Why I Changed My Mind About Bitcoin

December 12, 2015

Purpose

Discuss how the evolution of Bitcoin could disrupt the financial system, creating some

investment opportunities along the way

Disclaimer

I have no expertise in Bitcoin or any other digital currency. This presentation is for educational purposes and should not be construed as specific investment advice.

Content

• Definition of Bitcoin• Current state of the bitcoin economy• How to acquire and store bitcoins• How they are used today• Why I changed my mind about Bitcoin• Primary risks• How to become a Bitcoin Billionaire

What is Bitcoin?

• Bitcoin is digital money used for secure and instant transfer of value anywhere in the world

• The Bitcoin network is an open network managed by its

users – not controlled by any company or government

• Bitcoin is an improvement on existing payment methods which were not designed for the internet era

• introduced in 2008 by the pseudonymous developer Satoshi Nakamoto (Craig Stephen Wright?)

Big B and little b

• Bitcoin is both a global transaction network (Bitcoin with a capital “B”) and a digital currency (bitcoins with a lowercase “b”) used for secure and instant transfer of value

• In simple terms, it is a big public spreadsheet with some passwords and a way to keep it from being hacked

• First purely digital asset, allowing value to be sent like sending an email, without requiring permission or involvement of any other institution

The Public Ledger

• when bitcoins are transferred over the network, the transaction is recorded in a public ledger known as the “blockchain”

• copies distributed over many servers globally

• security key or password required to control the bitcoins that the ledger says you own

• all transactions are permanently stored and the complete history is viewable by everyone

How are bitcoins created?

• bitcoins are generated through a process known as mining

• mining process involves solving a complex mathematical equation in order to generate a unique digital signature

• generated at fixed intervals according to a mathematical algorithm (currently 25 / 10 min.)

• total number of bitcoins capped at 21 million by the year 2140

How do people get bitcoins?

• mining• purchase from an exchange, e.g., Coinbase• accept bitcoin as payment• buy directly from another individual

Where can you store them?

• online wallet or vault

• local wallet on your phone, PC or network drive

• usb drive or print it and store it in your safe/safe deposit box

Where are they used today?

• Online purchases at many small and large merchants

• Brick and mortar: home furnishings, yachts• International business payments• Person-to-person payments• Pay contractors and salaries• Donations: United Way

Some Widely-known Merchants

Exponential Growth Opportunity: Internet of Money

• revolutionary financial innovation enabled by the blockchain ledger

• decentralized, trustless – no single entity or server in control

• very low transaction fees• open source software – 75% already re-

written since release

Glaring Opportunity

Remittance market exceeds $1T annually

Innovation Driven by VC and Top Technologists

• Highly respected technology venture capital investors and top technology entrepreneurs

• Large financial institutions (NYSE, NDQ, GS, etc)• $140M 2013, $340M 2014, ~$1B 2015• > 30,000 programmers on Bitcoin-related

projects• Expect (hope?) a killer app within 12-18 months

that will drive global adoption

Innovation focus

• Making bitcoin easy to use• Creating the middleware for easy connection

to the financial world• Replacements for existing financial

applications• New applications not possible in today’s

financial system

Innovation Examples

• Making it as easy to use as Visa, MC, etc• Issue and trade securities, pay dividends• Host complex financial prods: derivatives, swaps• Record real property titles• Store encrypted medical records• Micropayments: single article, one time views,

avoid ads• Back-office efficiencies: internal flows of funds• Smart Contracts

Simplified Valuation Approaches

Money supply vs GDP: Nepal $18B $857/btc or Vermont $31B $1476/btc

Payment company: Western Union moves $200M valued at 10.9B $519/btc

Store of value: Gold $7T x 5% $16,666/btc

Wedbush Securities Valuation Estimate

Is Bitcoin Safe?

• Bitcoin’s core protocol has been vetted by thousands of top security researchers

• Using bitcoin is similar to using other private applications on the internet, such as email or online banking

• You access your bitcoin with a password in order to

ensure only you have access to your money

• Therefore it is critical to protect your password

Security breeches?

• inadequate wallet security• attacks on websites that use bitcoins• no attacks on blockchains that led to stolen

money• no heists from exploiting the protocol• no thefts due to holes with the original Bitcoin

client

Primary Risks

• Adoption stagnates, does not achieve significant market size

• Better digital currency

• Regulations too strict

How to become a Bitcoin Billionaire

• Own bitcoins directly

• Bitcoin Trust, ETF

• Venture capital

• Short Western Union

Closing Thoughts to Ponder• GS: 33 percent of millennials don’t expect to have a bank account

in 5 years• 2.5B people don’t have bank accounts today, and 4B people

without credit cards• How are they going to get their financial and banking services?• With Bitcoin, you can be your own bank• If you can put software on someone’s phone that replaces

banking functions, that is a big deal• Doesn’t matter if you were born in the first world or the third

world• Provides financial independence to people without someone

dictating what they can and can’t do

Questions

Supplemental

Bitcoin Transaction

Acquire and Transfer via Exchange