In case you missed the presentation Bitcoin: A New Paradigm or a Financial Bubble?, here is what was discussed by Dr. Werner Kristjanpoller, our RMU Fall 2017 Rooney International Scholar.

Dr. Werner Kristjanpoller:

• professor in the Industrial Engineering Department at Universidad Técnica Federico Santa María (UTFSM), in Chile
• Career Director of Industrial Engineering for UTFSM’s main Campus
• Director of 3ie – the Business Incubator of UTFSM
• Ph.D in Business Studies at the Universidad Autónoma de Madrid, in Spain
• MBA from UTFSM
• Industrial Engineer
• Vast research and teaching span includes:
  • finance and economics
  • econometrics
  • application of artificial intelligence to forecast financial assets
• Published in several journals such as:
  • Expert Systems with Applications
  • Applied Energy
  • Computational Economics
  • Sex Roles
  • Journal of Pension Economics and Finance
  • Emerging Markets Finance and Trade
• His plans at RMU are to research crypto currency, and develop a hypothesis for returns and volatility of Bitcoin.

The Presentation:

Bitcoin: hot topic – the fundamentals of currency.

Need for currency

• Barter(good for small civilizations) -> (increased commerce)currency
• EX: salt, seafood shells, cow, vegetables, stones, etc.
• Gold: most popular, and silver appeared – prevented currency from expiring. Creation of coins
  • Gold stores – transferred your gold to a paper equivalent; beginning of bills
  • Needed coins/gold to support the money being printed
• Gold system – all the money of a country needed to be able to be turned into gold that each central bank protected. Since 1930. Money could be changed to gold, and vice versa.
  • Every country has responsibility – but then it was left up to the US dollar to be the standard for all coins.
  • EX: pesos to US dollar
  • 1973: Nixon decided to end the condition of the uS dollar as the standard because we did not have enough gold to support the bills.
    • US was running out of gold needed to support all the circulating dollars.
    • TODAY: no metal support. Money only has value because we trust that it has value. -> essential to the financial value of Bitcoin.

Crypto Currency – 2009; virtual money; seeks decentralization – no central state controlling this; no one has control over the internet.

• Only generates a number of previously sdefined units, at a rate that is limited by a previously established and publicly known value
• We have a fixed amount
• More than 800 currencies have been created – bad
• Allows you to make purchases internationally and be exchanged for another currency without intermediaries
• Some think that there will be no tellers, cash registers, queues, or waits;
  • Amazon Go*: no lines – just walkout and receive payment to your amazon account; Dec 2016. Use of virtual currency and algorithms to keep track of what you pick up, and you can just leave.
  • Bank behind transactions.

Bitcoin – virtual currency, which is generated in a consensual network that allows a new payment system.

• First specificiation of the bitcoin protocol and proof: Satoshi Nakamoto (referred to this as his pseudonym) in 2009 in an email list launched this proof of concept.
• Numerous developers working on the bitcoin protocol; more people began to grow exponentially into the community of bitcoin: the more people who trust in bitcoin, the more industries will begin accepting bitcoin as a currency.
• Bitcoin has no owners
• Bitcoin network shares public accounting called “block chain” – system behind bitcoin

How does bitcoin work:

• Exchange money electronically like an email or a text
• Makes sure no one can send money from someone else’s account
• Signature required based on cryptography – used to create signatures through decryption proving that it is them; signatures cannot be copied because they are different for each transaction
• Provides a decentralized system
• Maintainers – keeps personal copy of ledger and updates it
• Fraud can cause changes in ledgers – vote on which one is the correct ledger using a mathematical formula by having users solve the problem, hand in the answer, each vote has a cost in electricity and computing power.
  • Keeping it fair: each puzzle is based on previous answer before starting
  • Only thing that makes people finish it faster is through having more electricity and computing power.
  • Solving puzzles -> small money; these people are called “miners”; randomly generating new money for the solving of puzzles.
• Reliability: accurate ledger is found through mathematical probability

Advantages:

• Ease of payment – send and receive instantaneously
• Security and control – bitcoin users have complete control over their transactions
• Very low rates – payment swith bitcoin are currently processed at low rates or at no charge. Can send money from US to Japan with no additional cost instantaneously.
• Less risk of fraud
• Neutral and transparent – all people know the quantity of bitcoin in the world – it is open to all; all information is available

Disadvantages:

• Degree of acceptance – many people still do not know Bitcoin; “big barrier to jump”
• Volatility – the total value of bitcoins in circulation and the number of businesses using bitcoin are very small compared to what it may become.
  • volatitlity can be used to as an advantage in some cases
  • Bitcoin: keeps increasing in price, lowering in price, coming up to $6,000 per Bitcoin soon.
  • Financial battle: because it continues to change
• Developing System – still in the beta phase with many incomplete features in development.
  • “Déjà vu” – “what is internet” (1994) “why would you buy a computer” “bitcoin”(made in 2009) – designed to be self-stabilizing.
  • Bitcoin is no longer a scam? Goldman Sachs boss Lloyd Blankfeind said his bank was considering bitcoin.
  • Howard Marks – billionaire investor; referred to it as a fad but has now accepted it as having the most valuable characteristic – people believe in and trust bitcoin as a currency.

Is bitcoin a threat?

• Fear about crypto currency because it implies to lost power – loss of state power – loss of centralization.
• Several industries can be negatively affected with the break-in of Bitcoin
• Several governments have been forced to regulate their use or ban it.
• Several governments have been pushing cashless
  • If all transactions are done by card or transfers with banks, the govt could lose power
• Some banks in Japan want to launch their own crypto currency – J coin.
  • Japanese government could be accepting
  • Against economy’s basis in Japan to reject Bitcoin.
  • If japan launches J-coin; and you have to choose one – you are more likely to choose J coin over Bitcoin due to the fact that J coin is centrally supported by an entire country.

Bitcoin behavior:

• Research in progress “Forecasting the Bitcoin Volatility”
• Kristjanpoller & Minutolo 2017.
• Mixing econometrics model with networking
• Generate bitcoin volatility for a week, weeks, and a month.

Q&A:

A question was asked about the legal implications of the court trying to define Bitcoin (property/currency/both?)

• Report gains in bitcoin as gains in property
• Federal government’s legal system is trying to see how to view it as well as how the IRS should view it.
• IRS – asset not taxed; official policy that it is property and should be taxed as such and not currency creates an inefficiency in the market.  Smart companies will trade capitol in Ireland to bitcoin and then bring it back to the US because it will get taxed differently.  If not seen as a currency, then it cannot be taxed as currency.
• J coin is an attempt to change the tax on that earnings.

Recommended readings/videos:

• The Aisles have Eyes
• The rise and mine of Bitcoin
• Money: the Unofficial Biography