AGBC - 2018-05-30 - Crypto-Currencies

AGBC AMERICAN-GERMAN BUSINESS CLUB CRYPTO-CURRENCIES
What, Why and How

Crypto-Currencies
Extended reading material for panel discussion at AGBC event on May 30, 2018
1|Page
Disclaimer
This document is for informational and educational purposes only and shall not be taken as investment advice. Nothing posted here shall constitute a
solicitation, recommendation or endorsement to buy or sell any security or other financial instrument. The author may or may not have financial interests in
any instruments mentioned. I may buy or sell at any time, might not disclose those actions and might not necessarily disclose updated information should
we discover a fault with our analysis. The author has no obligation to update any information posted here. I reserve the right to make investment decisions
inconsistent with the views expressed here. We can't make any representations or warranties as to the accuracy, completeness or timeliness of the
information posted. All liability for errors, omissions, misinterpretation or misuse of any information posted is excluded.
2|Page
Contents
Why Do We Need Crypto-Currencies? ............................................................................................................ 5
Even Your Cash is a Liability ............................................................................................................................ 6
World Debt ...................................................................................................................................................... 7
Credit Crisis Occurs Every Few Years ............................................................................................................... 9
Solution: Crypto ............................................................................................................................................ 11
Caution Advised ............................................................................................................................................ 12
What is Bitcoin not? ...................................................................................................................................... 14
What is Bitcoin? ............................................................................................................................................ 15
Coin or Token? .............................................................................................................................................. 16
Is Bitcoin Money? .......................................................................................................................................... 17
How to Get Bitcoin? ...................................................................................................................................... 18
Where to Keep Bitcoin? ................................................................................................................................ 19
Is Bitcoin Secure? .......................................................................................................................................... 20
Why Do We Need Mining? ............................................................................................................................ 21
What is a miner? ........................................................................................................................................... 22
Mining equipment race ................................................................................................................................. 23
3|Page
Mining equipment efficiency......................................................................................................................... 24

Mining factors ............................................................................................................................................... 25
Mining Statistics ............................................................................................................................................ 26
Transaction Speed ......................................................................................................................................... 31
Transaction Fees ........................................................................................................................................... 32
Bitcoin Keys and Addresses ........................................................................................................................... 34
Asymmetric cryptography ............................................................................................................................. 37
Elliptic Curve Cryptography ........................................................................................................................... 38
How High Could Bitcoin Go? ......................................................................................................................... 39
Recommended Reading ................................................................................................................................ 40
4|Page
Why Do We Need Crypto-

Crypto-Currencies?
• Our current monetary system does not allow debt-free saving; for
someone to save, someone else has to incur debt
• Notes and coins in your pocket show up under ‘liabilities’ at the central
bank
• Savings in your bank account show up under ‘liabilities’ from the bank’s
perspective. You are a creditor of a highly leveraged financial institution
• Your life insurance has invested your retirement money in debt
instruments of countries / corporations of various quality
• Your government has not even accounted for the money it owes you
upon retirement
5|Page
Even Your Cash is a Liability
• US Federal Reserve Bank, amounts in billion USD
6|Page
World Debt
• World debt has reached $237 trillion (World GDP = $75 trillion)
• Debt needs to be serviced (interest + principle)
7|Page
• Debt is rising faster than interest-bearing assets

• Central banks know debt has become unsustainably high, but all they can
do is lower interest rates. Negative interest rates punish the saver,
rewarding those who take up even more debt
• “Free” money encourages financing of projects / take-overs / expansion
that would otherwise have never happened. Zero-interest-rate-policy
guarantees misguided investments, that will not be able to support the
attached debt
Reduction of debt only possible in 3 ways

1 – repayment (unlikely; reduction in debt level causes recession)
2 – inflation (wealth transfer from savers to debtors)
3 – default or bankruptcy (same)
8|Page
Credit Crisis Occurs Every Few Years
Year Debtor Cause Remedy

1982 Latin-America Debt quadrupled in 7 years IMF bailout
1980’s US S&L Banks Lending long-term, borrowing Bank resolution
short-term (merger/closure)
1994 Mexico Strong credit growth $50bn bailout by US
government
1997-8 Asian crisis Foreign currency debt IMF bailout
1998 Russian default Foreign currency debt IMF bailout
1998 LTCM Indebted hedge fund Bailout by banks
2008 US + EUR banks Housing bubble debt Bailout by
governments
2010-2 PIIGS (Portugal, High indebtedness Bailout by IMF and
Italy, Ireland, government rescue
Greece, Spain) funds
• Recurring credit problems, but bailout required gets bigger and bigger
9|Page
To summarize:
• No creation of money without creation of debt
• Economy cannot grow without growth of debt
• Rate of growth of debt is unsustainable
• Financial institutions have become “too-big-to-bail” as they would bring
down entire governments
• During last financial crisis (2008/9), debt has been pushed upwards from
(insolvent) banks to governments and supra-national institutions (IMF).
But where can we push debt during the next credit crisis?
• A collapse of debt would imply a collapse of savings, as both are linked.
• Savers, pensioners and investors could lose everything
=> There MUST be a better way
10 | P a g e
Solution: Crypto
• Crypto-currencies offer debt-free saving (your savings are nobody else’s
debt – just like a gold coin in your pocket)
• Limited issuance crypto-currencies = no inflation, no punishment of saver
• Stable financial system => stable societies, fewer extremism
Implications:
• Households, corporations, governments, countries will have to run
balanced budgets (temporarily depressing growth)
• Existing debt in fiat* currencies might have to be written off
• Existing savings in fiat: same
• Natural state of economy might be deflation
*) “fiat” money: no intrinsic value, not backed by anything. Derives value from public trust and official
decree (Latin “fiat” = “let it be done”). Euros, Dollars, Swiss Francs etc. are fiat money.
11 | P a g e
Caution Advised
Beware of:
• “Free” coins / token scams (nobody is doing a “Bitcoin giveaway”)
• Investment schemes promising gains
• Obscure coins and tokens being promoted as the “next Bitcoin”
• “Pre-ICO sale” (pre-Initial Coin Offering, though some may make sense)
• ICO (Initial Coin Offering, though some may make sense)
• Online digital wallets (insecure)
• Leaving large amounts of coins with exchanges (get hacked)
• Unintentionally sending coins to wrong address (irreversible)
• Losing password for digital walled (all coins lost)
• Forgetting to include access to coins in your will (all coins lost)
12 | P a g e
• The price you see is an average of many exchanges; your exchange will
have different bid and offer prices; your exchange’s website might not be
accessible during periods of high volatility
• Correlation between various coins and tokens has recently increased. Just
as in the stock market, you may own the best horse, but that will be of
little help if the overall market is in a foul mood.
Bitcoin has already seen 4 bubbles and 4 crashes. There is no reason why
the current correction won’t
be similarly gruesome. An
80% drop from the top
(20,000) would take us to
$4,000; a 90% drop to
$2,000. Just be mentally
prepared.
13 | P a g e
What is Bitcoin not?
• Bitcoin is not a coin you could touch (every media article inevitably shows
a picture of a coin, often in gold)
• Bitcoin is not encrypted
14 | P a g e
What is Bitcoin?
• Bitcoin is a protocol (just like ‘http’ is ‘hypertext transfer protocol’)

• Bitcoin is a network (miners, nodes, holders, merchants)
• Bitcoin is a crypto-currency
• Unit = 1 Bitcoin = 100,000,000 Satoshi (just like dollars and cents)
• 1 BTC = USD 7,500 (May 2018)
• 1 Satoshi = ¾ of 1/100th of a cent (May 2018)
15 | P a g e
Coin or Token?
• Coins and tokens are digital

representations of an asset or utility
• They can be anything that is
fungible and tradeable, like loyalty
points or crypto-currencies
• Next to Bitcoin there are 851
other coins (aka alt-coins)
• Bitcoin account for almost half of
the value of all coins
• Coins act as money; their function is payment and/or saving
• Tokens have a broader function; they may be consumed (like a concert
ticket, giving access to specific event at specific time, expiring afterwards)
16 | P a g e
Is Bitcoin Money?
Fiat Currency Gold Bitcoin

Store of value Short-term Yes Hopefully yes
Medium of Yes Not really* Hopefully yes
exchange
Unit of account Yes Not directly* Yes
Divisible Yes Not really* Yes
Fungible Yes Mostly yes Yes
Durable Depends Yes Yes
Transportable Depends Yes Yes
Acceptance Yes Depends In future
Counterfeit Difficult Difficult No
Limited supply No Yes Yes
*) gold-backed fiat currency: yes
17 | P a g e
How to Get
Get Bitcoin?
• Purchase at a Bitcoin ATM against fiat money (list:

https://coinatmradar.com/countries/ ). There are, to my knowledge, zero
Bitcoin ATM’s in Germany. Nearest ones in Austria and Switzerland (all
Swiss railway company ticket machines able to sell Bitcoin)
• Open account at an electronic exchange (list:
https://en.wikipedia.org/wiki/List_of_bitcoin_companies ), transfer
money, purchase Bitcoin online
• Offer goods and services for sale against Bitcoin
• Receive Bitcoin as a gift or inheritance
• Invest in Bitcoin mining equipment / join a mining pool (not
recommended)
18 | P a g e
Where to Keep
Keep Bitcoin?
• At the electronic exchange it was purchased (not recommended)

• In a third-party online digital wallet (not recommended)
• On your home computer that connects to the internet (not
recommended)
• In a digital wallet on a computer or USB drive that is NOT connected to
the Internet
• In a digital wallet like ‘Trezor’ or ‘Ledger’ (USB-like devices), secured by a
PIN and a recovery ‘seed’ in case you lose / forget the PIN. Keep a backup
of the recovery seed printed on paper in a fireproof safe
• In a digital wallet on your mobile phone (recommended only for small
amounts for daily use)
19 | P a g e
Is Bitcoin Secure?
Secure?
• From today’s perspective it is secure. While exchanges have been hacked

and Bitcoins stolen, the Bitcoin network has never been compromised
• All transactions that ever happened are recorded in the blockchain; you
can look at every of the more than 500,000 blocks here
https://blockchain.info/ and even look at every transaction within
• The amount of Bitcoin someone owns is constantly calculated as the
balance of all your ‘inputs’ (for example transfer from an exchange) and
‘outputs’ (for example payment for a t-shirt).
• The Bitcoin network, consisting of more than 7,000 ‘nodes’, verifies each
transaction. Fraudulent transactions are rejected from the pool of
unconfirmed transactions. They will not be included in the next block and
therefore will not enter the blockchain.
• It is close to impossible to alter historic blocks
20 | P a g e
Why Do
Do We
We Need
Need Mining?
• A ‘miner’ picks roughly 1,000 items from the pool of unconfirmed

transactions and tries to mine them into a block by solving a difficult
mathematical puzzle.
• The miner has to spend considerable time and energy in order to
successfully mine a block. If he tried to insert a fraudulent transaction, his
block would get rejected by the majority of nodes, and the block would be
left hanging as an ‘orphan’. The block chain would simply ‘fork’. Miners
would continue to add blocks to the ‘honest’ chain. Nodes always identify
the longest chain as the ‘honest’ one.
• If a miner’s block is rejected, the fraudulent transaction does not become
part of the blockchain. There is hence no unspent output for the miner to
use (no benefit), while he still has to pay his electricity bill. This is what is
called “proof of work” (proof you have spent energy).
21 | P a g e
What is a miner?
miner?
• This is an AntMiner S9 by
Chinese company Bitmain
• It is a specialized
computer chip (ASIC) only
used to solve the
mathematical puzzle
• It can process 14 trillion
‘hashes’ (or 14 tera-hashes or
TH) per second
• It consumes 1,375 Watt
and emits a lot of heat
• Despite its processing power, the first Bitcoin can expected to be mined
after 40 years
22 | P a g e
Mining equipment race
• As price of Bitcoin
rose, mining became
very profitable
• This attracted more
miners, leading to faster
mining of blocks
• This automatically led
to an increase in mining
difficulty by the network
• This forced miners to
upgrade their equipment for even faster and more energy-efficient
mining.
23 | P a g e
Mining
Mining equipment efficiency
• Mining equipment
has become more
energy efficient over
time
• Latest machinery
achieves 0.6 Joule per
giga-hash, a 10x
improvement since
2013
• However, due to the amount of new mining equipment added, energy
consumption still skyrocketed
24 | P a g e
Mining factors
25 | P a g e
Mining Statistics
• This is from May 29

• Over 24 hours, 156
blocks have been mined,
or 1 block every 8.66
minutes on average
• As the network is set up to mine a block every 10 minutes, the mining
difficulty will be increased further should this persist after 2016 blocks (8
days).
• Around $400 million worth of transactions were added to the blockchain
26 | P a g e
• There were
around 250,000
transactions
• Miners were
rewarded with
roughly $200,000 in
transaction fees
• This amounts to a
fee of $1.27 per item
• But miners get also rewarded with Bitcoin; currently 12.5 BTC per block
• 12.5 x 156 x BTC price = $14.5 million
• Note how transaction fees make up less than 2% of total miner revenue
27 | P a g e
• “Difficulty” is the
above mentioned
setting to ensure
constant mining
• All miners
together currently
have a hashing power
of 33 quintillion
calculations per
second
• More than 2 million AntMiners S9 would be needed to achieve this hash
rate, consuming more than 3 GigaWatts
• Assuming an electricity price of $0.15/kWh this would result in electricity
cost of almost $0.5 million per hour
• Mining revenue is currently slightly above at $0.56 million
28 | P a g e
• Some locations sport much lower electricity cost; mostly near large hydro-
electric dams (Wenatchee-Valley near Seattle, WA, where electricity is
available at $0.02/kWh, or subsidized electricity near Chinese coal plants)
• Total Bitcoin network energy consumption is estimated to be equal to
that of Denmark or Ireland
• This sounds shocking. However, those countries have less than 5 million
inhabitants. If Bitcoin was to replace the entire banking system, a lot of
energy currently spend on computers, heating, lighting etc. of millions of
bank branches could be saved.
• Mining could be an opportunity for providers of wind and solar energy in
order to convert electricity into Bitcoin during times of low demand but
peak production (ie solar at lunch time)
• You can see that many miners will become unprofitable should the price
of Bitcoin fall further. This would reduce energy consumption
29 | P a g e
• As mining block reward is halved again in the year 2021 to 6.25 BTC per
block, mining revenue will depend more and more on transaction fees
• The current “subsidy” for miners from block rewards (98% of their
revenue) is meant as a temporary incentive for miners until transaction
volume will be high enough to secure their ‘income’.
30 | P a g e
Transaction Speed
• An area where Bitcoin needs to improve is transaction speed

• Currently only 2 transactions per second take place
• VISA and MasterCard alone process more than 1,700 transactions per
second
• The size of block is currently capped at 1 MB, and with 1 block every 10
minutes the chain can only grow by 525,000 / 10 = 52.5 GB per year
• This would bloat the blockchain to huge size within a short time
31 | P a g e
Transaction Fees
• Due to sudden
increase in popularity
and transactions,
average transaction
fees soared to almost
$40 at the end of
2017
• The average fee
per transaction is
currently at $1.40
• The fee is independent of the amount; it is calculated based on size in
bytes (multi-input and –output transactions are larger)
• Your wallet will suggest fees for you
32 | P a g e
• One fee suggestion would ensure inclusion within, say, the next two
blocks mined (2 x 10 = 20 minutes), currently at 9 Satoshis per byte
(roughly $0.27 for a simple transaction)
• Another fee suggestion would ensure inclusion within the next six blocks
(1 hour); this would currently cost 4 Satoshis per byte (roughly $0.12 for a
simple transaction)
• The Bitcoin fee estimator (https://estimatefee.com/) shows all fees
currently offered by transactions waiting to be included in the next
block(s)
• Miners will, of course, pick those transactions with the highest fees
offered first, as this will increase their revenue
33 | P a g e
Bitcoin Keys and Addresses

Addresses
• A Bitcoin
account
consists of an
address, a
private key and
a public key
• A Bitcoin
address is
similar to the
beneficiary
name of a bank
account
• The public key is comparable to an account number
• The private key is similar to a PIN or signature
34 | P a g e
• The Bitcoin address is derived from the public key

• The public key is derived from the private key
35 | P a g e
• This is an example of a Bitcoin address

• It is single use (like throw-away email address)
• Randomly generated
• 64 characters in hexadecimal (0-9, A-F) = 64 x 4 = 256 bits
• 2 256 = 10 77 possible different addresses (almost as many as the number of
atoms in the visible universe)
• With the command “getnewaddress” a user’s wallet generates public key
and address from stored private key
36 | P a g e
Asymmetric cryptography
• Hard to guess, easy to verify

• Example: find 4 digits where sum = 10
• Possible Solutions (for example)
• 1 + 2 + 3 + 4 = 10
• 1 + 1 + 1 + 7 = 10
• 2 + 2 + 3 + 3 = 10
• 4 + 3 + 2 + 1 = 10
• Verification: 4 + 3 + 2 + 1 = 10
• You can make scrambled eggs from raw
eggs, but the reverse is impossible. You cannot know which combination
of all possible solutions I had in mind, but you can easily verify it’s true.
37 | P a g e
Elliptic Curve Cryptography
• Trapdoor function (one-way)

• Elliptic curve function (public)
• Starting + end point (public)
• Number of times ‘n’ (secret)
• Public key = private key x “G”
• G = generator point
38 | P a g e
How High
High Could
Could Bitcoin Go?
Go?
For those who say $20,000 per Bitcoin was crazy, here is a little
thought experiment:
• World debt = $237 trillion
• Maximum Bitcoin outstanding = 21 million
• 237,000,000,000,000 / 21,000,000 = ~ 10 million
That, of course, would assume all fiat money in the world is
converted into Bitcoin.
39 | P a g e
Recommended Reading
• “Mastering Bitcoin” by Andreas Antonopoulos (quite technical)

• YouTube videos by same author
• YouTube videos by Roger Ver
• New Money Review (http://www.newmoneyreview.com/) by Paul Amery
• Follow all those above on Twitter (@aantonop, @rogerkver,
@newmoneyreview)
Munich, June 1st 2018

Alexander Gloy
Alex.Gloy@LighthouseInvestmentManagement.com
40 | P a g e

AGBC - 2018-05-30 - Crypto-Currencies

Загружено:

Сведения о документе

Исходное описание:

Авторское право

Доступные форматы

Поделиться этим документом

Поделиться или встроить документ

Параметры публикации

Этот документ был вам полезен?

Это неприемлемый материал?

Авторское право:

Доступные форматы

AGBC - 2018-05-30 - Crypto-Currencies

Загружено:

Авторское право:

Доступные форматы

AGBC AMERICAN-GERMAN BUSINESS CLUB CRYPTO-CURRENCIES

What, Why and How

Mining equipment efficiency......................................................................................................................... 24

Why Do We Need Crypto-

Even Your Cash is a Liability

• US Federal Reserve Bank, amounts in billion USD

• Debt is rising faster than interest-bearing assets

Reduction of debt only possible in 3 ways

Credit Crisis Occurs Every Few Years

Year Debtor Cause Remedy

=> There MUST be a better way

What is Bitcoin not?

• Bitcoin is a protocol (just like ‘http’ is ‘hypertext transfer protocol’)

• Coins and tokens are digital

Fiat Currency Gold Bitcoin

• Purchase at a Bitcoin ATM against fiat money (list:

• At the electronic exchange it was purchased (not recommended)

• From today’s perspective it is secure. While exchanges have been hacked

• A ‘miner’ picks roughly 1,000 items from the pool of unconfirmed

Mining equipment race

• This is from May 29

• An area where Bitcoin needs to improve is transaction speed

Bitcoin Keys and Addresses

• The Bitcoin address is derived from the public key

• This is an example of a Bitcoin address

• Hard to guess, easy to verify

Elliptic Curve Cryptography

• Trapdoor function (one-way)

• “Mastering Bitcoin” by Andreas Antonopoulos (quite technical)

Munich, June 1st 2018

Вам также может понравиться