percent; more in LDCs

Your transaction reveals information about you

Target 70 mm customers

Merchants have to reject 5-10% of orders

3

Bitcoin is a different system

It is not a trust-based system:

It is disintermediated. There is no central counterparty in

charge of bookkeeping for your account (no credit risk)

The public ledger is transparent to everyone

All the software, architecture, and rules are open source

It’s a consensual system

Peer to peer network of (currently) approximately 20,000 nodes

Everybody plays by the same set of rules

Decisions (additions, changes, anything) require agreement by

system participants (nodes).

4

Bitcoin has some really great “monetary” properties

Transaction costs are low (trust costs money)

Barriers to Entry are extremely low

It’s pseudonymous

Accounts are not maintained, only transactions are maintained

But traceability is inherent

Transactions are irreversible after about one hour (to be safe).

Micropayments can be made easily

Bitcoin is different than other currencies because it’s arbitrarily

divisible.

It is now divisible to eight decimal places (currently)

So you can charge .00000001 for something = one satoshi

The bitcoin universe has 2.1 quadrillion Satoshi

There are approximately 1 quadrillion pennies out there.

5

Bitcoin is a deflationary currency

There is no monetary authority that creates bitcoins….and the supply dynamics are

known ex ante

There is a limited supply of bitcoins

21 million will be created in total

Expected to be reached in about 2140

The rate of supply diminishes over time

In a predictable way…..this is really important

The amount of bitcoins awarded halves with every 210,000 blocks mined – Every four years. (started

with 50 bitcoins per block mined; since November of 2012, 25) award halved to 25 bitcoins.

“lost” bitcoins are never replaced

This happens by losing your private key

6

Bitcoin’s supply dynamics

7

Source: Bitcoin Forum; whitslack

But is Bitcoin a good currency?

It is illiquid. JPM: Daily turnover of the Mauritius Stock Exchange

It is volatile. 20X more volatile than the JPY. Daily drops of 35%

No cash yield.

No Full Faith and Credit. Limits usage. No deposit insurance

When it’s gone it’s gone. Don’t lose your private key.

Are transactions costs really that low?

Deflationary currencies are inherently recessionary.

High volatility undermines its ‘store of value’ properties

9

Sources: bitcoincharts.com, Milken Institute

Daily price movements of BitStamp (USD)

Bitcoin Price 3/20/2018 (USD)

Bitcoin Compared to Historical Asset Bubbles

What is the big deal, though, really?

Bitcoin is a distributed database where the order of transactions is

agreed upon by everybody.

Therefore, there is no question about legitimacy. Everybody agrees on

who has won (who got there first)

It solves the “double spending” problem without the requirement of a

central counterparty.

12

So what?

What if Alice paid Bob and then immediately paid Staci?

What if an “evil node” went back and made alterations to a block and then recreated a

competing block chain from that point??

Which one would be legitimate?

Who knows? This needs to be decided and everybody needs to agree on the

answer

13

You need to get lucky

14

Richie S. King. By reading this article, you’re mining Bitcoins. www.qz.com

This is how the bitcoin money supply is managed

“Miners” are rewarded bitcoins for maintaining the security of the system.

Creating blocks to form the public ledger.

New blocks are validated – and thus new bitcoins generated – every ten

minutes.

Every 2016 blocks (two weeks) the actual time taken is assessed. If it

didn’t take enough time, the problem becomes more difficult. So the rate

stays basically the same.

15

Changes, variations, and applications

Change the money supply dynamic rules

Accommodate the level of trust

Build on bitcoin or create your own

The blockchain: it’s not just about the money

Provenance

Usage

Compartmentalization

Rule-based automatic execution (smart contracts)

From IPOs to ICOs?

Total Crypto Market Cap

Source: Coinmarketcap.com

Top 10 Cryptocurrencies

Note: There are currently more than 1,500

cryptocurrencies, according to CoinMarketCap

Crypto Market Cap Share

Source: 2017 Global Cryptocurrency Benchmarking

Study; Cambridge Center for Alternative Finance

VC Funding Into Blockchain Startups

Blockchain Equity Financing

Blockchain Equity Financing vs. ICO Financing

Quarterly ICO Round Counts & Dollar Amounts for 2017