Bitcoin Mania

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    Is Bitcoin really a currency?

    David YermackNYU Stern School of Business

    November 22, 2013

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    What is Bitcoin?

    A stateless , algorithmiccurrency

    That exists only in cyberspace

    Major demand is in U.S., China, and certainEuropean countries

    Bitcoin / USD exchange rate: July 17, 2010 1 Bitcoin = $ 0.0495

    November 21, 2013 1 Bitcoin = $740.5948

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    Bitcoins appreciation vs. USD

    Past week 71%

    November 2013 (so far) 251%

    2013 year to date 5,382%

    Since inception 1,495,749%

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    Daily trading volumeMt. Gox exchange

    2010 2011 2011 2012 2013$0

    $10

    $1,000

    $100,000

    $10,000,000

    $1,000,000,000

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    History of Bitcoin

    Bitcoin is proposed as a peer to peer electronic cash systembyan unknown software engineer, October 2008.

    First Bitcoin issued electronically, January 2009.Current worldwide supply = c. 12 million.

    Mt. Gox trading market opens, July 2010.

    U.S. Treasury issues first regulatory guidance for virtual currencies,March 2013.

    Federal regulators, including Bernanke, comment favorably uponBitcoin at the U.S. Senate hearing, November 2013.

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    Bitcoins appeal

    Bitcoins value cannot be debased by anygovernment.

    The supply of Bitcoins can only grow slowly andis limited by a computer alogrithm to 21 million.

    Bitcoin attacts young, affluent users ofeCommerce.

    Seigniorage revenue goes to entrepreneurs whominenew Bitcoins by solving math problems.

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    Does Bitcoin have the

    characteristics of a currency?

    A currency is . . .

    1. A medium of exchange2. A unit of account

    3. A store of value

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    Bitcoin ATM

    Installed in a Vancouvercoffee shop, October 2013

    Victoria Hansen makesfirst-ever transaction

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    Bitcoin investment vehicles

    Winklevoss Twins claim to own 1% of worldwide supply,July 2013, and file for IPO of the Wilklevoss Bitcoin Trust

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    Does Bitcoin have a stigma?Silk Road online drug market

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    Bitcoins security risksDenial-of-service attacks depress Mt. Gox trading volume, April 2013

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    Bitcoins beta

    -10% -5% 0% 5% 10%

    Market return

    -50%

    -40%

    -30%

    -20%

    -10%

    0%

    10%

    20%

    30%

    40%

    50%

    Bitcoin

    return

    Slope = 0.67

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    Whats the best hedge for Bitcoin?Growth stocks like Vitamin Shoppe (NYSE VSI): = 0.607

    Vitamin Shoppe 2011-12

    (rescaled)

    Bitcoin 2011-12

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    Bitcoins volatility2013 to date

    Euro / USD Bitcoin / USD

    0.00

    0.20

    0.40

    0.60

    0.80

    1.00

    1.20

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    What can you notdo with Bitcoin?

    Store it in a real bank that has depositinsurance

    Spend it anonymously

    Sell it short

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    Bitcoins greatest vulnerabilityMarket entry by competitors