INVESTING IN BITCOIN-BASED TECHNOLOGIES

Krzysztof Piech, PhDWarsaw School of Economics and InvestOn Ltd

Young Markets 2015 „Exploring the Future of Finance”Warsaw, 17th September 2015

WAYS OF INVESTING IN BITCOIN-BASED TECHNOLOGIES

Investment in hardware Speculation – bitcoin as money or financial instrument Investment in startups Financial services Long-term financial investment

INVESTMENT IN HARDWARE Speed race on the market progres in microchips is faster than in traditional computer markets (!); nowadays approaching the technological frontiers (limits of physics)

Evolution: Mining based on personal computers Mining with computer graphic cards Mining with specialised equipment designed only to bitcoin digging Mining pools Large bitcoin mines

Present stage: end of technical race; beginning of cost-competition Looking for cheap electrical power

SPECULATION – BITCOIN AS A MONEY Investment on spot markets Simple buy-and-hold strategies Active trading: daytrading etc. Trading with bots (algotrading) Arbitrage between markets Investment with leverage

SPECULATION – CNTD. Bitcoin derivatives – futures Arbitrage Also with leverage This is what we are doing at InvestOn

Liquidity providers to the bitcoin exchanges Bitcoin investment funds Altcoins – tech innovations coupled with pump-and-dump (100% in a day is quite common)

Ponzi schemes

BITCOIN – STILL A FRACTION OF TRADITIONAL FINANCIAL MARKETS

SIZE OF MARKETS

bitfinex bitstamp btce coinbase okcoin 0

50

100

150

Turnover on major bitcoin USD exchanges

millions of US dollars

btc-china huobi okcoin 050

100150200250300350400 Turnover on major bitcoin CNY

exchangesmillions of US dollars

okcoin-1wF

okcoin-2wF

okcoin-1qF

796-1wF

0 200 400 600 800 1000 1200 1400 1600 1800

Turnover on major bit-coin futures exchangesmillions of US dollars

Spot markets: - US+EU:

$420M- China:

$880M

Futures: $3980M

Source: InvestOn

Time period: one month (May 2015)

1-MINUTE PRICE DIFFERENCES BETWEEN BITFINEX AND OKCOIN DURING ONE MONTH

Source: InvstOn.

SELECTED KPIS OF INVESTON GENESIS – 2014

Initial capital in mid-December 2013: $10,000.

Some extra opportunities appeared, e.g. 35% of returns in 1 week. Usually however on average 4.3% per week only. The results: rate of return c. 1000% (13.5 months).

21/Dec

4/Jan

18/Ja

n1/F

eb15

/Feb

1/Mar

15/Mar

29/Mar

12/Apr

26/Apr

10/May

24/May

7/Jun

21/Ju

n5/J

ul19

/Jul2/A

ug16

/Aug30

/Aug13

/Sep27

/Sep11

/Oct25

/Oct8/N

ov22

/Nov6/D

ec20

/Dec3/J

an17

/Jan31

/Jan

100

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EXAMPLES OF ALTCOIN PRICE CHANGES

INVESTMENT IN STARTUPS Fin-tech startups Bitcoin exchanges – first companies (but mines) Bitcoin payment processors Various blockchain-exploring companies

Own (mainly R&D-focusing) companies setup by fin institutions (e.g. large banks)

Other startups, e.g. covering legal services, security Investment funds

Source: State of Bitcoin, Q2 2015, July 2015, http://media.coindesk.com/2015/07/BTC-vs-internet.png

FINANCIAL SERVICES Payment processors, e.g. BitPay (U.S.), InPay (Poland) Lending and borrowing – P2P, e.g. BitLendingClub (U.S.), GetLine.in (Poland) You can lend people your bitcoins (without bank intermediation)

Remittances Auctions (of arts) first such an auction in Poland, June 2014

Equity crowdfunding – selling shares of companies for bitcoins First (regulated) campaign run in Poland, 2014 Other based in tax-heavens (e.g. Havelock Investments based in Panama)

LONG-TERM FINANCIAL INVESTMENT Almost no long-term financial investment Bitcoin is not treated as long-term investment (too risky, too volatile) Expected turmois in the future driven by recessions; however some picks possible due to financial crises (e.g. Grece)

Lack of regulations – too high risk for financial institutions

RISKS Startups – they often fail; in bitcoin environment – even more frequently (large temptations to steal bitcoins)

Security threats – bitcoins stolen = no chargebacks Bitcoin price volatility New technology – future is unknown Evolution in financial world: from bitcoin only to blockchain-based technologies Blockchain – general purpose technology (?)