Introduction to Bitcoin and Its Potential to Transform Finance

An introduction.
Itay Damti (itay.damti@leverate.com)

Think about it for a second:
The internet is killing the world’s most
powerful mediators, slowly but surely.
Yet it has barely touched finance.

Things we’ll squeeze into this talk.

• What is money?

• What is money?

• What makes Bitcoin a different kind of money?

• What is money?


• How does Bitcoin work? (micro + macro)

• What is money?


• Fresh numbers from the Bitcoin economy.

• What is money?


• Why Bitcoin is so good, that it simply can’t fail.

• What is money?


• Why Bitcoin is so good, that it simply can’t fail.
• Why Bitcoin can fail.

Let’s talk about money first.

• Money is a medium to store and exchange economic value
• Was invented to replace barter (inefficient)
• Money can be exchanged for goods and services (including other money)
• Historic examples: shells, boards, gold


• 7 things that a good currency must be:
• Acceptable, Divisible, Durable, in limited supply, Portable, Uniform, Stable



• Value of a currency: balance between supply and demand



• Does money come with guarantee of value?



• Strong guarantee: intrinsic (Gold)



• Medium guarantee: convertible into a resource with intrinsic value (old USD -> Gold)



• Medium guarantee: convertible into a resource with intrinsic value (old USD -> Gold)
• Low guarantee (“Fiat money”): USD, ILS, HKD, Bitcoin

Bitcoin is money.
• From the Washington Post:

Bitcoin is: an electronic cash system that allows
online payments to be sent directly from one
person to another without going through a
financial institution (like a bank) or a third party
(like PayPal).
• It has (almost) all the properties of a good currency.

But it’s a different kind of money.


• Bitcoin has all the properties of a good currency, remember?


• What makes it different?


• It’s completely digital (owning Bitcoin is cryptographic digital information).


• It’s completely decentralized and not owned by anyone (company, country).


• It’s completely decentralized and not owned by anyone (company, country).
• It’s based on open sourced software and an open network.


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•
•
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It’s completely digital (owning Bitcoin is cryptographic digital information).
It’s completely decentralized and not owned by anyone (company, country).
It’s based on open sourced software and an open network.
It was started by an anonymous entity (Satoshi Nakamoto, 2008)

Micro: how do you use Bitcoin?

• Install an open source wallet software (or choose an online wallet)

• The wallet will create:
• Your address: 13v8NB9ScRa21JDi86GmnZ5d8Z4CjhZMEd (31, base 58)
• Your private key: 5KJvsngHeMpm884wtkJNzQGaCErckhHJBGFsvd3VyK5qMZXj3hS (51, base 58)


• Receiving Bitcoin is like receiving email: just give your address to
someone else.


someone else.
• Sending Bitcoin is like sending email: just put the recipient’s address,
choose amount and press “send”.


someone else.
• Sending Bitcoin is like sending email: just put the recipient’s address,
choose amount and press “send”.
• How to buy Bitcoin in the first place?

Macro: Bitcoin in numbers.
• BTCUSD rate: 557 USD

• Total Bitcoins today: ~12.4M

• Total Bitcoins today: ~12.4M
• Market cap today: ~6.9 bn USD

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•

BTCUSD rate: 557 USD
Total Bitcoins today: ~12.4M
Market cap today: ~6.9 bn USD
Total active Bitcoins wallets (accounts): 2.5M~ (source: reddit)

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•

Bitcoin transactions daily: 50-70k (100-200k BTC, 50-100M USD)

•
•
•
•
•
•

Businesses accepting Bitcoins globally: ~36k

•
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•
•
•
•
•

You can divide 1 Bitcoin down to the level of 0.00000001 BTC

•
•
•
•
•
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•
•

$100M are expected to be invested in Bitcoin startups in 2014

•
•
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$100M are expected to be invested in Bitcoin startups in 2014
Biggest Bitcoin wallet (account) contains 144,000 BTC.
And it belongs to…

Macro: Digital & Decentralized explained.

3
1

This is the global Bitcoin network.
It’s distributed:

2


3
1

It’s distributed:
• There’s no Bitcoin inc.

2


3
1

It’s distributed:
• There are no servers that
approve transactions.

2


3
1

2

It’s distributed:
• In fact, there are no servers at
all. All nodes are equal.


3
1

2

It’s distributed:
• Every node holds the complete
state of the Bitcoin economy.
Let’s see it in action.

Address
1

3

Balance (BTC)
100

2

200

3

300

1

2

It’s distributed:

Address
1

100

2

200

3

3

Balance (BTC)

300

1
Sender

2

Receiver

Amount

Signature

It’s distributed:

Address
1

100

2

200

3

3

Balance (BTC)

300

1
Sender

Amount

Signature

1

2

Receiver
2

10

1

It’s distributed:

Address
Address
1
1
2
2
3
3

3

Balance (BTC)
Balance (BTC)
100
100 90
200
200 210
300
300

1
Sender

Amount

Signature

1

2

Receiver
2

10

1

It’s distributed:

Address
Address
1
1
2
2
3
3

3

Balance (BTC)
Balance (BTC)
100
100 90
200
200 210
300
300

1
Sender

Amount

Signature

1

2

10

1

2

2

Receiver

3

10

2

It’s distributed:

Address Balance (BTC)
1
100
1
100 90
1
90
2
200
2
200 210
2
210 200
3
300
3
300
3
300 310

3
1
Sender

Amount

Signature

1

2

10

1

2

2

Receiver

3

10

2

It’s distributed:

1
100
1
100 90
1
90
2
200
2
200 210
2
210 200
3
300
3
300
3
300 310

3
1
Sender

Amount

Signature

1

2

10

1

2

3

10

2

3

2

Receiver

2

30

3

It’s distributed:

1 Address Balance (BTC)
100
1
100 90
1
90
2 1
200 90
2
200 210
2
210 200
3 2
300 200 230
3
300
3
300 310
3
310 280

3
1
Sender

Amount

Signature

1

2

10

1

2

3

10

2

3

2

Receiver

2

30

3

It’s distributed:

1 Address Balance (BTC)
100
1
100 90
1
90
2 1
200 90
2
200 210
2
210 200
3 2
300 200 230
3
300
3
300 310
3
310 280

3
1
Sender

Receiver

Amount

Signature

1

2

10

1

2

3

10

2

3

2

30

3

10 MINS: CLEARING!

2

2

It’s distributed:


Address
1

90

2

255 (25 BONUS!)

3

3

Balance (BTC)

280

1
Sender

2

Receiver

Amount

Signature

It’s distributed:


Address
1

90

2

255 (25 BONUS!)

3

3

Balance (BTC)

280

1
Sender

Receiver

Amount

Signature

WTF?
What was that “clearing” message?

2


Address
1

90

2

255 (25 BONUS!)

3

3

Balance (BTC)

280

1
Sender

Receiver

Amount

Signature

WTF?
• It happens every ~10 minutes.

2


Address
1

90

2

255 (25 BONUS!)

3

3

Balance (BTC)

280

1
Sender

Receiver

Amount

Signature

WTF?
• It’s called mining.

2


Address
1

90

2

255 (25 BONUS!)

3

3

Balance (BTC)

280

1
Sender

2

Receiver

Amount

Signature

WTF?
• It levels the network: it makes
everyone agree on one current
picture.


Address
1

90

2

255 (25 BONUS!)

3

3

Balance (BTC)

280

1
Sender

2

Receiver

Amount

Signature

WTF?
picture.
• The winner is random
(proportional to your CPU
power)


Address
1

90

2

255 (25 BONUS!)

3

3

Balance (BTC)

280

1
Sender

2

Receiver

Amount

Signature

WTF?
picture.
power)
• Expected production


Address
1

90

2

255 (25 BONUS!)

3

3

Balance (BTC)

280

1
Sender

2

Receiver

Amount

Signature

WTF?
picture.
power)
• Expected production
• The state of mining [2] [3]

Bitcoin just can’t fail #1
“The big 5” trillion-dollar economies that don’t like Bitcoin:


1. Credit cards: Bitcoin has very low (close to zero)
transaction fees (CC: min $0.2 + 2-3%)


2. Micropayments: Bitcoin is micropayments-ready.


3. Banking & Financial Inclusion: half of the world
doesn’t have a bank account.


4. Money remittance


4. Money remittance
5. Gold

• It’s anonymous (sort of). So you can do illegal shit with it.

• It’s inflation free (21M BTC in circulation by 2140- that’s it).

• It has no single point of failure (banking system, countries).

• It’s international (globalization-ready).

• Chargebacks will be more rare (transactions are irreversible).

• It publishes its entire history (easier to track/tax?)

• It publishes its entire history (easier to track/tax?)
• It’s innovation-ready (transparency & protocol)

Well, actually Bitcoin can fail.

• PKI cryptography could get hacked (very unlikely).

• Private keys could get hacked (quite likely).

• Countries and regulators.
• Can be used for illegal activity.
• Affects taxing, consumer protection, AML laws.
• Bitcoin is considered barter.


• Consumers & merchants.

• Software is clumsy and hard to use.
• Considered too risky, unstable or “just a Ponzi scheme”


• Consumers & merchants.

• Software is clumsy and hard to use.
• Considered too risky, unstable or “just a Ponzi scheme”

• Crazy volatility (BTCUSD rate) and high sensitivity.
• Mt. Gox halts withdrawals
• Apple takes blockchain.info wallet off the AppStore
• Regulation talks

• We don’t know what we don’t know.

However:
The internet is killing the world’s most powerful
mediators, slowly but surely.

I believe that cryptocurrencies will transform
our economy in radical ways.
If it’s not Bitcoin, and not today, it will be another
“cut the middleman” currency with the same
properties, sometime in the future.*
* Yes. It’s part rational and part ideological.

A (somewhat) decentralized discussion.

More info?
• BTC IL
• Bitcoin.org
• https://blockchain.info/

Introduction to Bitcoin and Its Potential to Transform Finance

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