C23 Cryptocurrencies Investment, Money, or Gamble A

Ilan Alon case W91C19
Antonio Candia October 7, 2019

Fabio Moreno
Cryptocurrencies: Investment, Money, or Gamble? (A)
Juan Perez worked as an investment analyst at Suprabanco,i a multilateral lending institutionii

headquartered in Bogotá, Colombia. The institution granted loans to member countries in Latin America.
In 2018 a Suprabanco risk assessment determined that Venezuela might struggle to repay a loan it
received in 2016 because the loan was denominated in US dollars.
Also in 2018, one of the hottest topics in the investment community was cryptocurrencies, and its
hype was widespread throughout Latin America, including Suprabanco employees. Some employees believed
cryptocurrencies had the potential to increase returns, especially in a low-interest-rate environment, as
well as diversify a portfolio. However, most of the bank’s board members thought the new cryptocurrencies
were a fnancial bubble and/or fraud created by a few who wanted to take advantage of unwary people and
companies. At best, the board thought it was similar to the dotcom bubble in the late 1990s and early
2000s.
Perez was commissioned with two tasks. The frst was to look at Suprabanco’s investment potential to
increase returns, especially in a low-interest-rate environment, and consider diversifying the portfolio by
adding cryptocurrencies to the loan fund. His second task was to determine if cryptocurrencies could serve
as an alternative to US dollar payments in case the Venezuela loan situation deteriorated.
On March 1, 2018, Perez was scheduled to present a recommendation to the bank’s investment committee.
He was aware that none of the committee members were tech-savvy, that their experience was mainly with
i
Juan Perez and Suprabanco are fctional names.
ii
A multilateral lending institution (MLI) is owned or established by governments of two or more countries. MLIs are usually
established by international treaties to pursue specifed policy objectives and are generally not subject to commercial law. MLIs
are usually established to promote economic development in their member countries, facilitate regional integration, and/or expand
cross-border trade.
Published by WDI Publishing, a division of the William Davidson Institute (WDI) at the University of Michigan.
© 2019 Ilan Alon, Antonio Candia, and Fabio Moreno. This case was written by Antonio Candia and Fabio Moreno under the supervision
of Ilan Alon, Professor and Head of International Affairs at the University of Agder, Norway. The case was prepared as the basis for
class discussion rather than to illustrate either effective or ineffective handling of a situation. The case should not be considered
criticism or endorsement and should not be used as a source of primary data. The case contains both factual and fctional information.
Suprabanco is a fctional organization and the opening situation described in the case is a dramatization created for the purpose of
class discussion and engagement.
This document is authorized for use only in Prof. Qambar Abidi's Fin Tech. at Indian Institute of Management - Kozhikode from Sep 2022 to Mar 2023.
Cryptocurrencies: Investment, Money, or Gamble? (A) W91C19
traditional fxed-income investments, and that all were very risk-averse. Perez’s presentation would be the
frst Suprabanco step to start moving the conversation forward regarding this potential new asset class. He
needed to fully understand what cryptocurrencies were all about, and how blockchain innovations and new
defnitions of money could affect the investment industry. He also needed to understand any misconceptions
about cryptocurrencies. He decided to focus on bitcoin as the most developed among the cryptocurrencies.
Was bitcoin real money? Perez knew that money had to possess three fundamental properties: it must
be a unit of account, a medium of exchange, and a stable storage of value. Did bitcoin measure up? Was it
an investment and, if so, how could it be valued? Was bitcoin a technological pioneer that would soar and
then falter, like AOL?
(See Exhibit 1 for a glossary of cryptocurrency terms.)
Bitcoin Digital Currency
Bitcoin did not have a known creator, though it was attributed to a developer with the name Satoshi
Nakamoto.iii Bitcoin’s original peer-to-peer (P2P) electronic cash system became a speculative instrument
and had fueled interest in newer cryptocurrencies. It was often used as the primary tool to access other
cryptocurrencies called altcoins.
Bitcoin received much attention due to its price surges and subsequent volatility.
Bitcoin was described for the frst time in 2008 with the publication of a paper titled “Bitcoin: A Peer-
to-Peer Electronic Cash System,” written under the alias of Nakamoto.1 Nakamoto (or whoever) combined
several prior inventions—such as b-money and HashCash—to create a completely decentralized electronic
cash system that did not rely on a central authority for currency issuance or settlement for validation of
transactions. The key innovation was to use a distributed computation system (called a “proof-of-work”
algorithm) to conduct a global “election” every 10 minutes, allowing the decentralized network to arrive
at a consensus about the state of transactions. This elegantly solved the issue of double spend—where a
single currency unit could be spent twice. Previously, the double-spend problem was a weakness of digital
currency and had to be addressed by using a central clearinghouse for all transactions.2
On January 3, 2009, the bitcoin network became a reality when the founder mined the genesis block of
bitcoin (block number 0), which had a reward of 50 bitcoins. Embedded in the coinbase of this block was
the text “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.” This timestamp message
referenced a headline in the British newspaper The Times. It also served as a tongue-in-cheek reminder of
the importance of an independent monetary system, with bitcoin’s launch occurring at the same time as a
worldwide monetary crisis.3
Programmer Hal Finney downloaded the bitcoin software the day it was released and received 10
bitcoins in the world’s frst bitcoin transaction on January 12, 2009. Other early supporters were Wei Dai,
creator of bitcoin predecessor b-money, and Nick Szabo, creator of bitcoin predecessor bit gold.4
In May 2010, Gavin Andresen, a coder in New England, bought 10,000 bitcoins for $50 and created
a site called the Bitcoin Faucet, where he gave them away for no particular reason. Laszlo Hanyecz, a
Florida programmer, conducted what bitcoiners consider the frst real-world bitcoin transaction when he
iii
There was a Satoshi Nakamoto—a California systems engineer who, it is thought, had his name borrowed by a neighbor who may
have been bitcoin’s real inventor.
paid 10,000 bitcoins to have two pizzas delivered from a Papa John’s restaurant. (He sent the bitcoins
to a volunteer in England, who then called in a credit card order.) And, a farmer in Massachusetts, David
Forster, began accepting bitcoins as payment for alpaca socks.5 Bitcoins reached a value of 19,783.21 USD
in December 2017.6
The Cryptocurrency Industry
Cryptocurrencies were virtual currencies empowered by blockchain technology and acted as tamperproof
digital money that could be traded openly. Cryptocurrency blockchains created distributed trust over
the Internet without an intermediary. As the frst viable example of cryptocurrency, bitcoins proved the
capabilities of cryptocurrency technology.
To be viable, any asset-based cryptocurrency had to establish the “Three Pillars of Digital Money
Viability” (see Exhibit 2).7 Digital money viability was established through interaction among the three
pillars of: technology, community, and liquidity.
Technology
The cleverness of blockchain was not that it was a totally new technology, but rather an innovative use
of three existing technologies. Basically, blockchain was a combination of a P2P network, plus public key
infrastructure (PKI) encryption, plus the use of a cryptographic hash (encryption). All these technologies
had been around since the 1970s.
The P2P network was popularized by Napster in June 1999. PKI provided the ability to secure transactions
between two untrusted parties and offered other critical elements such as time stamping. The cryptographic
hash—used for the consensus algorithm that solved conficts in a blockchain—was typically based on
elliptic curve cryptography, which was created in 1985.8
Blockchain was a superior database (a distributed ledger) where data and access to the data were
stored and encrypted. Blockchain’s distributed nature meant that it had a built-in redundancy that could
survive the loss of one or more nodes because the master record was shared. Transactions were impossible
to alter afterward, thus creating a credible audit trail.9
While each block within the system was generated once, multiple nodes reached a consensus and
validated the transactions. As a distributed database, multiple copies of data existed across multiple
computers, which together created a P2P network. Hence, rather than a single centralized server or database,
the blockchain captured an entire decentralized network of machines, with each acting as a node within
that network. This reduced the need for central authorities to clear transactions and certify ownership (see
Exhibit 3).
When a bitcoin transaction occurred, it was grouped together with other unconfrmed transactions into
a “block” that was validated before being added to the blockchain. Computers on the blockchain network
(referred to as nodes) competed to solve mathematical puzzles to validate each block in a process called
“mining.” Once a solution was found, the block was cryptographically added to the blockchain. The miner
who found the solution was rewarded in bitcoin and transaction fees, which provided an incentive to
continue to validate transactions and keep the network operational. This transaction validation was called
proof of work.10
The amount of computing power required to validate transactions on the blockchain network suppressed
the chance of an attack, since the cost to obtain such power was signifcant. After a bitcoin transaction was
validated and added to the blockchain, the records of that deal were widely distributed to nodes. Because
of open distribution, there was no single point of potential failure. In theory, the blockchain could not be
altered. The only way for the blockchain to be compromised was if an attacker had more mining capacity
than the rest of the network combined, known as a “51% attack.”11
Community
In order for a cryptocurrency ecosystem to thrive, cryptocurrencies had to be created, stored, exchanged,
and processed. Therefore, the community was divided into four major players.
1. Miners. Cryptocurrencies were mined by individuals using computers to process transactions

and earn a cryptocurrency reward. In this realm, mining was the act of recording transactions to
the public ledger (or blockchain) to unlock a reward (e.g. bitcoins). It was a resource-intensive
process that required substantial computer power to satisfy security conditions (rooted in
cryptography) and ensure that all network participants agreed the blockchain was accurate. The
blockchain grew more complex as more lists of transactions (blocks) were added to the chain
because more computer power was required to sustain it. The mining label is appropriate because
miners had to invest resources (hardware, energy, computer power) to position themselves to
be the frst to successfully process a transaction in order to earn the coin. Mining spawned
sub-industries including mining pools (i.e., miners pooling resources and sharing the rewards),
hardware equipment manufacturers, and mining cloud services.12
At the time Perez was studying the subject, more than 70% of bitcoin originated from miner
pools in China, according to Forbes.13 For other miners, Canada was a likely choice, with
its abundance of cheap power and colder climate, which was important given the need to
cool computer equipment used to mine cryptocurrencies.14 While anyone could code a new
cryptocurrency to compete with bitcoin, the challenge was in creating a community willing to
use and mine the new coin.
2. Wallets. Wallets to store cryptocurrencies took many forms, including hot (online) wallets in
an app or browser, and cold (offine) hardware options. Examples of wallets included BitPay,
Coinbase, Blockchain.info, Electrum, and Exodus.
3. Exchanges. Cryptocurrencies could be bought and sold on exchanges. Most exchanges allowed
trading cryptocurrencies for fat currencies such as US dollars. Exchanges tended to operate in
places that offered excellent access to talented developers and wealthy, tech-savvy investors.
However, government regulations differed from country to country.
4. Processors. Cryptocurrency processors provided services and tools for merchants to accept
cryptocurrencies as a form of payment. Many of these tools were integrated into the checkout
fow of a transaction. Examples of processors included Braintree and Shopify.
One mechanism to raise funds in exchange for cryptocurrencies was initial coin offerings (ICOs). ICOs
raised nearly $4.8 billion in the frst three months of 2018, which led to increased regulatory scrutiny due to
inherent fraud risks. The United States’ Securities and Exchange Commission (SEC) issued a warning against
ICOs, and China and South Korea banned ICOs outright.15
Bitcoin’s value was derived, in part, from the diffculty of transacting on the network. About 10
minutes of intense computing power was required for a bitcoin to achieve credibility without a third party
and to process a single new block of transactions. (See Exhibit 4 for a comparison of currencies by market
capitalization.)
Liquidity
For cryptocurrencies to be considered currencies, they had to build up liquidity. As they did so, the
economics of cryptocurrencies began to resemble the economics of traditional money. (See Exhibit 5 for a
comparison of the US dollar to bitcoin.) A standard defnition of money stated it was an asset that serves
as a medium of exchange. Historically, the concept of money arose as a technological advancement that
overcame some of the shortfalls of bartering. Chief among these was the so-called “double coincidence of
wants”: barter works only when you want some of what I am selling and I want an equivalent value of what
you are selling, which is a rare occurrence in advanced economies. Money solved this problem.16
The modern monetary theory generally lists three functions of money:17
(i) A unit of account: the measure used to represent the real value (or cost) of any economic item,
such as goods, services, assets, liabilities, income, and expenses
(ii) A medium of exchange
(iii) A store of value that can be saved, retrieved, and exchanged at a later time, and be predictably
useful when retrieved.
So, Perez wondered, to what degree were cryptocurrencies functioning as money? Their huge price
volatility had made using cryptocurrencies impractical as a unit of account. Only hobbyists were using
cryptocurrencies as a medium of exchange, at least for conventional transactions of goods and services.
And, while cryptocurrencies were serving as a store of value, they were not a stable store.
Yet the number of businesses accepting bitcoin and other cryptocurrencies in exchange for goods or
services was growing. In Poland, for example, there were bitcoin ATMs.18 By May 22, 2018, over 12,000
businesses allowed the use of cryptocurrencies in exchange for goods or services (see Exhibit 6).19
Regulation
Given the apparently anonymous nature of bitcoin transactions, there was a widespread perception
that its use was chiefy in black markets. However, the privacy afforded by bitcoin was not absolute, as
transaction details were displayed on a public ledger, even if the identities were hidden behind bitcoin
addresses.
It was this link between bitcoin addresses and individuals that various government agencies sought
to establish. For example, in late 2017 a US court in California ordered Coinbase, a major provider of
cryptocurrency wallet accounts, to hand over data to federal authorities. In mid-2017 law enforcement
agencies in the US and EU closed two of the largest “dark web” markets, AlphaBay and Hansa.20
Separately, a group of academics from Princeton showed that third-party web trackers used on most
shopping websites could be used to de-anonymize users of cryptocurrencies.21 The Blockchain Intelligence
Group provided estimates to CNBC suggesting that the share of illicit transactions declined signifcantly in
2017, down from a 20% share in 2016 and from around 50% in earlier years.22
Cryptocurrency Competition
By February 2018, 1,623 cryptocurrencies had a market cap of nearly $333 billion and bitcoin was the
largest, representing over a third of the market, according to CoinMarketCap.23
Litecoin was essentially a similar and more effcient version of bitcoin. It was created by Charlie
Lee in 2011 as a “lighter” complement to bitcoin, with faster transaction times at lower costs. However,
litecoin lacked the network size and brand recognition of frst-mover bitcoin and was often used like a P2P
electronic cash system—bitcoin’s original intent. 24
Ethereum was the second-largest cryptocurrency technology in the market, behind bitcoin. Unlike
bitcoin’s foundation as a currency blockchain, ethereum was a blockchain platform for transacting
anything—a decentralized platform for applications. This is why many developers built applications (such
as ICOs) on ethereum. The key difference was that the ethereum framework included “smart contracts”
(code) embedded in the blockchain that were executed once certain transaction conditions were met. In
other words, a smart contract automatically recorded a transaction on the blockchain once agreed-upon
instructions were satisfed. This created a host of opportunities to automate any transaction without the
need for an intermediary. These contracts were what miners executed in exchange for a reward of an
ethereum token (Ether).25
The cryptocurrency space encompassed well over a thousand cryptocurrencies, each with different
characteristics and serving different functions.26 If hypothetically, some would rise to meet the functional
defnition of money, Perez wondered if they could compete with traditional currencies? Could they gain
acceptance in a niche role that functioned better than alternatives, or in a broader ecosystem that
maintained a balance between adaptability to different tasks and effciency in performing them?
Cryptocurrency Owners and Users
Estimating the total number of cryptocurrency holders was diffcult given the secret nature of
transactions (i.e., details were displayed on a public ledger, but users’ identities were hidden) and the fact
that each individual could use a number of wallet and exchange accounts, and thus, multiple addresses.27
That said, it seemed that only 1,000 users held about 40% of bitcoin.28 Such a concentrated ownership
was not surprising, but instead, typical for a new asset class such as cryptocurrencies. The two best-known
whales—people who held large amounts of a particular coin—were two Harvard-educated entrepreneurs
who bought about 120,000 bitcoins when they were less than $10 each, using money they got from settling
a lawsuit against Mark Zuckerberg over their claim that they came up with the idea for Facebook.29
Blockchain and Banks
Although banks around the globe had limited direct involvement in cryptocurrencies, the industry
actively pursued initiatives around blockchain technology. For banks, utilizing blockchain technologies as
a cost-effcient means of conducting business could have far-reaching implications.30
Bitcoin as an Exchange-Traded Fund (ETF)
Moving bitcoin from its shadowy original sphere to institutional portfolios was clearly a challenge. In
the traditional fnancial markets, there was a long history of best practices and regulation to protect the
institutional investor. With cryptocurrencies, however, only a handful of funds offered exposure and these
limited offerings came largely from outside the United States. The SEC and many major distributors had
expressed concerns about cryptocurrencies.31
The Options for Suprabanco
Perez carefully reviewed all the data he had collected in order to have a clear understanding of the risk
and return possibilities for cryptocurrencies.
Perez knew that trying to determine value with traditional institutional tools was not applicable to
cryptocurrencies. Currency strategists generally relied on macroeconomic variables like infation, interest
rate differentials, and a country currency’s overall global positioning for setting an exchange rate. But none
of these metrics seemed relevant to cryptocurrencies that had values seemingly determined by speculative
forces of supply and demand. Bitcoin’s lack of fundamentals meant investor sentiment drove prices.
For comparison purposes, Perez combined his database of cryptocurrency market exposure options with
the traditional asset classes that Suprabanco was already investing in. The options he decided to present
to the investing committee included:
Buy bitcoin directly. One of Perez’s main concerns with this option was that there was no form to
reverse or correct a trade once the blockchain was modifed. Another concern was that bitcoin was not yet
included in the traditional custody services provided by Suprabanco’s custody bank. Therefore, Suprabanco
would have to select and contract with a cryptocurrency custody service provider.
Buy shares in a trust. Grayscale Bitcoin Trust (GBTC) enabled investors to gain exposure to the
price movement of bitcoin through a traditional investment vehicle, without the challenges of buying and
safekeeping bitcoins.
Buy a cryptocurrency index. Bloomberg Galaxy Crypto Index (BGCI) was designed to measure the
performance of the largest cryptocurrencies traded in US dollars. It offered data integrity and diversifcation
(see Exhibit 7).
Buy bitcoin futures. Before futures existed, many funds and institutions were restricted from accessing
bitcoin directly and so they used GBTC. However, in 2018, traders turned more to futures (see Exhibit 8).
The CME Group and Cboe Global Markets Inc. both sought to become the standard for bitcoin futures (see
Exhibit 9). The underlying contract size was a major difference between the two. CME had fve bitcoins,
with futures based on the Bitcoin Reference Rate, disseminated by several exchanges. Each Cboe contract
was directly matched with one bitcoin, with futures based on bitcoin trading on the Gemini exchange.
Buy a blockchain ETF. An SEC rejection of nine bitcoin futures-based ETFs came after concerns were
raised about fraud and manipulation in underlying markets. However, 2018 saw a major launch of thematic
ETFs, including some involved in blockchain technology. For example, the Reality Shares Nasdaq NexGen
Economy ETF used a proprietary scoring model to identify companies in the global blockchain technology
ecosystem that benefted from the development of blockchain technology. Its top holdings were in
technology frms such as ZTE, Red Hat, Intel, Alibaba, Cisco, and Microsoft.32
The Moment of Truth
Moments before the meeting with Suprabanco’s investment committee, Perez was still undecided about
his options. He was not able to balance the advantages and disadvantages of the blockchain or predict the
future of cryptocurrencies. He was also unsure how such innovations could disrupt Suprabanco’s business
model. In short, he was not confdent that bitcoin’s volatility was worth taking the investment risk.
Exhibits
Exhibit 1
Glossary of Cryptocurrency Terms
51% attack – Attack on a blockchain network where more than half of the computing power is controlled by an
individual or concentrated group of miners.
Address – A unique numeric or alphanumeric string that serves as the virtual location where cryptocurrency
can be sent.
Air gapped – Describes a device that has never been connected to the Internet.
Altcoin – Alternative cryptocurrency to bitcoin.
Block – Files where data pertaining to the bitcoin network are permanently recorded. It records recent transactions
that have not yet entered any prior blocks within the blockchain.
Block reward – The reward/incentive allocated to a miner for solving the equation to validate a block of
transactions.
Blockchain – Shared public ledger of historical cryptocurrency transactions, secured and linked using cryptography.
Circulating supply – Number of cryptocurrency coins/tokens currently available and circulating in the market.
Coin – A store of value or medium of transfer that can operate independently.
Cold storage – A cryptocurrency wallet not connected to the Internet (considered the most secure).
Cryptography – The science of transforming information into an unreadable format to protect and secure that
information.
Custody bank – A fnancial institution that holds customers’ securities for safekeeping in order to minimize the risk
of theft or loss.
Exchange-traded fund (ETF) – An investment fund traded on stock exchanges, much like stocks.
Fiat currencies – Government-issued money which is neither convertible by law to any other thing, nor fxed in
value in terms of any objective standard.
Fork – A split in consensus resulting in two separate blockchains.
Hard fork – A radical change in a protocol resulting in two separate blockchains that are not interoperable with
one another. Hard forks may be planned in advance or may result from a disagreement among network participants.
Example: Ethereum Classic.iv
Hash/hash rate – Amount of power required to keep the network operational, specifcally for cryptocurrencies
leveraging “proof of work.” As the diffculty for mining each block increases, the higher the hash rate, as power
demand increases.
Hot wallet – A cryptocurrency wallet connected to the Internet.
Initial coin offering (ICO) – A form of fundraising for startups (predominantly cryptocurrencies) where a token
is distributed to market participants in return for another previously-established cryptocurrency like bitcoin or
ethereum.
Maximum supply – The number of coins that will ever exist for a particular cryptocurrency.
Mining/miner – The process of validating blocks of transactions by solving mathematical puzzles.
Node – A computer connected to the blockchain network working to validate blocks of transactions.
P2P – Peer-to-peer: transactions without a centralized intermediary.
Private key – A secret piece of data that proves your right to spend bitcoins from a specifc wallet via a
cryptographic signature.
Proof of work (PoW) – A system requiring a substantial amount of provable work be completed in order to verify the
validation of transactions and deter bad participants from disrupting or misusing computational power.
Public key – A cryptographic code used by anyone to receive cryptocurrencies into their account and transact on
different networks.
iv
More information at: https://cointelegraph.com/news/discovering-atlantis-ethereum-classic-hard-fork-and-what-will-change.
9
Exhibits (cont.)
Exhibit 1 (cont.)
Glossary of Cryptocurrency Terms
Satoshi – The smallest unit of bitcoin cryptocurrency, named after the anonymous bitcoin creator(s): 1 Satoshi =
0.00000001 bitcoin.
Smart contracts – Computer protocols that digitally facilitate, verify, or enforce customizable and non-alterable
agreements stored on a blockchain.
Soft fork – Blockchain protocol where previously valid transactions become invalid. Sometimes thought of as a
software upgrade, where the new protocol is still capable of interacting with the legacy protocol.
Tokens – A digital unit providing access to and use of a larger cryptographic system. Has no store of value on its
own but software can be developed around it.
Total supply – The total amount of coins/tokens in existence, all of which may not be circulating or available in the
marketplace.
10
Exhibits (cont.)
Exhibit 2
Three Pillars of Digital Money Viability
Source: Chishti, Susanne and Thomas Puschmann. The WEALTHTECH Book. The Fintech Handbook for Investors,
Entrepreneurs and Finance Visionaries. John Wiley & Sons Ltd, 2018.
11
Exhibits (cont.)
Exhibit 3
Distributed Network Infographic
Source: Baran, Paul. On Distributed Communications Networks. Institute of Electrical and Electronics Engineers (IEEE), 1964.
12
Exhibits (cont.)
Exhibit 4
Top 10 Cryptocurrencies by Market Capitalization, February 2018
Cryptocurrency Signifcance Inception Market Cap. ($B)
The originator of the blockchain and
Bitcoin Jan - 2009 129
cryptocurrencies.
Ethereum First smart contract functionality. Jul - 2015 59
Blockchain technology for ultrafast payment
Ripple May - 2013 24
network (no miners).
Bitcoin fork for faster transactions through
Bitcoin Cash Aug - 2017 17
larger blocks.
EOS Operates as a smart contract platform. Jan - 2018 10
P2P transactions, more frequent block
Litecoin Oct - 2011 7
generation (faster times).
Layered currency & contracts. Focus on
Cardano Oct - 2017 5
governance.
Low-cost P2P transactions, nonproft focused
Stellar Aug - 2014 5
on access.
TRON P2P version of iTunes or Google Play Store. Aug - 2017 5
No transaction fees, not blockchain (Directed
IOTA Jun - 2016 4
Acyclic Graphs).
Source: Adapted from “Top 100 Cryptocurrencies by Market Capitalization.” CoinMarketCap, coinmarketcap.com/.
13
Exhibits (cont.)
Exhibit 5
Comparing Bitcoin with the US Dollar
US dollar
Bitcoin
(or any other fat currencies)
Monetary supply Maximum limited to less than 21 million. No maximum.
A set amount of BTC created approx. every 10 minutes (per No set amount per minute; the banking
block). sector can increase monetary supply faster
upon demand.
Creator The bitcoin code, where the rules for coin creation were The central bank and commercial banks.
defned at the start. Bitcoin mining creates currency units.
Who controls the Set within the code at creation in 2009. Central bank policy encourages or
money supply of discourages a change of the pace of
coins? Would require the majority of bitcoin users to agree to any future currency creation by commercial
changes to the rules setting money supply growth. banks.
Central banks use interest rates and the

reserve requirements for commercial banks
to control the future money supply.
How are transactions The sender transmits a signal to the network indicating a Commercial banks transfer deposits
made? desire to send a set amount of bitcoin to another address. between each other. Coins or notes are
The network will confrm if the sender owns the bitcoin. transferred between two people.
When confrmed, the bitcoin will arrive at the receiver’s
address. Each bank involved in sending and
receiving a transaction holds its own
All information about the transactions is held within a
record on the transfer of the deposit.
shared public ledger on the bitcoin network. A copy of the
Banks may store data differently,
ledger is stored on everyone’s computer, eliminating the
increasing the potential for inconsistent
need for a central authority to maintain the database.
records from bank to bank.
The smallest unit that 10-8 BTC or 1 Satoshi. 10-2 USD or 1 cent.
can be sent
Security features “Fake” bitcoins cannot be used because they are encrypted Users need to check the validity of a
and secure via blockchain technology that checks the coin or note being accepted. Banks
validity of every unit before it is accepted by the receiver. additionally check the origin of funds
Some say this feature means the receiver does not need to with regard to money laundering.
trust the sender.
Banks usually act as an intermediary for
No single intermediary is required for a transaction. The user digital payments via deposits into a bank
can hold their own “bank account” and send value directly account. Alternatives like PayPal still
to another user. require a transaction to be made via that
intermediary company.
Acceptance Theoretically, anyone in the world can accept bitcoin in Currency is usually accepted in the
exchange for goods and services, but few retailers accept it. country of origin, e.g., the US dollar
is accepted in the US. However, major
currencies may be accepted outside the
country of origin.
Source: Adapted from “Comparing Bitcoin with the US Dollar.” Morgan Stanley Research, 9 May 2019.
14
Exhibit 6:
Venues Accepting Cryptocurrencies Around the World as of May 2018
(Concentration levels of venues accepting cryptocurrencies: Red=High; Yellow= Medium; Green=Low.)
Exhibits (cont.)
Cryptocurrencies: Investment, Money, or Gamble? (A)
15
Source: ”Worldview.” Coinmap. https://coinmap.org/#/world/15.53837593/8.26171875/3/. Accessed 22 May 2018.
W91C19
Exhibits (cont.)
Exhibit 7
Bloomberg Galaxy Crypto Index Fact Sheet
Source: Bloomberg Galaxy Crypto Index Fact Sheet. https://data.bloomberglp.com/professional/sites/10/BGCI-Fact-Sheet-08-31-19.pdf. Accessed 11 Sept. 2019.
16
Exhibits (cont.)
Exhibit 8
Futures Dollar Volume Increased in 2018
Source: McGlone, Mike, and James Seyffart. “Crypto Outlook 2019 - Pros Are Embracing Futures.” Bloomberg Intelligence, 19 Dec. 2018.
Exhibit 9
Bitcoin Futures Open Interest and Volume
Source: McGlone, Mike, and James Seyffart. “Crypto Outlook 2019 - Pros Are Embracing Futures.” Bloomberg Intelligence,
19 Dec. 2018.
17
Endnotes
1 Nakamoto, Satoshi. “Bitcoin v0.1 released.” Satoshi Nakamoto Institute, 8 Jan. 2009. http://satoshi.nakamotoinstitute.org/
emails/cryptography/16/. Accessed 4 Sept. 2018.
2 Antonopoulos, Andreas M. Mastering Bitcoin: Programming the Open Blockchain. 2nd ed., O’Reilly Media Inc., 2017.
3 Antonopoulos, Andreas M. Mastering Bitcoin., e-book, O’Reilly Media Inc., 2014. www.oreilly.com/library/view/mastering-
bitcoin/9781491902639/ch07.html. Accessed 24 July 2019.
4 Antonopoulos, Andreas M. Mastering Bitcoin., e-book, O’Reilly Media Inc., 2014. www.oreilly.com/library/view/mastering-
bitcoin/9781491902639/ch07.html. Accessed 24 July 2019.
5 Wallace, Benjamin. “The Rise and Fall of Bitcoin.” Wired. 23 Nov. 2011. https://www.wired.com/2011/11/mf-bitcoin/. Accessed
10 Oct. 2018.
6 Kharpal, Arjun. “Bitcoin Market Share Is at the Level It Was Just after It Hit Its near-$20,000 Record High.” CNBC, 7 Aug. 2018.
www.cnbc.com/2018/08/07/bitcoin-market-share-near-level-when-price-hit-record-high.html. Accessed 10 Oct. 2018.
7 Chishti, Susanne and Thomas Puschmann. The WEALTHTECH Book. The Fintech Handbook for Investors, Entrepreneurs and Finance
Visionaries. John Wiley & Sons Ltd, 2018.
8 Curran, Brian. “Elliptic Curve Cryptography: The Tech Behind Digital Signatures in Cryptocurrencies.” Blockonomi, 6 June 2019.
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18
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2017. https://www.bloomberg.com/news/articles/2017-12-08/the-bitcoin-whales-1-000-people-who-own-40-percent-
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source=facebook&utm_medium=social. Accessed 15 July 2019.
29 Ong, Thuy. “The Winklevoss Twins Are Now Bitcoin Billionaires.” The Verge, 4 Dec. 2017. www.theverge.
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19
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C23 Cryptocurrencies Investment, Money, or Gamble A

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Ilan Alon case W91C19

Antonio Candia October 7, 2019

Cryptocurrencies: Investment, Money, or Gamble? (A)

Juan Perez worked as an investment analyst at Suprabanco,i a multilateral lending institutionii

(See Exhibit 1 for a glossary of cryptocurrency terms.)

Bitcoin Digital Currency

The Cryptocurrency Industry

1. Miners. Cryptocurrencies were mined by individuals using computers to process transactions

The modern monetary theory generally lists three functions of money:17

Cryptocurrency Owners and Users

Blockchain and Banks

Bitcoin as an Exchange-Traded Fund (ETF)

The Options for Suprabanco

The Moment of Truth

Central banks use interest rates and the

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