BitCoin & the Disruptive Potential of Cryptocurrency

1. BitCoin & the Disruptive Potential of Cryptocurrency April, 4th 2014Stefano Grazioli

3. Objective: Assessing BitCoin’s disruptive potential • What is it? • What is its business value?

4. There areNo BitCoins

5. BitCoin “it’s a method of transmitting money”

7. A distributed ledger that tracks fund transfers among accounts ‘Block Chain’

8. Mt. Gox bankrupt Nov.08Nakamoto paper Silk Road shut down by the FBI IRS recognizes BTC as property Jan.09 Bitcoin (BTC) is launched German finance ministry recognizes BTC as a unit of account ‘09 BTC trades at $0.14 2009 2010 2011 2012 2013 2014

9. Use of BitCoin follows apre-existing business agreement SAM the consumer Account ABC123with secret key Secret123 RHONDA the merchant Account XYZ678 “I accept BitCoin Payment12 roses = 0.1 BTCAccount: XYZ678” “Please send 12 roses to 839 Hilton Rd., Cville, VA.I am sending a transaction (from ABC123)”

10. Fund transfers use public key cryptography to insure non-repudiation and integrity SAM the consumer Account ABC123with secret key Secret123 RHONDA the merchant Account XYZ678 Transaction Transfer of funds Sender: ABC123 Transfer to:XYZ678 Amount: 0.1 BTC Digital Signature:973sdskhu9dft Proof of BTC ownership Sender: RST234 Transfer to: ABC123 Amount: 5BTC

11. Transactions are propagated through a P2P network SAM theconsumer Account ABC123 RHONDA the merchant Account XYZ678 Transaction BitCoin P2P client network Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership

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

13. Once in the block chain, the transaction is irreversible RHONDA the merchant Account XYZ678 Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership

14. Bitcoin Strategic Analysis

15. Based on Iyer & Davenport HBR 2008 Network Analysis is a better fit than Porter’s Five Forces for many Internet businesses. Consumers Content Providers Google Platform Network Effect = when the value of a service changes for the user, based on how many others adopt it. Advertisers

16. Based on Iyer & Davenport HBR 2008 We will apply Network Analysis to assess BitCoin’sbusiness potential Users Miners BitCoin Platform Merchants Services: Wallets & Exchanges

17. Users and Merchants An awkward experience

18. BTC has apoor value proposition for buyers and sellers Low Transaction Costs Semi-anonymous Irreversible 10-minute confirmation Volatile Difficult legal remediation Taxed as property SAM theconsumer RHONDA the merchant

19. The same characteristics make BTC attractive for dishonest players Low Transaction Costs Semi-anonymous Irreversible 10-minute confirmation Volatile Difficult legal remediation Taxed as property

22. Miners Reward Schema Introduce a Serious Flaw

23. Verification (‘Mining’) includes a reward to the Miner BitCoin P2P client Network Unverified Transactions Verified Transactions Check Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Newly minted BTC that is owned by the miner Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership ‘Block Chain’ of verified Transactions

24. Many Miners compete to create the next block and reap the reward Verified Transactions Unverified Transactions BitCoin P2P client Network Check Check Check Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Transfer of funds Check Transfer of funds Transfer of funds ‘Locked’ into the next block of the Block Chain Check Check Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Digital Signature Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Proof of ownership Transfer of funds Digital Signature Proof of ownership ‘Block Chain’ of verified Transactions

25. Mining requires solving cryptopuzzles by brute-force methods Application SpecificIntegratedCircuit 1 ASIC = 70,000 Intel CPUs Source: HashFast

26. Mining activity is determined by hard economics • 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 Source: Dec. 2013 data self-reported by a miner

27. BTC has a good value proposition for miners in the short term “Printing money” Rewards ingenuity Rapid depreciation

28. Malicious mining pools can rig the ledger “The system is secure as long as honest nodes collectively control more CPU power than any cooperating group of attacker nodes” – Satoshi Nakamoto Hashrate distribution from BitcoinX.com, Apr. 2014

29. Exchanges &Wallet Services Weakest point in the BitCoin Ecosystem

30. Wallet services companies build software that makes Bitcoin easier to use • 1,100,000 consumer wallets • 28,000 merchants • U.S. bank integration Source: coinbase.com Apr 2014

31. Exchanges trade BTC for other currencies Source: The wayback machine

32. Mt. Gox is no Ft. Knox • Feb 7 – suspended withdrawals • Feb 28 - Bankruptcy • 850K BTC missing • 7% of the BTC supply • No FDIC Mark Karpeles, CEO of Tibanne Co.

33. The BTC platform is unsecure at its outer edges • 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

34. BTC has a fair value proposition for Wallet Services and Exchanges Low transaction costs Semi-anonymous Irreversible Security Volatile Difficult legal remediation Taxed as property Wallet Services Exchanges

35. Conclusion “Stay Away!” - Warren Buffett

36. For the general public BitCoin has low usefulness and ease of use Users Miners BitCoin Platform Services: Wallets & Exchanges Merchants

37. BitCoin has strong network effects Users Miners BitCoin Platform Services: Wallets & Exchanges Merchants

38. Users are the engine for BitCoin’s growth, but do not have sufficient reasons to adopt it Users Miners BitCoin Platform Services: Wallets & Exchanges Merchants

39. As a currency, BTC scoreswell below the Dollar

40. “It is a bubble, there is no question about it.” “The central problem with Bitcoin … is that it doesn’t really solve any sensible economic problem.” Robert J. Shiller, Professor of Economics at Yale

43. Exhaustion of the pool of Bitcoins will lead to transaction fees Total Coins In Millions 2033: 21 Mil. 2014: 12 Mil. Source: Wikipedia

44. Satoshi Nakamoto Is The Alleged Inventor of BitCoin “I did not create, invent or otherwise work on Bitcoin” -Dorian Satoshi Nakamoto

45. An Experiment by Wired Confirmed The Claims By Miners • Butterfly Labs Bitcoin Miner, $274 • 5.5 GH/s on average • Eclipse MiningConsortium • 2 BTC in 10 days. Source: Wired May 2013 report

46. “Our best definition would be that it is currently a speculative financial asset that can be used as a medium of exchange” Dominic Wilson, Chief markets economist at Goldman Sachs 2009 2010 2011 2012 2013 2014

47. BTC is a bubble • High volatility • Market inefficiencies manifested as persistent forex arbitrage opportunities

48. Forex Arbitrage Opportunities • Exchange A: BTC = $1,000 • Exchange B: BTC = $1,100 • Purchase 10 BTCs in Exchange A for $10,000 • Immediately sell 10 BTCs in Exchange B for $11,000

49. BitCoin is “Evil”

50. Trust “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