bitcoin and the future of money (icelandic version)

Bitcoin and the Future of MoneyThe emergence of the first global, decentralized, digital cryptocurrency

Sveinn Valfells, PhD

linkd.in/wtaHi5

Islandsbanki Wealth Management (VIB.is)Open Meeting on Cryptocurrencies

April 23, 2014

Sveinn Valfells, PhD (linkd.in/wtaHi5) Bitcoin and the Future of MoneyIslandsbanki Wealth Management (VIB.is) Open Meeting on Cryptocurrencies April 23, 2014 1

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Outline

1 Money and Modern Civilisation

2 The Economic Consequences of Bitcoin

3 About the Author


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Money and Modern Civilisation

Outline



3 About the Author


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Money and Modern Civilisation: A Brief HistoryMoney serves as store of value, medium of exchange, unit of account

“The ascent of money has been essential to the ascent of man”— Niall Ferguson [1]

600 BC – 1971 AD

Croesus mints first gold coins around600 BC in Sardis (Asia Minor).

Distinctive colour, easy to work with,useless for tools and weapons.

Used by Roman Empire, in MiddleAges, by British Empire and by UnitedStates.

President Nixon suspends convertibilityof USD into Gold, 1971 AD.

Fungible, divisible, impossible tocounterfeit, supply constrained only bymining. Figure: Croesus and gold coin from Sardis

(top); Nixon and USD gold note (bottom).


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Fiat (Paper) Money Is A Government Backed IOUFiat money is not backed by physical commodity

“Money is a special kind of IOU that is universally trusted.”— Bank of England [2]

Figure: Fiat money is created intransactions between central banks,commercial banks and bank customers [2].


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Great Thinkers Agree on Basic Role of MoneyFunction of money is to store value and transmit between unrelated parties over distance and time

Money is a crystal formed of necessity in the course of theexchanges.

— Karl Marx [3]

The importance of money flows from it being a link between thepresent and the future.

— John M. Keynes [4]

The very performance of its central function requires money tobe generally acceptable and to pass from hand to hand. As aresult, individuals may be led to enter into contracts with personsfar removed in space and acquaintance, and a long period mayelapse between the issue of a promise and the demand for itsfulfilment.

— Milton Friedman [5]


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The Economic Consequences of Bitcoin

Outline



3 About the Author


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Bitcoin Is a Token AND a NetworkFungible, divisible, impossible to counterfeit, prescribed supply, tested governance model

Figure: Private–public key public used forauthentication (top); transactions cleared ona peer-to-peer network (bottom).

Figure: The chain of blocks of transactionsis updated every 10m [6].


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Bitcoin Has Large Addressable MarketsBitcoin can serve as store of value, medium of exchange and unit of account

“In an extreme case, virtual currencies could have a substitution effecton central bank money if they become widely accepted.”

— ECB [7]

Global asset classes (value storage)

Private investment in gold >$1T [8].

London housing stock >£1T [9].

Global payment streams (value transmission)

Growth in global electronic payments ≈7% [10].

Non-bank market share from 6% to 21% during 2009-13 [10].

Global non-bank payments in major economies >$609B (2011) [11].

Global m-payments ≈ $300B (est. 2013) [12].

PayPal 25% YOY increase in payment volume to $180B in 2013 [13].


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Bitcoin Is Growing Like Bacteria in a Petri-DishMoney will rotate into cryptocurrencies from traditional assets, payment streams [14, 15]

Cryptocurrency economicsEndstate is one dominantnetwork, 2–3 runners-up.

Fast growth (+2σ)Fast rotation into Bitcoinfrom assets, payments.

Steady growthSteady rotation into Bitcoinfrom assets, payments(expected case).

Contraction (−2σ).Bitcoin stagnates, moneyleaks out.

Figure: Growth of Bitcoin market cap modelled asGeometric Brownian motion (µ = 50%, σ = 50%).


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Bitcoin Ecosystem Is Rapidly EvolvingDeveloped countries lead Bitcoin adoption [17, 18, 19]

Milestones to date (2009–14):

Bitcoin foundation established.

>5M downloads of official client.

≈ 3M active hosted wallets.

Accepted by ≈ 40,000 merchants.

$20B annual transaction volume.

$6B annual exchange volume.

$100M in venture funding fromleading VCs.

Ecosystem of exchanges, paymentprocessors, ATMs, payment cards,wallets, miners, vault storage, PtPlending.

$6B+ market cap.

?50Petahash computing power.

Figure: Bitcoin client downloads (percapita) [16].


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Many Governments Recognize BitcoinRegulatory framework for cryptocurrencies is falling into place [20, 21]

[Virtual currencies] may hold long-term promise, particularly if theinnovations promote a faster, more secure and more efficient paymentsystem.

— Ben Bernanke, November, 2013

Relevance Regulatory situationUS Largest

economyConflicting approach of financial and taxauthorities. Bill in Congress to definecryptocurrencies as money.

CN 2nd largesteconomy

Credit bubble, FX controls in place, authoritieseffectively shutting down Bitcoin exchanges.

DE Largest EUeconomy

Recognized as “private money”.

UK LargestFX/goldmarkets

Same treatment as FX and investment gold.


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Bitcoin Is Not Fully De-RiskedMainstream adoption faces hurdles

For

Strong brand recognition.

5+ years of development.

Diverse community of committedparticipants.

Rapidly growing market cap,turnover.

Rapidly growing ecosystem.

Regulatory acceptance in many keyjurisdictions.

Against

Consumer adoption still limited.

Market cap small, liquidity low.

Ecosystem immature.

Conflicting regulatory approaches.

Concentrated ownership.

Potential for market manipulation,collusion.


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Opportunity for Iceland Lies with Consumers, ClearingDigitally advanced nation with abundant energy and substantial tourism [22]

Consumer payments

GDP per capita: $43K.

Internet usage: 91%.

E-payments per capita: 328/year.

Tourists per capita: 2.0/year.

Payment clearing (mining)

≈$600M market, est power requirement ? 30MW.

Computationally intensive, low bandwidth, modestlatency, data and human capital requirements.

Datacenters with competitive Power UsageEffectiveness.


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Bitcoin Is A Leap In The Ascent of MoneyBitcoin pioneers a new category of global, digital, decentralized money

Key themes in near- and middle term are:

Adoption Bitcoin will continue to gain adoption as (i) a global digitalpayments network and (ii) an asset class similar to gold.

Drivers Potential drivers include international cash remittance,micropayments, global inflation.

Price Price will continue to rise if turnover increases faster than supply.

Leaders Democratic countries with (relatively) stable, open financialsystems will extend regulation to Bitcoin (Brazil, Canada, EU, US).

Laggards Autocratic countries with (relatively) vulnerable, closed financialsystems may limit or ban use of Bitcoin (China, Russia).

Threats A better cryptocurrency; regulatory clampdown across G20; globaldeflation; market manipulation of BTC price; collusion of key BTCstakeholders.

Surprises New usecases, new companies not anticipated to date.


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About the Author

Outline



3 About the Author


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About the Author

About Sveinn Valfells, PhDlinkd.in/wtaHi5

Some relevant previous remarks:

Bitcoin is potential dynamite waiting to be ignited.

— Communication with Teddy Shalon, August, 2011

Bitcoin can easily be projected to rise to $20 – $120 within three years.

— Communication with Pamir Gelenbe, January, 2013

We expect Bitcoin clearing [mining] revenues to grow to $600M-$3Bwithin three years [with] energy requirement of 12-70MW.

— Communication with Landsvirkjun, August, 2013 [23]

MtGox failure is not systemic . . . trend of Bitcoin will continue upwardsbut will be interspersed with price spikes and corrections.

— BBC World News & BBC World Business Edition, February, 2014


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About the Author

References

[1] Niall Ferguson. The ascent of money. London: Allen Lane. 2008.

[2] Amar Radia Michael McLeay and Ryland Thomas. Money in the modern economy. http://www.bankofengland.co.uk. Quarterly Bulletin, Q1 2014.

[3] Karl Marx. Das kapital. Hamburg: Verlag von Otto Meisner. 1867.

[4] John Maynard Keynes. The general theory of employment, interest and money. London: Palgrave Macmillan. 1934.

[5] Milton Friedman. A program for monetary stability. New York: Fordham University Press. 1960.

[6] Scotch Branwell. Assembling the bitcoin block chain. http://bitwriters.blogspot.co.uk/. December 2, 2013.

[7] European Central Bank. Virtual Currency Schemes. http://www.ecb.europa.eu. October, 2012.

[8] Wikipedia. Gold reserve. http://en.wikipedia.org/wiki/Gold_reserve. Retrieved June, 2013.

[9] Savills. UK Housing Stock Climbs [to] £5T. http://www.savills.co.uk. February, 2013.

[10] CapGemini, Efma, RBS. The 8th Annual World Payments Report 2012. http://www.capgemini.com. October 9, 2012.

[11] Global Finance. Payments Volumes Worldwide. http://www.gfmag.com. Based on BIS report published January, 2013.

[12] Eileen Yu. Global mobile payment transactions to surpass $235B. http://www.zdnet.com. June 4, 2013.

[13] Ed Parry. Financials. https://www.paypal-media.com/about. Retrieved, April 2014.

[14] Wikipedia. Network effect. http://en.wikipedia.org/wiki/Network_effect. Retrieved June, 2013.

[15] Wikipedia. Geometric Brownian motion. http://en.wikipedia.org/wiki/Geometric_Brownian_motion. Retrieved June, 2013.

[16] John Nelson. The united nations of bitcoin. http://uxblog.idvsolutions.com. October 22, 2013.

[17] Sourceforge. Bitcoin. http://sourceforge.net. Retrived April, 2014.

[18] CoinDesk. State of Bitcoin 2014 . http://www.coindesk.com. February 24, 2014.

[19] blockchain.info. Blockchain.info – charts. http://blockchain.info. Retrieved, April 2014.

[20] Wikipedia. Legality of Bitcoins by country. http://en.wikipedia.org/wiki/Legality_of_Bitcoins_by_country. Retrieved April, 2014.

[21] Stan Higgins. US Congressman to Submit Bitcoin Tax Bill. http://blockchain.info. April 8, 2014.

[22] Various sources incl. Central Bank of Iceland, Statistics Iceland.

[23] Jon H Egilsson & Sveinn Valfells. Global Payment Processing Using Icelandic Energy Resources. Memorandum for Landsvirkjun. August, 2013.


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http://www.bankofengland.co.uk

http://www.ecb.europa.eu

http://en.wikipedia.org/wiki/Gold_reserve

http://www.savills.co.uk

http://www.capgemini.com

http://www.gfmag.com

http://www.zdnet.com

https://www.paypal-media.com/about

http://en.wikipedia.org/wiki/Network_effect

http://en.wikipedia.org/wiki/Geometric_Brownian_motion

http://uxblog.idvsolutions.com

http://sourceforge.net

http://www.coindesk.com

http://en.wikipedia.org/wiki/Legality_of_Bitcoins_by_country

bitcoin and the future of money (icelandic version)

Economy & Finance

inwtahi5 bitcoin

ascent of money

time money

modern civilisation

central bank money

iou fiat money

brief history money

physical commodity money