Crypto Guide for Investors En

CRYPTO CURRENCIES GUIDE FOR INVESTORS

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The world of finance is about to change drastically: the huge multitrillion dollars financial market* has been targeted by a newcomer, and it means business!

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Currencies around the globe, together with the rest of the financial system, have long been regulated and managed centrally. However, instead of economic stability and prosperity, the result has too often been economic crisis, financial collapse and even war.

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In difficult times people have traditionally turned to gold as a safe store of value even though it suffers from significant disadvantages: it’s heavy, expensive to store, the market is rigged and in most countries subject to regulation. But if not gold, then what? Something is certainly needed: the recovery from the global financial crisis of 2007–8 remains fragile and given the potential legacy problems of quantitative easing and unsustainable amounts of government deficit spending there continue to be serious reasons to worry about the health of the global economy in the coming years. There is a clear need for a safe haven, one that can withstand the coming economic shocks. In the Internet age, with its everincreasing demand for faster, more secure transactions, crypto-currencies could well be the answer.

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The three major payment networks (MasterCard, Visa, and

American Express) together process over $3 trillion of payments, generating a combined annual turnover of more than $30 billion. The total market capitalization of credit card companies is almost $400 billion. US banks alone generate over $250 billion in fees per year. Online merchants produce a $1 trillion yearly turnover. Over 2

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$30 trillion is hidden away in offshore bank accounts. Remittance companies process $500 billion worth of exchanges yearly. Another $500 billion are spent each year to pay for transactions. Gold capitalization is about $8 trillion.

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FAST CURRENCIES FOR A FAST WORLD What is Bitcoin?

What are Bitcoins?

Bitcoin is a peer-to-peer electronic payment system. It

The payments in the Bitcoin system are recorded in

allows for transactions to take place between people

a public ledger using its own unit of account, which is

without going through any central authority or

called Bitcoin.

middleman. In that sense, Bitcoin is a network of

individual

terminals.

Transactions

Users can send and receive Bitcoins electronically

are

for an optional transaction fee using wallet

made by informing other peers that money is

software on a personal computer, mobile

transferred from one wallet (the equivalent of a

device or a web application.

bank account) to another. The system enforces a very high security encryption

The current market capitalization of the Bitcoin system

standard to protect the sender, the receiver and the

is over 8 billion dollars. (June 2014)

supporting system and that is why Bitcoin and other digital coins are commonly referred to as “crypto currencies”.

Economic features: There is a very small optional fee for every transaction (a few cents at current market prices)1. Bitcoins monetary supply is programmed to increase at a fairly slow pace, and then stop. The effect of this controlled inflation2 is shown on chart 1. The Bitcoin currency is very slowly inflationary. There are currently (2014) about 12 million Bitcoins in existence; this number will slowly increase until it reaches 21 million in 2140. After that date no more Bitcoins will be created, then the nature of Bitcoin as a currency will change to being slightly deflationary. This means

Bitcoin is the beginning of something great: a currency without a government, something necessary and imperative.” -

“ 

Nassim Taleb

Philosopher, writer, statistician

and author of the Black Swan Theory (2013)

that, all other things being equal, the value of each Bitcoin will tend to increase with time. Unlike with credit cards, transactions are final once they are submitted to the network. If there is demand for a possibility of chargeback, this service can be offered by third parties. There is no central bank. Instead, the decisions are made by the market or defined from the start within the system: key lending rate, monetary supply, inflation rates, unfakeable money, etc. Welcome to a healthy monetary system!

1 This fee is depends on technical aspects outside the scope of this document. Please refer to this article for technical details: https://en.Bitcoin.it/wiki/Transaction_fees 2

All through this document, when speaking of inflation, it is meant as inflation of the monetary supply, as opposed to inflation of the prices. 3

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Total Bitcoins in circulation over time Chart 1

The decentralized ownership and the possible anonymity of this method of payment and store of value put Bitcoin and crypto currencies in general in the same category as gold.

21 M 18.38 15.75 13.13

Due to its being mined (see the technical features section for details), Bitcoin is a slightly inflationary currency: the monetary supply will therefore increase by a 10 percent-factor in 2014. But this inflation is set to decrease: there is an end to mining, at which point inflation will stop. cf chart 1.

10.50 7.88 5.25 2.63 2009

The value of Bitcoin is, for the moment, very volatile. Its value depends a lot on public announcements, as, for example, when the People’s Bank of China issued a notice effectively banning banks from doing business with Bitcoin exchanges in mainland China. Even though the Bitcoin network is resilient and can, technically, resist such a ban, the Bitcoin price is nevertheless affected, tending to rapidly decrease before returning to its longterm upwards trend. See chart 2 for an evolution of Bitcoin’s volatility and chart 3 for Bitcoin’s price and volatility.

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Bitcoin Volatility %

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Chart 2

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Bitcoins value and volatility Chart 3

Volume BTC

Bitcoins are gradually becoming more and more accepted as payment for goods and services, as store of value, and even as collateral. Bloomberg has recently added a BTC ticker to their professional trade terminal, as have Google Finance and Yahoo Finance.

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Bitcoin’s number of transactions per day Chart 4 90 000 85 000 80 000

More and more people are becoming interested in Bitcoins. With over 60,000 transactions per day

75 000 70 000 65 000 60 000 55 000 50 000 45 000 40 000 35 000 Jun’ 13

(chart 4) and an estimated daily transaction volume of over $45,000,000, Bitcoins are becoming extremely liquid, making trading easier and less risky.

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Technical features: +

To maintain the integrity of Bitcoin’s blockchain (a digital public accounting ledger), people run sophisticated “mining” hardware in competition with each other to add blocks to the blockchain. These blocks are like pages in the accounting ledger, each block containing the transactions that occurred since the last block was added to the chain. Since this is all public and shared among a great number of computers, cheating and modifying past transactions is considered to be impossible. A transaction is usually seen as perfectly secured after six confirmations, which means six blocks were mined since it occurred. This happens in about an hour (each block taking on average about 10 minutes to confirm.) Nonetheless, most people find it unnecessary to wait for all 6 confirmations and are prepared to rely on fewer confirmations before treating the funds as cleared in their Bitcoin wallets.

“

I think Bitcoin’s a technological tour de force.

Bill Gates, Founder of Microsoft (2013)

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Miners mine to earn a reward: when a miner solves a specific

algorithmic equation, some Bitcoins are created and sent to the miner’s wallet, adding to the total number of Bitcoins. In 2014, 25 Bitcoins will be created this way every 10 minutes on average (See chart 1 for Bitcoin’s inflation.) This method of maintaining the blockchain is called Proof of Work: the “work” being the solving of the equation and the “proof” being the announcement to the Bitcoin network of the solution.

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Implications: This is the reason why a race for ever-greater amounts of computer power is raging. Miners are spending more and more money to buy specialist hardware to mine ever faster – that is, to have more chances to earn the 25 Bitcoins’ reward.

“ “

Bitcoin is a remarkable cryptographic achievement and the ability to create something that is not duplicable in the digital world has enormous value. Eric Schmidt, CEO of Google (2013)

How to buy Bitcoins? Today, the vast majority of Bitcoin purchases are being made through centralized exchange platforms. Some are nonetheless exchanged hand-to-hand or even through ATMs. Several have opened up in different countries (Canada, New Zealand, Switzerland…) A $1000 ATM has even hit the market so Bitcoin owners can easily set up their own automated selling point for Bitcoins (As at June 2014, 220 had already been sold).

http://projectskyhook.com/

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Bitcoin: new services for existing markets As a new payment, accounting, and store of value system, Bitcoin competes with existing ones, including: +

Credit cards on the Internet: Bitcoin was designed for the specific purpose of making Internet payments: being peer to peer, it does not require the parties to incur the expense of using a third party payment processor such as a credit card company; in addition, since payments using Bitcoin are irreversible, there is no possibility of any chargeback. Internet-based businesses and some online stores are already accepting Bitcoins, or announced they would. (Overstock, CVS, Sears, Home Depot, Kmart, Amazon, Shopify, TargetDirect, Virgin Galactic, Dish Networks, C7 Data Centers, Expedia, Newegg.com, Dell, etc.) As at July 2014, over 60,000 merchants worldwide

were

accepting

Bitcoins

as

payment, and it is estimated that this number

Virgin Galactic is a bold entrepreneurial technology. It’s driving a revolution and Bitcoin is doing just the same when it comes to inventing a new currency.

“

Sir Richard Branson, Founder of Virgin Records, Virgin Galactic, and 400+ other businesses (2013)

will increase to over 100,000 before the end of the year.

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Credit cards in physical stores: using credit cards (off or online) is expensive, while with a simple QR code people will be able to pay with Bitcoins using any Internet-capable device, instantly and completely securely. (See Infographic 1)

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PayPal and other online payment systems: these cost money to use, while a Bitcoin payment is almost free. Nonetheless, Bitcoin can also support additional services, like insurance or a “buyers’ protection program” as, for example, is provided by Paypal.

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Remittance: Western Union and MoneyGram are clear targets: Bitcoin does for free what they charge for (an average of 9% per transaction.)

I do think Bitcoin is the first [encrypted money] that has the potential to do something like change the world.

“

Peter Thiel, Co-Founder of Paypal (2014)

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+

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Cash: Bitcoins can perform as electronic cash. It’s fast and small payments can be made easily.

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Sex: the sex industry has always been in search of new technologies to satisfy its numerous customers. The relative anonymity of Bitcoin payments can be attractive to such customers and that is why this industry is moving towards Bitcoins as a payment alternative.

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Gambling: online casinos are already starting to accept Bitcoins. It’s an international currency that is convenient and

I think the internet is going to be one of the major forces for reducing the role of government. The one thing that’s missing, but that will soon be developed, is a reliable e-cash.

“

fast for such companies with customers from many countries. This market is estimated at $30bn.

Milton Friedman,

Winner of Nobel Prize in economics (1999)

This is it, Mr Friedman, reliable e-cash has now arrived. People in countries like Argentina, Cyprus, or Greece for example, are becoming interested in Bitcoins due

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Crowdfunding: Bitcoin’s global availability, cheap transfer

to a lack of trust in their own currency or government.

costs and instant transfers empowers all types of crowdfunding efforts by removing location and forex conversion barriers.

Infographic 1

PAYMENT SYSTEMS Inefficient Transaction

Efficient Transaction

(Intermediaries: bank, credit card, etc)

(No intermediary)

You buy lunch for $20

You buy lunch for 0.03 BTC

Credit card checks with your bank

Bitcoins go directly to vendor and transaction is verified to be true by network

Credit card sends money to restaurant’s bank, and charges 3%

Merchant gets 0.03 BTC

(merchant gets $19.40)

(Buyer also pays 0.0001 BTC fee to miners, who process the transaction)

Credit card charges you interest/annual fees

In this case, fees amount to 0,3%

10X

MORE EFFICIENT

Kashmir Hill published an e-book in the Forbes Signature Series, titled Secret Money, Living On Bitcoin In The Real World, in which he details how he spent a week in San Francisco spending only Bitcoins. 7

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Bitcoin: new services for new markets The specific features of Bitcoin make it a formidable tool in the development of new markets: Micropayments: the potential scope for very small payments (