THE FUTURE OF CRYPTOCURRENCY Reaching Beyond Bitcoin’s Orbit
The Philosophy and Technology Behind Cryptocurrency
Keeping Your Crypto Portfolio Safe
Why We Need the Digital Economy
Your Guide to the World’s New Asset Class
yBitcoin_2018 (MASTER).indd 1
5/1/18 12:11 PM
yBitcoin_2018 (MASTER).indd 2
5/1/18 12:11 PM
yBitcoin_2018 (MASTER).indd 3
5/1/18 12:11 PM
yBitcoin_2018 (MASTER).indd 4
5/1/18 12:11 PM
yBitcoin_2018 (MASTER).indd 5
5/1/18 12:11 PM
yBitcoin_2018 (MASTER).indd 6
5/1/18 12:11 PM
yBitcoin_2018 (MASTER).indd 7
5/1/18 12:11 PM
Table of Contents
KEY Profile Basics Value Investment Security
Crypto Assets as Investment Vehicles
What Is Bitcoin?
Po.et and the Distributed, Tokenized Future of Media
18 What Is Bitcoin Mining?
Top Five Cryptocurrency Exchanges
Bitcoin and the Blockchain 101
28 Why Bitcoin Has Value
The Past, Present and Near Future of Cryptocurrency Regulation
The Dollars and Sense of Bitcoin Payments
Bitcoin India Leads an Emerging Epicenter for Digital Asset Services
Bitcoin: Why It Now Belongs in Every Portfolio
A Tax Guide to Cryptocurrency
38 A Beginner’s Guide to Buying Bitcoins
40 ZenCash Is More Than Just a Private Cryptocurrency
58 From Bitcoin to Crypto Assets
84 How to Ensure Bitcoin Security
86 Five Security Habits for a More Valuable Cryptocurrency Portfolio
88 Four Questions to Ask About Your New Cryptocurrency Wallet
How Bitcoin Created the New Crypto Asset Class
Gem’s Vision for Empowering Consumers to Cross the Crypto Chasm
Opinion: How Experts Evaluate ICOs and New Cryptocurrencies
Category Guide to Crypto Wallets
yBitcoin_2018 (MASTER).indd 8
5/1/18 2:18 PM
22 How to Plan a Bitcoin Meetup
24 Bitcoin, Bitcoin Cash and the Nature of Forking
42 Bitcoin’s Journey to All-Time Highs and Beyond
46 Tim Draper’s Big Bet on Bitcoin
50 Bitcoin, Petro and Venezuela’s Embrace of Cryptocurrency
5 4 COV E R STO RY Beyond Bitcoin: The Future of Cryptocurrency
66 The Top 25 Cryptocurrencies Top-25 cryptocurrency projects are ranked by market capitalization at the time of press, per CoinMarketCap. yBitcoin_Volume 5.1
yBitcoin_2018 (MASTER).indd 9
5/1/18 12:12 PM
Founder David F. Bailey Publisher Calli S. Bailey Executive Editor Tyler Evans Editor in Chief Peter Chawaga Supervising Editor Ellen Sullivan Technical Editor Elliot Feeny Copy Editor DoEun Kwon Design Josh Dykgraaf Tommy Marcheschi Jennifer M. Taylor Sales Greg Clements Chris Eley Billy Hereford Christian Keroles Circulation/Logistics Vanessa Krohn Contributing Writers Andreas M. Antonopoulos John Barrett Matthew Beck Tuur Demeester Tim Enneking Tony Gallippi Jeremy Gardner Shawn Gordon Andrew Hinkes David Hollerith Drew Kernosky Diana Ngo Stephen Pair Kirk Phillips Giulio Prisco Craig Salm Michael Scott Jake Smith Kyle Torpey Christopher Tozzi Aaron van Wirdum Erik Voorhees Rachel Wolfson For a digital version of the magazine and to subscribe or order more issues, visit yBitcoin.com
Advertising Sales Office 615.454.4861 www.btcmedia.org yBitcoin is published biannually by BTC Media, LLC, 150 3rd Avenue South, Suite 1820, Nashville, TN 37201. Reproduction without the express written consent of the publisher is prohibited. yBitcoin is not responsible for unsolicited manuscripts, photography or art. yBitcoin is not responsible for errors and omissions in advertisements, sponsored content or editorial content. The information contained herein should not be construed as an endorsement of any company or individual, nor reflect in any way upon the products/services they provide. yBitcoin does not knowingly accept false or misleading advertisements, sponsored content or editorial content, nor does the publication or its staff assume responsibility if such advertisements, sponsored content or editorial content appears in the publication. yBitcoin makes no warranties or representations and assumes no liability for any claims regarding services, products or claims made by advertisers. yBitcoin does not provide legal advice, is not a broker, seller or buyer of bitcoin, nor shall it be considered to be promoting or encouraging the purchase of or investment in bitcoin. ÂŠ2018, all rights reserved.
*Sponsored executive profiles are either paid advertorial or written in close collaboration with the subject. Some photographs have been contributed courtesy of TokenFest.io.
yBitcoin_2018 (MASTER).indd 10
5/1/18 12:12 PM
From the Editor
Your Guide, Now and Forever Peter Chawaga Editor in Chief In a space so dynamically technical, so inherently built upon the internet, why produce a print magazine dedicated to cryptocurrency?
ecosystem at the time this issue was produced, making this publication valuable for the very fact that its content cannot be changed or updated.
It is, after all, virtually impossible to publish a tangible, up-to-the-minute status of the cryptocurrency ecosystem. By the time this issue is in your hands and your eyes are trained on its content, the price of bitcoin will have surely fluctuated, new cryptocurrencies will have launched, and blockchain technology will have taken new strides. But yBitcoin has never sought to compete with digital news sources to provide its readers with these rapid updates. In fact, by existing as a print publication in such a high-tech world, it delivers a largely unmet need for both new and seasoned cryptocurrency enthusiasts.
This issue’s cover is a preview into our feature (page 54) on how Bitcoin has empowered the world of cryptocurrency in which we now live. yBitcoin 5.1 has come at a time when ICOs are now commonplace and technologists around the world have built upon Bitcoin’s foundation to introduce countless tokens and distributed ledger projects poised to change the world. Following suit, yBitcoin has evolved to accommodate that change. Capturing and reflecting this momentum, in addition to the cover story, we present the latest on Bitcoin’s journey (page 42), a ranking of the most vital cryptocurrencies now available (page 66) and the latest in crypto regulation (page 78), among other stories that are inherently of the here and now and make this magazine a hard-copy marker of our times.
What you’re holding in your hand and can store on your bookshelf, lay on your coffee table or pass on to a friend is an unalterable snapshot of the cryptocurrency world at the precise date and time of press. While a significant focus of this publication is to provide evergreen content — items like our Bitcoin timeline (see the next page), explainers like our FAQ (page 14) and glossary (page 96), and overview advice like our tips on how experts evaluate initial coin offerings (ICOs) (page 62) — many of these pages offer a unique sense of the
If there is one thing we know, it’s that all of this will change. Bitcoin and cryptocurrency in general have come so far in such a short period of time — the only thing guaranteed is that this progress will continue. Within this rapidly evolving space, yBitcoin is your guidepost, now and forever, amidst a constant stream of change.
yBitcoin_2018 (MASTER).indd 11
5/1/18 12:12 PM
The “Internet of Value” is spawned and a new age of financial and digital sovereignty arises.
Bitcoin is introduced to the wider world and attracts its earliest followers.
Satoshi Publishes White Paper Bitcoin’s seminal concept paper, “Bitcoin: A Peer-to-Peer Electronic Cash System,” is first published by the pseudonymous Satoshi Nakamoto. The white paper explains the technical and economic foundation of the trustless digital currency in detail.
First Great Bitcoin Surge
Genesis Block Is Mined The original “genesis block,” the first block in the Bitcoin blockchain, is mined by Nakamoto. This is the only block that does not refer to an earlier block and, therefore, its bitcoin reward cannot be spent.
First RealWorld Bitcoin Purchase Marking the first time bitcoin is used for a real-world trade, a programmer, Laszlo Hanyecz, pays a fellow forum user 10,000 BTC for two pizzas.
Following media attention, acceptance by the Foundation for Economic Education and the establishment of digital black market Silk Road, the first inflow of Bitcoin users occurs. As a result, the bitcoin price rises from about $1 to over $30. This is followed by a sharp correction, a pattern that is often repeated in the digital currency space.
Bitcoin Enters Investment For the first time ever, a venture capital investment is made in a Bitcoin company: messaging and payment app Gliph gets funded $25,000.
Bitcoin's First Split
In possibly its largest ever error, the Bitcoin blockchain splits into two following an upgrade, with two halves of the network each adding blocks. For six hours, there are effectively two Bitcoin networks operating at the same time.
yBitcoin_2018 (MASTER).indd 12
5/1/18 12:12 PM
As early adopters of Bitcoin foster the cryptocurrency's development, mainstream acceptance remains elusive.
Bitcoin Investment Grows
Bitcoin exchange Bitstamp holds a $10 million investment round, making it the first ever startup to reach double-digits in the space. Within a year, Coinbase, Xapo, OKCoin, Circle, BitPay, Huobi, Bitfury, BitGo and KnCMiner all receive double-digit funding.
Investment Reaches Triple Digits
Mt. Gox Fails After months of withdrawal issues, the world’s first and largest bitcoin exchange, Mt. Gox, implodes in spectacular fashion, claiming to have lost nearly a half billion dollars of the nascent cryptocurrency.
Investment in the Bitcoin industry continues to grow. Bitcoin wallet and exchange Coinbase raises a total investment of $106 million, a new record for a Bitcoin-focused company. 21 Inc. and Circle follow.
As Bitcoin gains notoriety and users, prices reach all-time highs and confidence in the new economic landscape grows.
New York Introduces BitLicense
In the first attempt at Bitcoin regulation in the U.S., the New York State Department of Financial Services begins issuing business licenses for virtual currency activities, treating the space’s commercial operators like regular financial operators.
One bitcoin finally reaches parity with one ounce of gold. Only two months later, the price of one bitcoin reaches that of two ounces of gold.
All-Time Highs Bitcoin prices reach an all-time high of nearly $20,000. Then resettle to below $10,000.
yBitcoin_2018 (MASTER).indd 13
5/1/18 12:12 PM
The world of
What Is Cryptocurrency?
Today, there is a vast range of cryptocurrencies created to perform different functions, but they all act as digital assets that function as a medium of exchange using cryptography to secure transactions and confirm transfers. Bitcoin was the first decentralized cryptocurrency.
What Is Bitcoin?
Bitcoin and cryptocurrencies is evolving so
seem to arise almost daily. Here are some answers to the most commonly asked ones.
Bitcoin really refers to two different things: a decentralized financial network (Bitcoin) and the digital commodity created by that network (bitcoin). It is the worldâ€™s most popular cryptocurrency and the one that spurred the new digital economy.
Who Started Bitcoin? Bitcoin was created by the pseudonymous Satoshi Nakamoto, although the origins of its underlying technology go back to the late 1980s. Nakamoto created Bitcoin by combining a variety of existing technologies.
Who Controls Bitcoin? Bitcoin is not controlled by a single entity. Instead, the nodes on the network verify that all of the rules, such as the rule that only 21 million bitcoins will ever be released, are followed. When everyone verifies the rules are being followed, there is virtually no way for anyone to steal funds, cause inflation or otherwise create problems for the network. Having said that, the decentralized nature of the network also means rule-changing upgrades can be difficult to implement.
Where Do Bitcoins Come From? Much like gold, bitcoins are created through a mining process (see page 18) â€” albeit a digital one. Computer hardware is used to solve an extremely complex math problem about every 10 minutes. The computer (or miner) that finds the solution to the math problem is rewarded with new bitcoins. The amount of new bitcoins created through this process is reduced by half approximately every four years.
Is Bitcoin Anonymous? Bitcoin is not anonymous; it is pseudonymous. Every transaction can be viewed on the public blockchain, but a real-world identity is not necessarily attached to that. Use of Bitcoin can be more or less private depending on how it is used.
What Makes Bitcoin Valuable? Bitcoin has value because it is useful (see page 28). For the most part, Bitcoin transactions are most useful for those who are not served by the current financial system. Over time, bitcoin has become increasingly viewed as a mainstream store of value, one that is essentially uncensorable, and its price relative to the U.S. dollar has risen.
yBitcoin_2018 (MASTER).indd 14
5/1/18 12:12 PM
Is Cryptocurrency Legal? It is still very early days when it comes to cryptocurrency’s legal status around the world. Some countries have banned the use of cryptocurrency outright, while others are writing legislation to attract digital businesses to their friendly jurisdictions. In the U.S., bitcoin has been treated as a currency and commodity, meaning most Bitcoin companies fall under existing laws and regulations. In the U.S., it is legal for individuals to buy, transact and sell cryptocurrency for personal use as long as capital gains taxes are paid to the IRS (see page 82).
What Is a Blockchain? A blockchain is a record, or ledger, of digital events that is distributed among many different parties. It can be updated only by consensus of a majority of the participants in the system. And, once entered, information can never be erased without an effort from at least 51 percent of the network. Bitcoin’s blockchain links blocks of Bitcoin transactions. A new block is “mined” every 10 minutes and added to this chain. The blockchain represents the entire history of Bitcoin transactions; it is what makes it possible to tell who owns which bitcoins on the network (see page 20).
How Many Cryptocurrencies Are There?
What Does Cryptocurrency Mean for the Financial Industry?
Since bitcoin was created, more than 1,000 alternative cryptocurrencies have been launched. None of these alternatives to bitcoin have achieved the same level of success as bitcoin up to this point, but many have garnered significant investor and technologist attention and are poised to power central aspects of the future.
It is currently unclear what cryptocurrencies will mean for the traditional financial industry. Many banks and other legacy financial institutions are looking at upgrading their old systems to include many of the same technologies found in Bitcoin, for instance, without removing their centralized control over money and payments. Some believe that one day, cryptocurrencies will be powerful enough to disrupt and replace legacy financial institutions.
How Do I Buy Cryptocurrency? Cryptocurrencies are usually acquired in the same way as any other currency or commodity: by trading for them on the open market. Tokens can be bought through online exchanges (see page 74), traded for cash or earned in exchange for labor.
How Do I Keep My Cryptocurrency Safe? The safest way to hold cryptocurrency is on a device that is not connected to the internet. Hardware wallets are a popular option that create a physical barrier between a cryptocurrency wallet and an internet-connected device.
What Are Cryptocurrency Wallets? A cryptocurrency wallet is a piece of software that holds the private keys associated with a cryptocurrency address and allows users to sign transactions with those keys on the cryptocurrency’s network (see page 88).
Why Should My Business Care About Cryptocurrencies? Cryptocurrencies may eventually enable a payment system that combines the best aspects of cash and credit cards. While consumer use of Bitcoin was widely hyped in 2013 and 2014, most experts now understand that this is something that could take much longer to develop than originally anticipated. While the benefits of low transaction fees and no charge-backs are obvious to merchants right now, the immediate benefits for mainstream consumers are unclear. To get answers to more of your questions about Bitcoin and cryptocurrency, visit bitcoinmagazine.com/ guides.
yBitcoin_2018 (MASTER).indd 15
5/1/18 12:12 PM
What Is Bitcoin? By Erik Voorhees
The real magic of Bitcoin, the reason it’s so newsworthy, comes from the consequences of its existence.
When most people hear about Bitcoin, whether for the first or the tenth time, they ask one simple question: “What is it?” Like an automobile, Bitcoin is technically advanced and can appear complicated, depending on how much you want to know about it. But also like an automobile, it doesn’t require you to be a technical expert in order to use it — and for it to change the way you interact with the world. Here’s what you need to know. Generally speaking, Bitcoin is two things: 1) A payment network (“Bitcoin”) 2) The currency unit used on that network (“bitcoin”) Thus, as both a payment network and the specific currency used on that network, you use “Bitcoin” to receive and send “bitcoins” from and to other people. To clarify, take a look at the relationship between PayPal and U.S. dollars. PayPal is a payment network, but not a currency. In contrast, the U.S. dollar is a currency, but not a payment network. You use the PayPal payment network to make transactions in U.S. dollar currency. The PayPal payment network is operated and centrally controlled by one company (PayPal Inc.), and the U.S. dollar is created and centrally controlled by one organization (the U.S. federal government). Here’s where things get important, revolutionary — and a little weird. The Bitcoin payment network, unlike anything else before it, is
decentralized. It is not controlled by any company or organization. That fact alone is its core “value-add.” Bitcoin's decentralization is why it's unique and revolutionary. The Bitcoin network is like file-sharing: it’s a network of computers that talk to one another, but nobody controls the network itself (there is no central server). The bitcoin currency unit is similarly not created or controlled by any central party. Bitcoins are created by the network itself over time in a process that distributes the new coins to those computers that are supporting and operating the network. The number of coins created in this way is limited according to a clear mathematical schedule. As of this writing, there are 16.3 million bitcoins in existence, and this will continually increase over time to a maximum of 21 million bitcoins many years in the future. Unless you care about how Bitcoin accomplishes this, the above is really all you need to answer the question “What is Bitcoin?” It’s a payment network and a currency used on that network, which are controlled by no central party. People control their own bitcoins. The number of bitcoins in existence is limited by the rules of the protocol. Perhaps the more important question is, “Why should I care?” While computer engineers and mathematicians might find Bitcoin’s technical details fascinating, most people don’t really have the time for those complexities — just as most people don’t spend time worrying
yBitcoin_2018 (MASTER).indd 16
5/1/18 12:13 PM
about exactly how the internet works. We trust that it does, we enjoy its benefits and we know enough about it to use it. And while it’s true that Bitcoin permits financial transactions that have essentially zero cost and can occur instantly anywhere in the world, these consumer benefits are not really what’s important, either. The real magic of Bitcoin, the reason it’s so newsworthy, comes from the consequences of its existence. The fact that Bitcoin is decentralized, with no controlling entity, has fundamental implications. Because there is no central control, the power of the currency and its payment network belong entirely to the people who use it. And this power is tremendous indeed. Bitcoin enables any two people, anywhere on earth, to transact with each other freely. They cannot be censored. The only rules of their exchange are those they set between themselves. With Bitcoin, there is no third party presiding over the economic activity of the users. With Bitcoin,
you don’t need anyone’s permission when you make a financial decision. This means people can contribute to causes they believe are important, with no government agency or financial company able to cut off the payment flow. It means an entrepreneurial child can start an internet business before he or she is 18. It means a rural African farmer can receive payment for crops from a neighboring city, even with no bank account. It means a citizen of a tyrannical nation can hide their financial assets from seizure. It means the wealthiest and the poorest of the world now have the same authority over their money — beholden neither to banks nor bureaucrats. It democratizes finance just as the internet democratized speech and information. With Bitcoin, economic relationships are set and regulated by markets instead of politicians. By the individual, not the collective. The value of one’s savings now cannot be reduced through monetary debasement (i.e., inflation). Trade between individuals is now the business of only those individuals.
Certainly, some of these implications are controversial. Indeed, they will have a profound impact on human society, just as all great technological achievements do. A good way to think of it is that Bitcoin represents the separation of money and state — the ability to “practice one’s own economic behavior” without the permission of anyone else. It offers privacy in an age of surveillance, and honesty in an age of manipulation. So what is Bitcoin? It is a payment technology, sure. But more than that, it is a social and economic experiment. It is a project that, if successful, will change the relationships between humans on a fundamental level. Its implications have just barely been explored. Like any experiment, it can fail, but the genie is now out of the bottle. While this genie goes about its business, many things you take for granted will likely change. The changes will be beneficial, especially if you know something about them in advance. Remember the dawning of the internet. And educate yourself now on the phenomenon that is Bitcoin.
ABOUT THE AUTHOR Erik Voorhees, CEO of ShapeShift.io, is recognized as one of the world’s leading Bitcoin entrepreneurs. Voorhees passionately advocates for Bitcoin, which he considers among the most important inventions in history. As a featured guest on Bloomberg, Fox Business, CNBC, BBC Radio, The Peter Schiff Show Podcast and at numerous Bitcoin and industry conferences, he has asserted that “there is no such thing as a ‘free market’ when the institution of money itself is centrally planned and controlled.” His writings address “the human struggle for the separation of money and state,” with Bitcoin as the instrument by which the future will happen.
yBitcoin_2018 (MASTER).indd 17
5/1/18 12:13 PM
What Is Bitcoin Mining? By Aaron van Wirdum
If the platform works as intended, Bitcoin mining users should see their transactions embodies several confirmed and need not worry about how. But knowing a little about it of the beautifully makes involvement in the Bitcoin balanced incentives space all the more satisfying. The Role of a Miner that make Bitcoin Bitcoin mining is done by — who else? such a revolutionary — Bitcoin miners. Theoretically, anyone can system. So it’s become a Bitcoin miner. Like many other Bitcoin users, miners verify unfortunate that new transactions and new blocks and forward these to connected many users are Bitcoin nodes. They are part of unaware of the the peer-to-peer network just like anyone else, and, from a network process that perspective, there isn’t anything to identify them as miners. produces bitcoins, But miners take on an additional task within the network. They use as mining is the transactions they receive to try one of the most and “mine” new blocks themselves. This system has them serving an ingenious and important function for the network: If two conflicting transactions exist intriguing aspects on the network because someone tries to cheat and spend the same of the system.
Mining is, in many ways, Bitcoin’s backbone, simultaneously solving the “double spending” problem that could mean the same bitcoins are spent twice, making the underlying blockchain immutable, and bringing new coins into circulation. As a practical matter, mining is not something the average Bitcoin user needs to understand in order to acquire and spend bitcoins.
bitcoin twice, the miner picks which of these transactions is confirmed and includes it in a block of verified data. The conflicting transaction is then rejected from the network. As such, mining solves Bitcoin’s double spend problem.
How It Works This mining of new blocks is a somewhat complex mathematical process, the details of which are beyond the scope of a primer guide. But in a simplified metaphor, it can be thought
Where Is Bitcoin Mined? Bitcoin mining is an energy-intensive process, and miners tend to be most active in areas where energy is the most affordable. With so much mining activity taking place in China, the country has significant sway over the Bitcoin ecosystem.
of as a unique type of lottery. Miners “guess” what the next block could look like. If they guess correctly, their block is accepted by the network. If they guess incorrectly, they can guess again and as often as they want. However, each guess requires a tiny bit of computing, or hash, power to make. And because Bitcoin miners effectively compete against each other to be the first to find a new block, many try to guess as fast and as often as they can. This has naturally evolved into a sort of arms race over the years. Miners have increasingly optimized their computers to churn out a lot of hash power and spend a lot of computing energy doing so. This energy consumption is why Bitcoin mining is sometimes viewed as wasteful. But in actuality, this “wasted energy” offers the second great benefit to the Bitcoin network: it makes the blockchain tamperresistant and immutable.
Mining Immutability As a key property of the Bitcoin system, transactions that have been done in the past are practically impossible to undo. The only way for an attacker to potentially reverse an old transaction is to rebuild the entire blockchain that has been established since that transaction happened. This would also require the attacker to go through the whole “guessing game” and mine a whole new series of blocks from scratch. However, all of this “guessing” would require at least as much energy as has been invested by all
yBitcoin_2018 (MASTER).indd 18
5/1/18 12:13 PM
Figures per MorningBrew.com, accessed on January 23, 2018
of the miners since that transaction took place and potentially much more in order to overtake the original chain. Depending on how much hash power an attacker controls, this is either impossible or very expensive. Because this is impossible or prohibitively expensive, it’s safe to trust that older transactions will indeed not be reversed, making the Bitcoin blockchain relatively immutable. Of course, miners don’t invest all of this energy into finding blocks for charity. Each new Bitcoin block includes one special transaction. This transaction pays the miner in brand-new bitcoins that didn’t exist before, as well as transaction fees. And that is the third great benefit of Bitcoin mining: it’s how new bitcoins come into circulation, without the need of a central issuer.
Putting On a Hard Hat So, now that you understand what mining is, perhaps you want to become a miner and earn some new
bitcoins yourself. That’s possible — but it’s not easy. Back in the early days of Bitcoin, when the currency was hardly worth anything at all, anyone could mine bitcoins, even using a laptop computer. But this quickly changed when bitcoin gained real monetary value. Once miners realized that graphics cards could be dedicated to the task more efficiently, specialized mining farms emerged throughout 2010 and 2011. And since 2012 and 2013, Bitcoin mining has professionalized even further, as specialized chips and machines — known as “ASIC miners” — came to market. If you want to mine profitably, you will probably need one of these. It should also be noted that most Bitcoin mining today happens through mining pools. Instead of individual miners taking part in the peer-to-peer network, most of them actually bundle their hash power together through such a mining pool and share any rewards they receive.
This smoothes out the “luck factor” inherent in mining, so no one has to go without reward for months or years at a time. And last but not least, you will probably need relatively cheap (or free) energy; otherwise you are likely to spend more on your electricity bill than you will ever earn in rewards. Larger operations may also require a decent cooling system or a cold climate. And some basic technical skills to set up the operation and maintain it will come in handy, too. All of this is doable if you want to put in the time, money and effort. And if you have access to the right resources, it could even earn you a nice profit. But keep in mind that you will be competing in a highly professionalized industry. Bitcoin mining is not free money. To keep up with the latest news in mining, visit bitcoinmagazine.com/ sections/mining.
How Much Energy Does Bitcoin Mining Take? As the price of bitcoin rises, more miners are working to confirm more blocks. The greater the number of people that try to mine a bitcoin, the greater the amount of energy the network requires in order to do so. As Bitcoin becomes more popular, the average amount of energy that miners use to confirm the blocks grows as well.
Figures per Digiconomist.net, accessed on January 23, 2018
yBitcoin_2018 (MASTER).indd 19
5/1/18 12:13 PM
Bitcoin and the Blockchain 101
If any buzzword has garnered even more attention than “Bitcoin” over the past few years, it has been “blockchain.”
Increasingly leading a life outside of cryptocurrency, blockchain technology has generated hype in all sizes and shapes. Open or private, permissioned or permissionless, many with their own consensus algorithms, and some even developed or supported by well-known companies in the technology and finance sectors, the array of blockchain applications and solutions is exploding at a pace that’s hard to keep up with. But the concept of a blockchain originated, of course, with Bitcoin. And unbeknownst to many adopters, Bitcoin’s original blockchain provides advantages that no alternative system does. To understand why, let’s first look at what a blockchain actually is.
Underlying Technology The “block” aspect of a blockchain refers to blocks of data. In Bitcoin, these blocks are bundles of currency transactions, as well as some additional information about the blocks themselves, like the time at which they were mined. Each of these blocks is “hashed,” meaning that it’s scrambled and condensed into a compact and seemingly random string of numbers. And this string of numbers is then
included in the next block. This next block is in turn hashed as well, and this hash is included in the block after that. This links all blocks together, creating a chain. All of these blocks are shared over a network of computers, which all verify the integrity of a new block and its contents, and reconstruct the blockchain from it. Since all of these computers apply the exact same protocol rules, they all reconstruct the exact same blockchain. As such, the entire Bitcoin network reaches consensus over the state of the blockchain, a state which is updated about once every 10 minutes as a new block is found (for more, see our guide to mining on the previous page). Crucially, this consensus is reached without the need for a central intermediary. Bitcoin’s decentralized nature — in which tens of thousands of peers reconstruct the blockchain themselves — helps make the blockchain relatively censorshipresistant. Furthermore, the network doesn’t only achieve consensus every 10 minutes. It also ossifies the history of consensus. Because the unique identifier of each block — the hash — is included in the next block, all blocks are not just linked but also ordered chronologically.
yBitcoin_2018 (MASTER).indd 20
5/1/18 12:13 PM
The Bitcoin Blockchain’s Average Block Size Since its inception in 2009, the Bitcoin blockchain’s average block size has steadily increased as the number of transactions has grown. The current, built-in limit for data in a single block is 1 megabyte (MB), but innovations implemented on the blockchain such as Segregated Witness (SegWit) and the Lightning Network can allow for larger blocks. As of early 2018, average block sizes have surpassed 1 MB.
Figures per MorningBrew.com, accessed on January 23, 2018
In Bitcoin, changing what older blocks look like, by removing transactions, for example, is impossible. Due to specific mathematical requirements, the changed blocks would be entirely rejected by the system. The only way to rewrite history, therefore, is to create a whole new chain of blocks.
The Original Blockchain In many blockchains, it isn’t actually that hard to create whole new blocks and potentially rewrite history. But in Bitcoin, due to a requirement called “proof of work” and the fact that bitcoin is the most valuable of all cryptocurrencies, creating new blocks is very computationally expensive. It requires dedicated hardware, a certain expertise and, most of all, lots and lots of energy. To change history, then, requires an attacker to reinvest all of the energy that has been invested in Bitcoin’s blockchain from the point in history that needs to be changed. Depending on how much hash power a potential attacker has available, this is either very expensive or downright impossible. The costs involved in changing the data is what makes the Bitcoin blockchain the most robust,
immutable and chronologically sound chain of transaction data the world has ever seen. It’s a historical ledger of all transactions that ever took place.
The Blockchain — Beyond Bitcoin Interestingly, this doesn’t have to end with transaction data. As a global, censorship-resistant consensus system, Bitcoin’s blockchain potentially allows for much more. Transactions don’t really have to be used solely to transfer bitcoins. Instead, special software can be connected to the Bitcoin blockchain that interprets this basic transaction data a bit differently. As a simple example, a fraction of a bitcoin — potentially worth less than a cent — could represent something else entirely. Perhaps that fraction of a bitcoin can represent stock in a company. Or a piece of gold locked up in a safe. Or even a U.S. dollar in a bank account. Whoever then owns the “colored coin,” as this fraction of a bitcoin is called, has a claim on the underlying property. And as long as other participants recognize the claim, the Bitcoin blockchain — with its unique properties — all of a sudden carries much more than just bitcoins: it carries stocks, gold or dollars.
There are many other unique properties that continue to prove that Bitcoin’s blockchain is a standout player, even as the concept of blockchain technology takes off in countless industries. The Bitcoin blockchain as a global, censorshipresistant and immutable consensus database is a very powerful tool. And much like the internet itself, it is working today, ready and free to be used by anyone. To learn more about the technical details behind Bitcoin’s blockchain and the ways in which the technology is evolving, visit bitcoinmagazine.com/sections/ blockchain.
yBitcoin_2018 (MASTER).indd 21
5/1/18 12:13 PM
How to Plan a Bitcoin Meetup By John Barrett
The recent rise in the price of bitcoin is creating a buzz around the world. People from all walks of life are hungry for more information about Bitcoin, how to get started and what to do with it.
As the host of the podcast Bitcoins and Gravy, I have a lot of experience with the challenge of getting unfamiliar family members, friends and coworkers to understand the power of Bitcoin. Luckily, there is Meetup, the social networking website that facilitates offline gatherings. It’s the perfect solution for taking the largely online fan base and organizing real-world discussions that help advance the technology and promote education. As an organizer of the “Nashville Bitcoin Meetup,” which boasts nearly 250 members and monthly events in Music City, I have found the website to be a tried and true solution. Here are a few tips to help you start a successful group of your own.
yBitcoin_2018 (MASTER).indd 22
5/1/18 12:13 PM
Get the Word Out
For any Meetup group to be successful, you’ll need to get your name out there and attract new members. A wide variety of social media platforms are available to help you get the word out about your new group. As you gain momentum, make sure to ask for help from other members. It doesn’t have to be a one-person show.
Make sure each Meetup has a social aspect. Usually this means good conversation with refreshments provided by the organizers. To grow your group, create a sense of community from the onset and at every Meetup. Socializing leads to sharing ideas, solving problems and building things together. I’ve found that building friendships is a better approach than evangelizing. You definitely don’t want to come across as cultish or desperate for recruits.
Scout a Location Choosing a good Meetup location can be challenging, especially when it comes to Bitcoin. Users don’t always live in the same neighborhoods and finding an easily accessible location, such as a group-friendly restaurant, coffee shop or pub, is key. Some groups hold their meetings at the public library and many college campuses offer public meeting areas. (Note: Make sure your venue has adequate parking.)
Finalize an Agenda Have a well-thought-out agenda for your Meetups. Maybe it’s nothing more than an hour of sitting around and talking about developments in the Bitcoin space. In fact, that’s usually what we do at our events — share stories and exchange ideas. Some Meetups bring in speakers to talk about specific topics or provide tutorials. Other groups hold a “Satoshi Square,” where people meet to buy and sell bitcoins using their mobile wallets. Be creative, make it fun and be welcoming to everyone.
yBitcoin_2018 (MASTER).indd 23
Ask for Tips Once your group is established, don’t be afraid to ask members for bitcoin tips. People are usually happy to tip a few hundred Satoshis toward Meetup costs such as refreshments, guest speakers, advertising or possibly a venue fee should your group require a large space. Make sure to always use the same Bitcoin tipping address so that everyone can see the coins coming into and out of the same wallet. This transparency builds trust among members and encourages ongoing donations.
Don’t Be a Boss Bitcoin is all about decentralization, so do your best to organize your Meetup in a way that gives all members equal power. Working together on equal ground will make for a fun and successful Bitcoin meetup.
5/1/18 12:13 PM
Bitcoin, Bitcoin Cash and the Nature of
Forking Perspectives from both sides of the great forking debate.
The crypto economy has witnessed an explosion of innovation in the last few years. From altcoins to private blockchains to initial coin offerings (ICOs) and everything in between, new projects have been launched and new experiments are always under way. Bitcoin has, in many ways, served as the gold standard for this emerging crypto economy. As the oldest and largest cryptocurrency, it is the one that tends to make the most mainstream headlines and first attract those new to the ecosystem. But since 2017, a new trend has emerged. Bitcoin has undergone “hard forks,” splits between the individual nodes running the Bitcoin network over which version of the Bitcoin blockchain is valid. While forking is not completely novel, several hard forks have been deployed over the past year to create incompatible blockchains on purpose, effectively creating new coins that share a blockchain history with the original Bitcoin network, but institute fundamental changes in order to, in the eyes of some developers at least, improve upon it. The explanations below offer insight into forks from Bitcoin’s point of view as well as the perspective of one of Bitcoin’s most successful forks, Bitcoin Cash. While Bitcoin
purists might argue that the main network is the original and most secure digital currency with the most solid track record, advocates of Bitcoin Cash would say that it provides an update to the system that’s necessary to keep up with the growing numbers of transactions. Your stance, and your place in the constantly evolving cryptocurrency landscape, will be up to you to decide.
April 2011 Namecoin
October 2011 Litecoin
December 2014 BitcoinXT
Forking has become a way for those who want to improve upon or build projects based on the main Bitcoin network. Since 2011, significant forks have occurred both to the software client of the Bitcoin network and as “coin splits” of BTC.
August 2017 Bitcoin Cash
October 2017 Bitcoin Gold
yBitcoin_2018 (MASTER).indd 24
5/1/18 2:20 PM
What Forking Means to Bitcoin By Aaron van Wirdum, Technical Editor at Bitcoin Magazine and Advocate of the Original Bitcoin Bitcoin can be a confusing technology, and little is more confusing to new users than trying to wrap their heads around Bitcoin’s forks. This is, in part, because there are different types of forks with very different implications. The first type of fork that people refer to is a “software fork.” A software fork is really a copy of the code of a software implementation, which is typically tweaked to serve functions that the original code does not. But in the world of Bitcoin, there is also a very different type of fork: a blockchain fork. A blockchain fork occurs when different nodes accept different blocks of transaction data, henceforth constructing a different transaction history. This may sound bad for Bitcoin’s ability to secure and record all transactions immutably, but it happens fairly often. Importantly, these blockchain forks usually get resolved within an hour or less. If one chain becomes “longer” (meaning it has the most proof of work) than the other, the nodes should automatically switch to that chain and by design disregard the shorter chain. However, if different nodes apply incompatible protocol rules, the chainsplit may never resolve. One set of nodes could consider one version of the blockchain invalid, while another set of nodes does not. Such a split is typically called a “hard fork.”
A hard fork can be accidental — caused by a bug, for instance — or deployed on purpose. If it’s intentional, it is usually intended to be a protocol upgrade. More specifically, a hard fork upgrade entails protocol rules to be removed or expanded. This means that nonupgraded nodes consider the new rules invalid: they breach the original protocol rules. (As if the terminology isn’t confusing enough, the goal of a hard fork upgrade is typically to avoid an actual blockchain fork. Instead, everyone is expected to upgrade and adopt the new protocol rules.) And finally, contrasting a hard fork, there’s also such a thing as a “soft fork upgrade.” Whereas a hard fork removes or expands protocol rules, a soft fork adds or tightens protocol rules. This has one big benefit compared to a hard fork: a blockchain fork can be avoided even if not everyone upgrades. This is because, from the perspective of non-upgraded nodes, no rules are broken. Upgraded nodes are still operating within the bounds of nonupgraded nodes. With the possible exception of some irregular protocol changes in the early days, Bitcoin has only undergone soft fork upgrades. They range from the implementation of the well-known block size limit by creator
Satoshi Nakamoto, to advanced features like time-locked addresses, to the most recent Segregated Witness upgrade that resolved a protocol bug. Importantly, this means that all planned protocol upgrades so far have had an “opt in” nature. Anyone who preferred not to adopt a particular upgrade could choose not to whilst still remaining compatible with the rest of the network. By extension, this means that all software implementations of Bitcoin that have ever existed are still compatible with the current protocol — though some of the oldest versions would require a minor software patch for reliability. This compatibility is a crucial achievement for a project that is designed to come to consensus over the state of the blockchain without anyone in charge, and therefore also no one to dictate upgrades. However, not everyone agrees that Bitcoin’s protocol rules are desirable. A significant segment of the (former) Bitcoin community so strongly believed that the aforementioned block size limit should be removed with a hard fork that it decided to move forward with such a hard fork even without community consensus. This hard fork, therefore, caused a blockchain fork, in effect spawning a new currency: Bitcoin Cash. The relative success of Bitcoin Cash, in turn, ignited a spur of Bitcoin hard forks, all resulting in new currencies. Whether these “forkcoins,” as they are sometimes called, really add much to the cryptocurrency ecosystem is questionable, however. Launching a new cryptocurrency has always been possible, and, at least from a technical perspective, no forkcoin has introduced a feature that wasn’t already offered by either Bitcoin or an existing alternative coin. While many Bitcoiners would agree that anyone is fundamentally free to use any currency of choice — including forkcoins — it remains to be seen whether these coins will maintain much market value in the long run.
yBitcoin_2018 (MASTER).indd 25
5/1/18 2:20 PM
Forking for Bitcoin Cash By Jake Smith, Business Development Lead for Bitcoin.com and Advocate of Bitcoin Cash Although Bitcoin Cash is commonly thought of as the new kid on the block, proponents of the currency continue to make the case that “Bitcoin Cash is Bitcoin.” While it’s true that the Bitcoin Cash ticker symbol, BCH, is a new addition to the crypto landscape, the Bitcoin Cash blockchain traces its “genesis block” all the way back to Bitcoin’s origin, when Satoshi Nakamoto famously encoded the newspaper headline “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks.” Bitcoin Cash and Bitcoin Core share the same genesis block because they are both branches of the original Bitcoin. The Bitcoin Cash branch split from the original Bitcoin on August 1, 2017, by way of a “hard fork” — a change in the network rules that created two separate blockchains out of one. Less than a month later, on August 23, the Segregated Witness feature, also known as SegWit (see page 42), was activated on the original Bitcoin chain as a soft fork, universally applying new features to the network and deprecating the original ruleset. Today, the two main forks of Bitcoin (based on market capitalization at least) are Bitcoin Cash and Bitcoin Core, but there are dozens of others, bearing such names as Bitcoin Gold, Super Bitcoin and Bitcoin Diamond.
Which of these forks deserves the mantle of being “the real Bitcoin” is a frequent subject of spirited debate among the Bitcoin community. Some fans of Bitcoin Core will argue that their chain is the real Bitcoin because it uses the legacy ticker symbol, BTC, and is engineered by the same group of developers who produced the Bitcoin Core software. Bitcoin Cash supporters argue that their chain is “the real Bitcoin” because it adheres to the original design laid out by Satoshi Nakamoto in his seminal white paper, “Bitcoin: A Peer-to-Peer Electronic Cash System.” Because Bitcoin is a system without leaders, without central authorities and without rulemakers who decree rule changes with the wave of a hand, there is no mechanism for determining what truly is “the real Bitcoin.” Attempts to answer such questions can only be subjective in nature, and it is up to the participants of the system to decide for themselves. Over time, the market will likely converge on one of the many forks as the de facto leader. Which chain ends up on top will be decided by a combination of utility, adoption and community. If 2017 was “the year of the ICOs,” then 2018 is likely to be dubbed “the year of the Bitcoin forks” —
indeed, many have already said so. The process of rapid iteration through forking may be confusing and stressful for many, but to this author it represents the very nature of what Bitcoin was always supposed to be: the ultimate expression of the free market. That so many forks of Bitcoin have been created so quickly only proves it to be something that anyone can do. Yet it is not enough to just create a fork; one must also build up a critical mass of support for their fork to sustain it and keep it growing. This support comes in the way of merchants, users and infrastructure. By these metrics, Bitcoin Cash is the most serious contender for the title of “the real Bitcoin,” as it has seen rapid adoption amongst merchants, support from most major companies and services in the Bitcoin industry, and a worldwide network of user Meetups across dozens of countries. 2018 may be the year of the Bitcoin forks, but Bitcoin Cash in particular is one fork that should not be ignored.
yBitcoin_2018 (MASTER).indd 26
5/1/18 2:20 PM
Convert and spend blockchain assets easier. Truly Global Shipping Multiple Currencies No Activation Fee
Refer a friend and earn 10% residual referral bonus. Learn more â€“ WageCan.com
Apple and the Apple logo are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc., registered in the U.S. and other countries. Google Play and the Google Play logo are trademarks of Google LLC.
yBitcoin_2018 (MASTER).indd 27
5/1/18 12:13 PM
Why Bitcoin Has Value A journey through the history of trading, currency and the inherent need for digital money. By David Hollerith
Since the dawn of civilization, people have found ways to satisfy their needs. Society itself arose from the discovery that forming groups and dividing labor made meeting our needs easier. When these early groups grew into larger communities, they developed a more intricate process for exchanging goods. The first marketplaces emerged as forums for bartering where people who produced a single good could attain a diverse number of other goods. Though bartering improved life, the early marketplaces had their limits. If on the same day that a fisherman came to market seeking wheat, but no farmer desired fish, the fisherman would have to conduct a complex series of trades to acquire something he could trade for wheat. In each transaction, the fisherman could be expected to lose a percentage of his fishes’ original
value, and he must be able to understand the exchange rate of every good with respect to all other goods. After a long day of fishing, this situation would not be ideal. Our concept of trade needed to be further refined. Improvement came in the idea to use a single good as an intermediary, the introduction of currency. Using currency saved time and effort and it would enable trade to work on a greater scale. By agreeing on a single intermediary good, two was the maximum number of exchanges anyone in the marketplace would ever need to make. This meant that there would be only one exchange rate for every good that held value: its cost in currency. However, selecting a good to serve as an intermediate currency wasn’t simple. For instance, dirt would not make a good currency. A decent currency needed to be something durable, easily divisible and transportable. By this criteria, coins were settled upon as early currency. But even these had their limits. When trading on an extremely small or large scale, their material size and weight could be problematic. While bringing a wheelbarrow’s worth of silver coins to a market was a better alternative than doing the same with fish, it still had flaws.
Banking on Value Banks were introduced as a means of securing wealth in exchange for fees and accreditation. Instead of
withdrawing wealth to purchase something, people traded their banknotes for the goods they wanted. Without a doubt, the use of paper currency brought convenience. However, it also presented bankers with the opportunity to invest their clients’ deposited wealth for additional profit. This worked as long as not all of a bank’s clients withdrew their money at the same time. If that did take place, the number of banknotes that had already circulated throughout the system would be rendered worthless and the system altogether would collapse. To prevent such a catastrophe, European nations legalized the act of bankers lending more credit than what they possessed, as long as the banks followed regulations set in place by each nation’s governing body. Central banks were created for this explicit purpose. They are typically the only banks that have the right to issue legal tender, thus controlling and regulating the value of each country’s currency. In 1971, U.S. President Richard Nixon chose to “leave the gold standard.” The Federal Reserve, the country’s central bank, would no longer permit new dollars to be redeemed for their value in gold or silver, something their existence had always been predicated on. Without material backing, the American dollar became what is called a “fiat currency,” one that has been declared legal tender by a government, though not backed by a physical commodity. The value
yBitcoin_2018 (MASTER).indd 28
5/1/18 12:13 PM
of fiat money is derived from the relationship between supply and demand, instead of relying upon the actual value of the material the money is printed on. Today, only about 8 percent of the United States’ dollars in circulation are paper. While paper money has its advantages, debit, credit cards and other forms of digital payment like Venmo and PayPal offer better incentives and efficiency. But as we continue to improve the speed with which we communicate and share information across the internet, the prevalent electronic bookkeeping methods are beginning to lag behind in the privacy, security and speed they offer. Currently, any verified financial transactions are made possible through a trusted third party like governments, banks, accountants and notaries. While this method predominates at the moment, it is riddled with added costs, transaction delays and security breaches. Primarily, this method gives significant power and authority to trusted third parties.
Entering the Modern Era Bitcoin isn’t just an unregulated transaction system. It is a digital currency made possible by a pioneering technology that presents people with a fundamentally better method of trade. The Bitcoin software is enabled by a network of computers participating in collective bookkeeping or “verification” and it is decentralized,
meaning it is not controlled by a central party. The network is hosted on a digital ledger, the blockchain, open to anyone who joins (see page 20). Every piece of information, including time, amount, senders and receivers, surrounding a transaction is verified by hundreds of participating computers. The complex mathematical process in which participating computers race to verify and maintain transactions on the ledger for a reward of bitcoins is called mining (see page 18). The mathematical principles that are involved in the mining process ensure that all participating computers must automatically and continuously agree on every transaction. This process can be thought of as having a virtual and trusted third party present at every digital transaction. Many see Bitcoin as a long-dreamed-about replacement not just for our outdated financial system but for the whole concept of money. In the relatively short time that Bitcoin has existed, its foundational value has come from technological features that make it more transparent than any other transactional system. The caveat: to transact in the Bitcoin system, one must use the designated bitcoin currency. Therein lies the second — and potentially greater — level of Bitcoin’s value. As a commodity, Bitcoin’s value runs according to the strength of the network. The more people who use the technology, the more valuable the currency becomes. It’s an economic
concept inherent in adopting most comprehensive technologies. The internet, for example, increased in the diversity of information it contained and the communication opportunities it presented as the number of its users grew. Thinking back to society’s earliest markets, currency first emerged as an intermediary out of the need to improve trade speed, costs and efficiency. What Bitcoin shares with the earliest forms of money, such as gold and silver, is that there is a finite supply. Even for those who don’t see Bitcoin superseding our current monetary system, the technology still demands the question: What should the money of our time look like?
yBitcoin_2018 (MASTER).indd 29
5/1/18 12:13 PM
yBitcoin_2018 (MASTER).indd 30
5/1/18 12:14 PM
Let's Talk Bitcoin! is a twice weekly audio show about the ideas, people and projects building the new digital economy and the future of money. Featuring analysis and discourse by host Adam Levine and others including Andreas Antonopoulos, Jonathan Mohan and Dr. Stephanie Murphy with varied perspectives and interviews with the people behind tomorrow's headlines.
The only FM radio show dedicated to cryptocurrencies and disruptive technology.
yBitcoin_2018 (MASTER).indd 31
The Tatiana Show talks about politics, activism, blockchain technology, music and how to combine them all to help the world. Tatiana Moroz, co-host Joshua Scigala and special guests chat about all kinds of exciting topics from technology, the arts and the Bitcoin revolution in a casual conversation that a layman can understand.
Epicenter takes you to the heart of perhaps the most important technological revolution of our time: the rise of decentralized technologies. Each week over 20,000 listeners, including some of the most influential people in the space, tune in as hosts Brian Fabian Crain, Sebastien Couture and Meher Roy bring you in-depth conversations with some of the brightest minds in this burgeoning ecosystem of startups and open-source projects around the globe.
Talking about the world from the perspective of how technology affects choice and how choice affects technology. A limitless scope for insightful discussion.
John Barrett is a Bitcoin enthusiast and entrepreneur from Nashville, Tennessee, who interviews experts from around the country and around the world about cryptocurrency, blockchain technology and the future of decentralized value exchange networks.
The Bitcoin Game has provided long-form Bitcoin interviews since 2014. As one of the few edited cryptocurrency podcasts, it delivers content-dense, listenable audio enjoyment.
Host Arthur Falls takes the listener on a journey through the most interesting projects driving innovation on the encrypted and incentivized internet.
5/1/18 12:14 PM
The Dollars and Sense of Bitcoin Payments By Tony Gallippi and Stephen Pair
Bitcoin is a digital currency and a global payment network that is growing in popularity every day, offering unique advantages to businesses in a wide range of industries. But does it make sense for your business to accept bitcoin? Let’s explore why it may.
Credit Cards: Designed for an Offline World Credit cards were never designed for the internet. These lovely pieces of plastic with magnetic stripes were popularized in the 1950s (though the magnetic stripe was not added until the 1970s). These cards still work well 60 years later when paying in person, but they don’t work well for paying online. Customers expect a seamless payment experience — they don’t want to fill out credit card information forms for every purchase. Merchants are still being hit by multiplepercentage-point processing fees to securely settle customer payments through the multiple antiquated layers of the card network. And the costs of the security failures of this system have the most impact on online businesses. Online payment fraud continues to hit record highs year after year and it shows no signs of slowing down. “Friendly fraud” is also increasing, as consumers learn how to abuse the charge-back system. When an online merchant ships merchandise to a shopper, that merchant assumes a risk for up to 90 days. If the payment is disputed by the cardholder at any point during that time, the merchant is usually forced to reverse the
payment and pay a penalty fee. Merchants bear the cost of this fraud, and ultimately this cost is passed back to honest consumers in the form of higher prices. As businesses use the internet to meet demand from consumers around the world, this weakness is sapping time and money from the online economy, one that should have a payment method of its own.
Bitcoin: The Solution for Online Payments Bitcoin was invented in 2009, making the most of everything we know about the internet and online security. It’s a payment system designed specifically for internet purchases from the ground up. While credit card companies spend countless resources trying to make their outdated products work better online, they’ll never be able to match the simplicity and security of Bitcoin. Bitcoin works like cash for the internet. It’s sent from person to person in a push transaction, not drawn from accounts by third parties. It uses cryptography to provide proof of ownership, bypassing the traditional multiparty routing and authorization processes that transmit sensitive customer information. With this native solution for payment security, Bitcoin functions without a charge-back mechanism like the one today’s card system is built on. Customers and merchants alike are protected from fraud and its costs. If your business accepts a large number of payments over the internet, accepting bitcoin might make sense for you. Here are three
areas of online payments on which accepting bitcoin can have the most impact.
Macropayments: Between $1,000 and $10,000 Credit cards make payments between $1,000 and $10,000 more difficult. At this scale, interchange fees of up to 3 percent on card transactions can quickly add up. These macropayments are also at a higher risk of fraud. When criminals obtain stolen credit card information, they try to buy the most expensive things they can find before the cards get deactivated. Merchants selling items in this price range are at the forefront of the battle against payment fraud. For merchants like precious-metals giant JMBullion.com, Bitcoin already provides a muchneeded solution.
International B2B Payments Businesses that need to receive payments from international clients are often hit with elevated interchange rates, which vary from country to country and can easily be over 5 percent per transaction. In many of the world’s fastest-growing economies, businesses may not have access to card networks at all. Wire transfers can be received from more countries, but they are inefficient solutions. Bank wires rely on a large network of corresponding relationships, leading to unpredictable costs and transfer times to simply get money from point A to point B. Senders and recipients end up with little or no information as to the delays and fees incurred along the way.
yBitcoin_2018 (MASTER).indd 32
5/1/18 12:14 PM
The Growing Value of Bitcoin Payments
T B D
Since 2013, the average value of the bitcoin payments processed by BitPay has risen, as has the overall trading volume. These figures have likely risen even more, powered by the rise in bitcoin’s price.
Figures per TheAtlas.com, accessed on January 24, 2018.
Bitcoin changes that. There is tremendous potential for companies to offer Bitcoin as a payment option for their international receivables. It’s faster, lower-risk and costs less than any other payment method. We’ve already seen traction — Bitcoin billing already makes up more than 10 percent of transactions run through one Bitcoin payment processor, and those B2B payments are 25 times the size of average consumer Bitcoin payments. If your business has international clients, then accepting bitcoin also might be worthwhile for you.
Payment Disbursements Businesses don’t just need a new way to accept payments. Many times, they need to issue payouts as well. Some businesses have large fleets of affiliates, consignment sellers or vendors that need to get paid their revenue share on a regular basis. Traditional bank transfers work well if you need to pay a batch of payments in the same country (for example, a domestic payroll). However, these traditional transfers break down when businesses need to send batches of small
payments internationally. Those small international payments are very costly to send via bank transfer. Plus, the banks and their routes can be different in every country, and making a mistake in a transfer instruction can lead to delays. Bitcoin payments operate on the same network worldwide, with a direct point-to-point access to any internet-connected device on earth. Marketplaces, affiliate networks and app stores can pay their users directly, frequently and cost-effectively with Bitcoin. Imagine a rideshare driver getting paid after every ride, or an app store developer getting paid after every download.
Getting Started With Bitcoin Payments
your local currency and local bank account. This way, the rise or fall in the price of bitcoin doesn’t affect the price of your product or service. A partnership with a payment processor can essentially eliminate any risk with Bitcoin. In fact, due to the lower cost of accepting bitcoin payments and the publicity it can bring as a byproduct, your business has more to gain than to lose. And you’ll be joining the more than 100,000 merchants worldwide who already accept bitcoin. Even as Bitcoin matures in its growth as a technology, the opportunities for merchant adoption remain wide open. It is expanding the possibilities for online commerce well beyond the limits of traditional payments. Is your business ready?
Integrating Bitcoin payments into your business is a fairly simple process. If you have a small business or online store, you can start accepting bitcoin in just a couple of hours. Billion-dollar enterprises take a little longer. Most Bitcoin payment gateways allow you to set your prices in your local currency. More important, they can settle incoming bitcoin funds in
ABOUT THE AUTHORS Tony Gallippi is the co-founder and executive chairman of BitPay, the global leader in Bitcoin payments. He has over 20 years of experience in sales and marketing, and holds a bachelor’s degree in mechanical engineering from the Georgia Institute of Technology. Stephen Pair is the co-founder and CEO of BitPay. He has 20 years of experience building software systems in the financial and telecommunications industries.
yBitcoin_2018 (MASTER).indd 33
5/1/18 12:14 PM
yBitcoin_2018 (MASTER).indd 34
5/1/18 12:14 PM
yBitcoin_2018 (MASTER).indd 35
5/1/18 12:14 PM
Bitcoin: Why It Now Belongs in Every Portfolio By Tuur Demeester
A technology is called “disruptive” if it creates a new market that first disturbs and then displaces an earlier technology. Bitcoin has the potential to be such a technology and much more. The fact that it can disrupt the largest and most interconnected marketplace in the world — that of money, banking and finance — makes it perhaps the most promising investment opportunity of our age. Unlike our current, increasingly unstable and unpredictable financial systems, Bitcoin has critical 21st century technologies at its very core. The digital currency and clearing network is open source, mobile, peer-to-peer, cryptographically protected, privacy oriented and native to the internet. The fusion of these technologies allows for a level of security and efficiency that is unprecedented in the world of finance. These are some of the areas in which Bitcoin-based technologies can directly compete: • The $5.72 trillion annual market for card payments • The $1.9 trillion annual e-commerce market • The $580 billion annual remittance market • The $3.2 trillion hedge fund market • The $7.8 trillion gold market • The $1.2 trillion cash market • The $21 trillion offshore deposit market
Achieved Growth Bitcoin’s potential is not going unnoticed. After it had been praised by tech moguls such as Bill Gates (“a technological tour de force”) and Gmail founder Paul Buchheit (“Bitcoin may be the TCP/IP [Transmission Control Protocol/Internet Protocol] of money”), the money started speaking. Bitcoin saw investment by top venture capital (VC) brass such as tech entrepreneurs Marc Andreessen and Fred Wilson, LinkedIn co-founder Reid Hoffman and PayPal co-founder Peter Thiel; by billionaires such as former eBay President Jeffrey Skoll and Li Ka-shing (by many reports the richest person in Asia); by iconic executives such as former Citigroup CEO Vikram Pandit, Blythe Masters of Digital Asset Holdings and former Reuters CEO Tom Glocer; and recently by large-cap companies such as Google, Qualcomm, NYSE, Nasdaq, USAA and NTT DOCOMO, a $75 billion Japanese phone operator. In addition, several academic and government heavyweights have affiliated themselves with Bitcoin companies: Larry Summers (ex–Treasury Secretary and former World Bank chief economist), James Newsome (former chairman of the Commodity Futures Trading Commission and former president and CEO of the New York Mercantile Exchange) and Arthur Levitt (former chairman of the U.S. Securities and Exchange Commission). The core value proposition of this network
is the fact that, in the words of IBM executive architect Richard Brown, “Bitcoin is a very sophisticated, globally distributed asset ledger.” What Brown and others are getting at is that Bitcoin will, in the future, be able to serve not only as a decentralized currency and payment platform, but also as the backbone for an “internet of property.” This entails a decentralized global platform on which companies and individuals can issue, buy and sell stocks, bonds, commodities and a myriad of other financial assets. The effect will be to remove much of the current bureaucracy and barriers to entry that exist, presenting a huge opportunity for the world’s 2.5 billion unbanked people. Which raises the question: Why Bitcoin and not some other cryptocurrency? The answer may lie in the network effect. Of all the digital currencies, Bitcoin is the one with the highest adoption rate and the strongest security. The combined computing power of the Bitcoin mining industry serves as a protective firewall around the payment network. In short, no other digital currency is as secure as Bitcoin. This attribute alone attracts more capital, which in turn makes the network even more secure and performant. So, how much of this potential has already been realized? From the inception of Bitcoin in 2009 until January 2011, its market capitalization grew to $1.5 million. From there, it rocketed to $145 million in
yBitcoin_2018 (MASTER).indd 36
5/1/18 12:14 PM
Potential Pitfalls However, these scenarios are far from sure things. Bitcoin faces several risks going forward. These include: • The emergence of a much better digital currency that steals its market lead • An undetected bug in the system • A hard fork (what happens when some nodes in the network start running a Bitcoin software upgrade that is incompatible with previous versions) causing the Bitcoin payment network to split in two • A sustained attack by an organization with substantial financial resources, such as a government
A better currency is possible, but experience shows that disruptive protocols — such as a Simple Mail Transfer Protocol for email and TCP/ IP for internet — have proven to be very resilient once adopted by a critical mass of the population. As with any software application, the discovery of bugs may destabilize the system, but the open-source nature of Bitcoin allows for many eyeballs to help track problems and for many minds to help figure out a solution. A hard fork creates competition between two versions of Bitcoin, and after a period of fear and doubt, eventually the value will flow to the version deemed most useful by its users. In other words, not a long-term threat. An organized attack on the network is possible but expensive, and there are many potential defense mechanisms: miners can refuse suspicious transactions or raise fees, vulnerabilities in the code can be fixed and so forth. From the perspective of the government, approaching the robust, decentralized Bitcoin network with an outright ban is near impossible. Therefore taxation, regulation and acceptance seem the more likely outcome. In any case, it is becoming exceedingly clear that digital currencies are here to stay. Bitcoin does not appear to be a fad or bubble, nor merely a one-off hedge against gold. With a risk-reward proposition this attractive, holding a small percentage of bitcoins in one’s portfolio as a speculation on increased adoption may be one of the wisest investment decisions of our age.
How Serious a Risk Do These Challenges Pose?
January 2013 and spiking to over $10 billion in January 2014. Since then, it has recently reached a value of over $110 billion. Investments in the Bitcoin ecosystem are also taking off rapidly. In 2013, just over 40 VC deals were made that raised a total of $96 million. That number nearly quadrupled over 2014, with $335 million invested. For 2015, despite a softening VC climate, Bitcoin and blockchain startups raised a total of $490 million, an increase of 46 percent. In Q1 of 2017, VC firms invested $107.5 million into blockchain technology infrastructure. Additionally, initial coin offerings raised over $3.7 billion in 2017, per Coinschedule. The value of bitcoins in circulation has been rising steadily. This can be explained mostly by the fact that it is a scarce commodity (the maximum supply is capped at 21 million) with rapidly growing utility. The future value of bitcoin could grow exponentially were it to replace the remittance market, become the global e-commerce currency or become the new form of offshore deposits.
Value of Bitcoin in Potential Transaction Scenarios If the following scenarios occurred and accounted for all of Bitcoin’s transaction volume, the price of a single bitcoin would spike, demonstrating the digital currency’s potential for growth: 1
Gold holders divest 1 percent into bitcoin: $3,500
Bitcoin replaces the remittance market: $6,860
Bitcoin becomes the global e-commerce currency: $11,500
25 percent of black market transactions are conducted in bitcoin: $44,000
Bitcoin replaces reserve currency: $500,000
Bitcoin replaces offshore deposits: $800,000
ABOUT THE AUTHOR Tuur Demeester is the founder of the cryptocurrency-focused economic research firm Adamant Research. He first discovered Bitcoin on a research trip to Argentina and started recommending it as an investment at $5 in January 2012.
yBitcoin_2018 (MASTER).indd 37
5/1/18 12:14 PM
A Beginner’s Guide to Buying Bitcoins By Diana Ngo
As Bitcoin’s value rises and more people around the world become interested in investing, brand-new users are still plagued by a fundamental question: How can I buy bitcoins?
That’s why we’ve included this handy “Beginner’s Guide to Buying Bitcoins.” This step-by-step instruction manual should provide everything a new user needs to know to get started with their investment. But before moving too far, it is crucial that new users keep in mind that safety is imperative. Since cryptocurrencies are still in a regulatory gray area throughout the world, consumers need to conduct due diligence and their own research before using a service and depositing money anywhere. With that disclaimer out of the way, it’s time to get started.
Choosing a good bitcoin wallet is one of the most important aspects of using the platform. Without a wallet, you cannot, technically, have bitcoins. But finding a good and secure solution isn’t an easy task, as it often comes down to a choice between safety and convenience. There are many different wallet options out there and even more questions you need to ask yourself in order to find the right one. But making the right choice about where to store the private keys attached to your bitcoins is an important first step. (See page 94 for more on the type of wallet that is right for you.)
With a wallet selected and set up, users will be ready to assess the different payment options for purchasing bitcoins. Many choose to do this through bank transfers or with credit cards, and this will mean selecting a bitcoin exchange. But before sending funds anywhere, users need to do their own research and ensure that they are doing so safely. It is advised that they dig into these five elements of a bitcoin exchange: fees, payment methods, ease of use, security and customer service. • Fees: Some exchanges are very transparent about their fees while others are less so. It’s important to look into this before depositing money anywhere. • Payment methods: Payment methods that are often proposed include bank transfers, credit cards, PayPal and cash. Most places will accept either one or two of those methods.
yBitcoin_2018 (MASTER).indd 38
5/1/18 12:14 PM
3 • Ease of use: Don’t try to use a decentralized exchange if you are still new to Bitcoin. Choose a service that accommodates beginners. Some are very userfriendly while offering more advanced features for experts. • Security: Bitcoin exchanges are known to get hacked, so it is crucial that you check whether a service follows security best practices. These include providing proof of coins in cold storage and offering and encouraging customers to use two-factor authentication, among other methods (see page 86). • Customer service: Some exchanges are very fast to respond to customer queries, while others may take days to get back. At some point you will have to interact with support, so it is important to choose a service that is responsive. (To learn more about some of the top-ranked exchanges available for buying bitcoin and other cryptocurrencies, see page 74.)
directly with others in a relatively anonymous manner. Meanwhile, purchasing bitcoins with cash will guarantee you the highest levels of anonymity. This can be done using a bitcoin ATM or physically meeting with someone and swapping your cash for their bitcoins. But keep in mind that not all bitcoin ATMs are anonymous, as some require ID submission. To find nearby bitcoin ATMs, check Coin ATM Radar, an online website that lists all the devices available worldwide as well as their locations, features and fees. One research option for person-toperson exchanges is LocalBitcoins, which will allow you to find sellers in your area who are willing to sell their bitcoins for cash. Fees associated with cash transactions are generally higher than buying via an exchange platform by bank transfer. Moreover, for large transactions, using cash can be quite inconvenient, as well as risky.
CHOOSE A PAYMENT METHOD Those preferring to utilize PayPal or cash to purchase bitcoins will have a few providers to choose from, though due to a fear of reversible transactions and “charge-backs,” not many sites offer the ability to buy bitcoins via PayPal. Nevertheless, and despite the high fees involved, PayPal remains a convenient method. LocalBitcoins, an online marketplace and over-the-counter exchange platform, is the most popular option for purchasing bitcoins via PayPal. However, the biggest drawback is that most sellers will require you to have a community reputation and previous purchase history. This allows them to minimize the risk that bad actors will reverse the PayPal transaction while keeping the bitcoins obtained. Other services include Paxful and WeSellCrypto. Advanced users can use Bitsquare, a decentralized bitcoin exchange that lets you trade
4 WELCOME TO BITCOIN! Following these steps, as well as conducting your own research as necessary, should usher you into the world of bitcoin ownership. As you become more comfortable in the space, reassessing the payment and storage methods that are right for you will become necessary. With bitcoin now in hand, you have taken the first step to embracing the digital currency revolution.
yBitcoin_2018 (MASTER).indd 39
5/1/18 12:14 PM
ZenCash Is More Than Just a Private Cryptocurrency
I want peace and freedom for the world, and I view this project as one that embodies that,” said Rob Viglione, co-founder of ZenCash. Once you consider this vision in more detail, ZenCash’s current status and future plans begin to coalesce into a potential gamechanger for the cryptocurrency ecosystem and the world at large.
Private History ZenCash was born as a fork of Zclassic, a cryptocurrency designed to provide advanced privacy features. The co-founders of ZenCash, Viglione and Rolf Versluis, have backgrounds in finance and IT networking, respectively, although both were engaged in other blockchain projects prior to launching ZenCash. The ecosystem of privacyfocused cryptocurrencies is a very crowded one. Zclassic is itself a fork of Zcash, another cryptocurrency designed for privacy. Monero and
Dash also fall within this category, as do a range of lesser-known coins. Yet the ZenCash team believes that other privacy-centric cryptocurrencies do not fulfill the full potential of private blockchain platforms. “We thought Zclassic had a limited mandate, and we decided to fork it,” Viglione said. He explained that other projects in the private cryptocurrency space are focused primarily on the currencies themselves, whereas ZenCash aims to build an original, decentralized blockchain that supports a range of applications. “Our competitors are taking the cryptocurrency route, whereas we’re taking the secure platform route,” he said.
ZenCash’s main focus is on being a cryptocurrency built on a privacy-centric platform offering additional services. Toward that end, the ZenCash platform currently boasts over 8,000 nodes in operation, which form the ZenCash blockchain. That’s more than half the nodes that exist on the Bitcoin blockchain.
Application Ecosystem Although the ZenCash blockchain does not support Ethereum-style smart contracts, it enables Bitcoinlike scripting that can be leveraged to build a range of applications. Currently, the ZenCash ecosystem consists of three applications. One, ZenChat, is a private communications protocol. The application is currently available in “beta form with Rolf Versluis, ZenCash Co-Founder
yBitcoin_2018 (MASTER).indd 40
5/1/18 12:14 PM
ZenCash is not the first privacy-focused cryptocurrency to emerge with promises of providing a more personally secure alternative to the current world economy. But the vision of its leadership and the drive of its team offer reason to believe it may have the best chance of realizing this future. Rob Viglione, ZenCash Co-Founder
ongoing development,” according to Viglione. In addition, the Zen Blockchain Foundation, the organization behind ZenCash, is sponsoring the development of ZenPub and ZenHide. The former enables the publication of data on the ZenCash blockchain like a decentralized version of Dropbox. The latter application leverages domain fronting to circumvent internet censorship. ZenCash is committed to an open-source development model. Although the code for applications that are under development remains closed until application release, the code for completed applications and the core protocol code are publicly available, according to Viglione.
Approach to Governance ZenCash’s approach to governance is another distinguishing feature of the platform. The project’s white paper states, “Fundamentally, our philosophy on governance is that we do not know a priori the best approach.” Toward this end, the ZenCash governance model is designed to be flexible and to evolve over time. The ZenCash project is currently governed by a team of about 50 individuals, who operate within seven distinct divisions. That model
is subject to change, however, as the project works to implement a protocol-level voting system. Viglione said the voting system will be highlighted by two key innovative features. One is secret ballots backed by “Zero-Knowledge Succinct Non-Interactive Argument of Knowledge” (zk-SNARK) anonymity, a protocol that allows someone to prove possession of something without revealing its secret key. Because the ballots will enable reliable election returns without revealing who is leading in an election until voting is complete, they will help to ensure that candidates with an early lead do not gain an outsized advantage. By extension, the system will level the playing field for minority candidates, whom voters might otherwise ignore because they believe they have no serious chance of winning. The second feature is that the ZenCash voting system will combat voter apathy by paying stakeholders to vote or allowing them to transfer their voting rights to others. “My wildest dream is for our voting system to become a proof of concept for a small nation to create cleaner, fairer governance,” Viglione said. He cautioned, however, that “of course, the cryptocurrency space is all one big experiment.”
Research Projects The ZenCash vision is rooted in research and evidence-based decision making. In an interview, Viglione spoke frequently of game theory as a way to make decisions about the architecture of ZenCash. In addition, the Zen Blockchain Foundation has partnered with IOHK, a blockchain research company, to produce reports that evaluate how best to build voting into the ZenCash protocol, as well as how to build scaling solutions that will prevent the ZenCash blockchain from facing the scaling challenges that have beset Bitcoin. While other privacy-focused cryptocurrencies exist, ZenCash is notable for its end-to-end encryption and its network of nodes enabling additional services. As a broader platform for building privacy-focused applications whose computing and storage resources are hosted on the blockchain, ZenCash warrants special attention as well. So too does the project’s innovative and flexible approach to governance. Whether ZenCash will truly fulfill Viglione’s mission of changing the world remains to be seen. But for now, at least, it is clear that the project is cultivating innovative ideas within the blockchain community.
yBitcoin_2018 (MASTER).indd 41
5/1/18 12:14 PM
Bitcoinâ€™s Journey to All-Time Highs and Beyond From an all-time high of nearly $20,000 to dips that brought it back within quadruple digits, the price of bitcoin has taken a wild ride since our last issue. Though it may be hard to pinpoint where exactly the price will be heading next, Bitcoinâ€™s technological progress continues to trend decidedly up.
By Aaron van Wirdum, originally for Bitcoin Magazine with editorial changes for yBitcoin
yBitcoin_2018 (MASTER).indd 42
5/1/18 12:14 PM
Since late 2017, the Bitcoin community has taken some notable strides to keep the network running amidst controversy and to prepare it for further growth in the future. Because understanding the technological advancements and philosophies that underpin the world’s preeminent cryptocurrency is critical to understanding its value, we’ve compiled the pivotal stories that have powered Bitcoin from early 2017 to today.
Hard Fork Threats and the Birth of Bitcoin Cash The first half of 2017 witnessed the rise of Bitcoin Unlimited. After Bitcoin XT and Bitcoin Classic, this was the third alternative protocol implementation designed to increase the limit on individual block sizes through a “hard fork,” a diversion in the Bitcoin blockchain that implements new, incompatible protocol rules and essentially creates a new version of the cryptocurrency. Almost half of all newly mined blocks were signaling support for this change by spring, which could have led to a “split” of the Bitcoin network into two different blockchains. Such a thing had never happened before, and it was considered by many within the community to be a potential threat to Bitcoin as they knew it. But in large part because of a series of bugs that crashed all Bitcoin Unlimited nodes, and in large part because major cryptocurrency exchanges announced their intention
yBitcoin_2018 (MASTER).indd 43
5/1/18 12:14 PM
BITCOIN’S JOURNEY TO ALL-TIME HIGHS to list any coin resulting from a fork as a new asset (so Bitcoin Unlimited would be listed under the currency ticker BTU and not BTC), Bitcoin Unlimited’s relevance decreased before the summer. At the same time, bitcoin’s exchange rate increased from just over $1,000 to over $2,000. During the summer, however, another protocol implementation — Bitcoin ABC — announced a similar initiative. Compared to previous attempts, Bitcoin ABC employed a much more viable strategy, in large part because its lead developer acknowledged that they were indeed creating a new coin: Bitcoin Cash (BCH, sometimes referred to as “Bcash”) — not Bitcoin (BTC). Interestingly, when this fork finally occurred on August 1, the markets responded positively. While BTC had been trading at a little under $3,000 before the fork, the combined value of the two coins were trading at over $3,000 shortly after the fork: holders were rewarded for holding. Moreover, in the weeks that followed, BTC’s exchange rate surged to over $4,000 for the first time.
Increased Institutional Acceptance: Derivatives Clearing and Bitcoin Futures Up until 2017, it was difficult for institutional money, at least in the United States, to gain exposure to the bitcoin markets. Last year, it initially did not look as if this situation would get much better. Throughout the first months of 2017, Bitcoiners were anticipating the potential approval of the Winklevoss twins’ COIN exchange-traded fund (ETF) by the U.S. Securities and Exchange Commission (SEC). This ETF would have been tradable much like gold ETFs, which essentially means that institutional investors would have been able to easily buy and sell BTC derivatives without having to worry about holding actual BTC.
After years of review, this ETF was rejected. But interestingly, and as opposed to what many may have been expecting, this disappointment didn’t have much of an effect on bitcoin’s price. The exchange rate that had been building up to over $1,100 in anticipation of the SEC verdict did dip to below $1,000 in the two weeks after the rejection, but this fully recovered in April, even breaching new all-time highs. Throughout the rest of 2017, new entry points into the bitcoin markets were starting to form after all. In July, as bitcoin was still trading under $3,000, the U.S. Commodity Futures Trading Commission (CFTC) granted LedgerX with a derivatives clearing organization (DCO) license, giving the New York–based startup permission to exchange and clear Bitcoin options and futures, and to swap products. Then, in August (when BTC was still trading under $3,000), the exchange holding company Cboe announced plans to launch cashsettled Bitcoin futures. While these technically still don’t let institutional investors put money into bitcoin directly, they allow them to bet on the price of bitcoin. And, importantly, if investors bet on a price increase, market makers will most likely hedge their bets by buying actual BTC; that’s how they can be sure to make money. In other words: institutional demand translates into a real BTC price increase. The month closed with bitcoin prices near $5,000. In October, when bitcoin was already trading over $5,000, further institutional acceptance was gained. By then, the first trades were happening on LedgerX: about $1 million worth in the first week. At the end of October, still before the bitcoin price had ever reached $6,000, the major derivatives marketplace operator CME announced plans to launch a Bitcoin futures product as well, similar to what Cboe had done. Bitcoin’s price shot up to over $7,000 within weeks.
yBitcoin_2018 (MASTER).indd 44
5/1/18 12:14 PM
AND BEYOND Activating Segregated Witness
Struck by Lightning
One of the biggest-ever tech innovations deployed on the Bitcoin network has been Segregated Witness (SegWit). First proposed as a “soft fork” (a change to the Bitcoin protocol that would render only previously validated blocks as invalid, but would allow all future blocks to continue being validated by the old nodes) back in 2015 and implemented in the Bitcoin Core software by late 2016, the upgrade initially faced an uphill battle to adoption. Segments of the Bitcoin community, and in particular some major miners, opposed the upgrade. This changed in early 2017. In February, when bitcoin was still trading at around $1,000, the pseudonymous developer Shaolinfry proposed a new idea to get SegWit activated: a useractivated soft fork (UASF). Instead of having miners activate the soft fork (as had become the norm for major Bitcoin changes over the past years), users could set a deadline at which they would start enforcing the new rules themselves. Probably motivated by SegWit’s successful deployment on the cryptocurrency Litecoin, as well as other developments, one of the proposed UASFs — known as “BIP148” — started to gain significant traction by summer. But with the BIP148 deadline set for August 1, and still no activation by mid-July, the markets became nervous: BTC dipped from over $3,000 to under $2,000. But when SegWit was finally activated in time to avoid a network split after all, the markets quickly rebounded and continued to surge to new highs of almost $5,000 by the end of August.
Amid outlandish price spikes and steady drops, it’s Bitcoin’s technological progress that heartens many about the cryptocurrency’s future. Chief among the developments has been the deployment of the Lightning Network, which started live, public tests in January 2018. The Lightning Network has long been a highly anticipated payment network that would exist on top of Bitcoin and could greatly increase the speed, cost-effectiveness and privacy for exchanging coins. It may solve one of the fundamental problems that Bitcoin is encountering as it grows in popularity: because every transaction must be verified on the blockchain, they are relatively slow and expensive to conduct. But the promise of the Lightning Network would allow Bitcoin users to create “payment channels” with one another. These channels would record transactions without sending each one to be confirmed, only sending final balances to be verified by the Bitcoin network and thus saving lots of time and fees. New transactions can be routed over existing payment channels, meaning that the number of individual channels can be kept relatively low. Of course, this is an optimistic view of what is a complex and experimental protocol. The Lightning Network is still in its very early stages, and while it’s a potentially powerful technology, it’s unlikely to, by itself, remove all potential obstacles to large-scale adoption. Nevertheless, it is one of the latest developments powering the world of Bitcoin.
The Lightening Network is still in its very early stages.
yBitcoin_2018 (MASTER).indd 45
5/1/18 12:14 PM
A venture capitalist with marked success in the early days of the internet became one of the first legacy financial leaders to legitimize Bitcoin with his personal investment. After reaping the benefits of that early adoption, Tim Draper is looking toward the future.
One drawback to Bitcoin’s rise in mainstream popularity last year is that many people were learning about the cryptocurrency from those who had only discovered it a short time before. A major part of understanding Bitcoin is knowing who and what supported it throughout its short and complex history. And despite popular belief, it was not only dark web coders and anarchists who kept it going. One of Bitcoin’s earliest advocates, Tim Draper, is, in fact, a third-generation venture capitalist. Draper is the founding partner of Draper Associates, Draper Fisher Jurvetson (DFJ), the Draper Venture Network and Draper University, an online school with a residential program that teaches entrepreneurship globally. Draper’s notable investing successes include Hotmail, Skype, Twitter, Tesla, Baidu and Coinbase. He has been ranked as number seven on the Forbes Midas List, listed as the number one “Most Networked Venture Capitalist” by Always On, and named the World Entrepreneurship Forum’s 2015 “Entrepreneur for the World.”
Tim Draper’s Big Bet on Bitcoin
So, it’s fair to say that his interest in cryptocurrencies and Bitcoin specifically marks one of the most forceful votes of confidence from the legacy financial sector for this space. Draper first made Bitcoin-related headlines in 2014 after purchasing a lump sum of BTC auctioned by the U.S. government after its seizure of the Silk Road, the online illegal goods marketplace. Less than three months later, in an interview with Fox Business, Draper made an unprecedented, at the time, claim — bitcoin’s price would reach $10,000 by 2018. Though he concedes that the price just reached his prediction within the last month of 2017, he remains bullish on Bitcoin’s future and is interested in initial coin offerings (ICOs) and how blockchain technology will impact governments the world over. “I think everybody is going to realize cryptocurrency is here forever,” he said. “It’s going to be a major part of our economy. In five years, if someone tries to buy a cup of coffee with dollars, the barista is going to laugh at you because nobody will use it anymore.”
BRINGING BITCOIN INTO THE FUTURE Tim Draper first encountered Bitcoin in 2011 and soon realized that it was far more than a way to pay for virtual products. It was a new currency, a unique store of value outside of government control, meaning it could cross borders and, with a finite supply, was likely to increase in value over time. While Draper’s own interest was piqued, that of his son, Adam, was more so. Adam started an accelerator program, Boost VC, dedicated to helping Bitcoin companies and the underlying blockchain technology they used. Adam was the first investor in Coinbase, one of the world’s biggest cryptocurrency exchanges. Meanwhile, the elder Draper’s first investment into Bitcoin went to the blockchain consulting firm CoinLab. It was part of the first official venture capital raise for a direct investment in Bitcoin, he recalled. Not long after, Draper bought $250,000 worth of bitcoin through CoinLab when the price of BTC was hovering around $6.
yBitcoin_2018 (MASTER).indd 46
5/1/18 12:15 PM
Most of Draper’s bitcoin was stored with Mt. Gox, which handled about 70 percent of Bitcoin transactions until it was hacked in February 2014. When all was said and done, approximately 850,000 bitcoins — an amount valued at more than $450 million at the time — belonging to the exchange and its customers were stolen. After Mt. Gox collapsed, the price of bitcoin dropped approximately 20 percent and would not rise to its January 2014 average until May 2016. Though initially furious, Draper’s financial loss gave him a firsthand lesson in Bitcoin’s resilience. He was stunned that despite such an enormous theft, Bitcoin exchanges and other startups kept on, largely undeterred. New and more interesting use cases around blockchain technology appeared, and the need for a frictionless currency persisted. Draper’s continued optimism around the technology would prove to be prescient. When the FBI arrested Ross Ulbricht, founder of the Silk Road, on charges of money laundering, computer hacking and conspiracy to traffic narcotics, the agency dealt
another major blow to Bitcoin’s mainstream reputation, as the cryptocurrency quickly became associated with illicit online purchases. Following Ulbricht’s arrest, the FBI seized millions of dollars of bitcoin from Silk Road accounts and Ulbricht’s personal computer. A portion of those seized — 36,000 BTC — was auctioned off by the U.S. Marshals Service on July 1, 2014, and Draper bought all of it. “If it’s a long-term bet, I like to look stupid early so I can look smart later, or really stupid later,” Draper said. “I’m willing to do either.” Bidding $14 over the market price per bitcoin, Draper found himself back in the Bitcoin ecosystem under unlikely circumstances: buying the dark web’s preferred currency from the Feds. Needless to say, Draper was well aware that, though intangible, BTC still carried a sentiment of its ill-reputed past. The best way that he could personally reconcile Bitcoin’s reputation, he determined, was to make good with his new investment. Draper secured the bitcoin with Vaurum, later renamed Mirror Labs, a startup working on developing investor
exposure to economies in emerging markets. He would later back other companies building exchanges and marketplaces for Bitcoin in the developing world, such as BitPesa in Africa, BitPagos in Latin America and Coinhako in Southeast Asia. For Draper there is still no greater use of Bitcoin than as a currency that is not beholden to any one, centralized authority. “Many people want money that is not at the mercy of some government,” Draper explained. “Whenever people have less faith in their government they will gravitate toward cryptocurrency, where they can travel across borders while possessing value that will not be confiscated.” For people in failing states, Bitcoin’s existence means their earned value is no longer directly subjugated to the detrimental inflation of a national currency, such as Venezuela’s bolivar. “It also allows the two to three billion people of the world who are unbanked to be able to participate in the global economy,” Draper said. “By consequence, it also means Bitcoin has the potential to grow the world economy quite a bit.”
yBitcoin_2018 (MASTER).indd 47
5/1/18 12:15 PM
CRYPTOCURRENCY AND GOVERNMENTS Draper’s belief in Bitcoin’s potential to have a strong and positive impact on the world economy also illustrates the significant attention he has paid to how governments interact with cryptocurrency and blockchain technology. Given his long career of finding business opportunities by improving upon inefficient and costly government projects like rockets, it is only natural that he is attracted to opportunities to use the blockchain as a way to reduce government spending. Draper was the second e-resident of Estonia’s blockchainbased e-Residency program — the first blockchain use case for virtual governance. Important things that can be done through virtual governance are healthcare, social security, pension, welfare and workers’ compensation, to name a few. Furthermore, Draper believes Estonia’s program will be a model other nations will follow. “Today, a lot of what governments actually do is virtual. Some of it is land based like border protection but I think that’s getting less and less important, although someone might create a war just to make people believe it is important.” Where Draper sees less of a need for central governing bodies, he recognizes more need at the local level of government within towns and cities, where leaders can focus on individual citizens within their areas. For Draper, the consequences of Estonia’s virtual governance is a major breakthrough in world politics. “It means governments can now reach across borders to compete for virtual citizens. In the next five to ten years we’re going to see governments move from buyside to sellside. Governments will move from thinking they control all that they purvey to strategizing how they can get more people to become citizens of their country.” By Draper’s account, just as companies have to provide competitive service to their customers, governments too will
need to provide competitive service to their constituents. However, he is doubtful of government-backed cryptocurrencies (GBCs). GBCs are different from a government blockchain ecosystem such as Estonia’s in that they are the cryptocurrency equivalent of a national or fiat currency, while Estonia’s estcoin is simply a transaction token for governmentissued services. China, Russia and Venezuela have all announced plans to create or at least experiment with their own cryptocurrency. Draper draws a hard line on the economic use for a GBC to compete with bitcoin and other cryptocurrencies in that they do not possess the fundamental value of cross-border transactions. “If a government can still confiscate a currency, I don’t see it offering any real value for the consumer.”
FIXING CRYPTOCURRENCY REGULATION Draper pointed to Japan as the model for how governments should work with, instead of against, cryptocurrency, In April 2017, the Japanese government enacted the Virtual Currency Act as an amendment to their Payment Services Act. In it, regulators clarified that bitcoin is an asset and payment method that will be regulated by Japan’s Financial Services Agency (FSA). A few months later, the country opened markets internationally by removing a consumption tax for foreign investors. To a large extent, Draper’s views on cryptocurrency rely on what his accumulated failures and successes throughout his business career have shown him. “It’s all about the customer,” Draper said. “This is true for every industry, including government. Those companies and governments that provide good service to their customers, such that the customers become the salesforce, are the
ones that do well. The key is to have your customers so delighted with a product that they go out and promote it to all of their friends.” Overall, Draper believes countries will do a lot better economically if they treat bitcoin as a currency that people can use. “Governments should not be thinking of cryptocurrency as a threat to their existence,” he explained. “Overall, a country will do a lot better financially if it recognizes bitcoin as a currency that can open entrepreneurial opportunities and prevent brain drain.” Draper suggested that the current U.S. policy of having to report capital gains on every bitcoin purchase over $200 is a grave error that is preventing economic growth. However, along with lauding smaller governments such as those in Singapore, Estonia and Malta, Draper was complimentary on how the U.S. Securities and Exchange Commission (SEC) has handled cryptocurrency. Particularly, how the SEC has held off going after ICOs except under the most obvious cases of fraud. “This is a good idea because nobody can be sure where [the cryptocurrency and blockchain technology space] is going from here,” he said.
CRYPTOCURRENCY BEYOND BITCOIN Governments aside, ICOs and the emergence of hundreds, if not thousands, of new cryptocurrencies have brought a wealth of new players into the Bitcoin and blockchain technology business space. Draper’s take on the ICO craze is optimistic, as it introduces a new mechanism for funding ventures. “It’s fantastic,” Draper said. “These ICOs are allowing people to pay for the future they want to see.” However, when it comes to ICOs, Draper maintains the same due diligence that he has long since established in venture capital.
yBitcoin_2018 (MASTER).indd 48
5/1/18 12:15 PM
“While some [ICOs] are just vaporware where they’ve got nothing, I back those ones I feel are movements where people are willing to dedicate themselves to building something great,” he said. Under the same line of thinking, Draper proposes that most new coins — those that don’t have a marketplace, community or system for demand and supply, and don’t really have a viable reason to exist — will not trade, though a few may rise to a level of extraordinary value. “If it is a cryptocurrency that is doing something better than Bitcoin or maybe better for a specific reason or group of people, then there might be a true reason for a coin [to exist],” he said. “I think, as in the dotcom era, there will be like five that make it big.” While Draper is hesitant to compare the world of cryptocurrencies too closely to the emergence of the internet and its accompanying bubble of investment, he believes bitcoin and other cryptocurrencies have acted as catalysts for change in a similar way. “The way the internet changed communications, entertainment, taxes and information in general, cryptocurrency will do a similar thing to much bigger industries — real estate, government [and] healthcare,” he said. If and when a similar crash takes place in the cryptocurrency space as it did following initial investment into internet companies, Draper predicts a migration from some of the more tangential cryptocurrencies to those that have paved the way, including Bitcoin. “During and after the dotcom crash, the quality investments people made were Amazon, Google and Microsoft,” Draper explained. “People gravitated toward quality. They thought this has been fun, but what is really going to work. By consequence, the quality cryptocurrencies will become even more valuable because more attention pointed in their direction means more engineers putting in effort to work on those [cryptocurrencies’] problems.”
LOOKING TO THE PAST, POINTING TOWARD THE FUTURE Though he admits he’s not certain how exactly this will happen, Draper thinks back to his experiences as a leading investor in the early internet for lessons about what will happen in the near future of Bitcoin and other cryptocurrencies. He looked back and found that “most of our effort in the dotcom world has solidified to about five companies and that took 20 years. There will always be smaller companies and coins trying to compete. But I imagine there will be 5 to 10 major coins and the others will be smaller. These little currencies will keep the big ones honest in the marketplace.” Perhaps the best lesson a cryptocurrency investor can learn from Draper is to pay close attention to what makes a successful project and, despite what may seem like early success, to be wary of the risk. “A company must have a total dedication to what they are doing,” he said. “There needs to be a feeling that this thing is going to happen with or without you as an investor. People [who have] passion toward the thing that they are doing become clear when you start asking them about it. However, I’ve been fooled a lot and I imagine I will be fooled for years to come.”
yBitcoin_2018 (MASTER).indd 49
5/1/18 12:15 PM
Bitcoin, Petro and Venezuelaâ€™s Embrace of Cryptocurrency By David Hollerith By David Hollerith 50
yBitcoin_2018 (MASTER).indd 50
5/1/18 12:15 PM
WHAT IS THE FUTURE FOR THE WORLD’S FIAT CURRENCIES AND BLOCKCHAIN TECHNOLOGY?
For many cryptocurrency advocates, tokens represent much more than just a digital store of value. They represent, for the first time in modern history, the opportunity to create an economy that is free from centralized control, even governments. But many, especially those invested in those legacy institutions, are skeptical that this type of future could ever exist. “No government is going to put up with it for long,” said Jamie Dimon, chairman and CEO of JPMorgan Chase, while speaking to an audience in San Francisco in January. “There will be no real, noncontrolled currency in the world.” Decentralized consensus may be acceptable for recording events or storing medical records, but for one reason or another, many find it unlikely that cryptocurrencies will one day replace governmentbacked, fiat currency.
And the governments themselves have all been treating the advent of the digital economy differently. Policies vary widely, from Japan’s Virtual Currency Act, which states that bitcoin is an asset and form of payment method, to Bangladesh’s warning that conducting transactions in cryptocurrency could result in serving as much as 12 years in prison. Morocco, Ecuador and Nepal have outright banned cryptocurrency. Australia, Canada and the United States are taking steps to regulate cryptocurrency in some way. Naysayers aside, another, telling reaction from some of the world’s governments has been to try out blockchain technology for themselves. Estonia has done this with its e-Residency program, which runs a distributed ledger that can hold all pertinent personal data for each citizen. Other governments are exploring the creation of government-backed cryptocurrency (GBC). China, Russia, the United States, Canada, Japan, Uruguay and Sweden have all publicized that they are exploring the potential for a fiat currency based on a blockchain. It’s hard to say whether a given GBC would truly embrace cryptocurrency’s potential to create a transparent, decentralized economy. While some may, others might end up with the same issues that plague many fiat currencies, namely burdensome, centralized control.
Venezuelans Turn to Bitcoin An intriguing place to watch the relationship between cryptocurrency and government is Venezuela. Without a doubt, Venezuela could use the benefits that many cryptocurrencies promise. The Venezuelan government has
maintained strict controls over its fiat currency, the bolivar, since 2003, and falling oil prices since 2014 have spurred the country’s current economic depression. The government’s response has been to increase state control over the economy at the expense of the private sector. In 2017, inflation of the bolivar exceeded 650 percent. As the exchange rate continued to tumble, the country’s gross domestic product (GDP) contracted 12 percent by the end of the year.
The Antminer S9 is said to be the most popular device to mine Bitcoin in Venezuela. “A lot of people are leaving Venezuela,” said a native software developer familiar with cryptocurrency mining, who asked to remain anonymous. “At this point, the country doesn’t have enough money to provide food, medicine and other necessities for its people.” The resource that Venezuela has in the most abundance is oil. According to VenezuelaAnalysis .com, an independent website dedicated to Venezuelan news analysis, the country is the fifthlargest oil exporter in the world, with the largest reserves of unconventional oil in the world. An abundance of oil reserves has allowed the government to subsidize electricity to the point of it being
At this point, the country doesn't have enough money to provide food, medicine and other necessities for its people.
yBitcoin_2018 (MASTER).indd 51
5/1/18 12:15 PM
nearly free. The financial constriction of hyperinflation, coupled with this cheap electricity, has proved to be a strong catalyst for Venezuelans to turn to Bitcoin mining as a way to take charge of their own economic futures. The Antminer S9 is said to be the most popular device to mine Bitcoin in Venezuela. Each unit costs about $3,000 plus shipping, and comes (often indirectly) from China. In Venezuela, three S9 miners cost $3 to run for 10 months and earn about one bitcoin in that time. This low energy cost for Bitcoin mining has made it an effective way to supplement the salaries of those in the middle and upper classes, while many Venezuelans have scaled operations so that they can easily live off the mining income alone. Venezuelan miners, along with other Venezuelan professionals who receive payment in bitcoin, trade currency over exchanges like Coinbase or LocalBitcoins.com. To procure necessities, they buy foreign products with cryptocurrency or simply trade their bitcoin for bolivars to purchase them domestically. Bitcoin mining in Venezuela has been dangerous for two main reasons, the anonymous source said. “First, in a country where the national currency has no value, people are hungry and desperate to have money at the cost of committing violent crimes,” the source explained. “Second, the government is not your friend.”
Cryptocurrency mining in Venezuela was deemed legal by President Nicolás Maduro, who expressed interest in cryptocurrencies and announced that the Venezuelan government intended to create an official cryptocurrency for the country. 2017 was an especially confusing year for Venezuelan Bitcoin miners. Large operations were targeted by government authorities and traced by their irregularly high electricity consumption. In most of these cases, devices were seized and the miners were jailed for some form of money-laundering charge.
In this environment, law enforcement groups are able to wield the threat of “money laundering, foreign exchange control violations, tax evasion and even homeland treason, traición a la Patria,” said Randy Brito, the founder of a local cryptocurrency resource, BitcoinVenezuela.com. Though Brito alleged that all of these illegal activities are certainly happening in the country, they are most often committed by members of the upper class, who are themselves often involved with the government.
The Problem With GBCs In a surprising twist, on December 3, 2017, cryptocurrency mining in Venezuela was deemed legal by President Nicolás Maduro, who expressed interest in cryptocurrencies and announced that the Venezuelan government intended to create an official cryptocurrency for the country, to be called the “petro.” Less than two weeks later, however, authorities ransacked a mining operation in western Venezuela, seizing the equipment and arresting its operator. This GBC was made available amidst controversial allegations and warnings: an open letter to the U.S. Secretary of the Treasury Steve Mnuchin from U.S. Senators Marco Rubio and Robert Menendez denounced the petro as a way for the country to circumvent U.S. sanctions. Since its introduction, reports have emerged indicating that Russia helped Venezuela create the petro as a way to do just that. At press time, news was circulating that President Donald Trump’s administration had plans to restrict the use of the cryptocurrency for U.S. financial transactions. The petro is supposedly tied to Venezuelan oil, gold, gas and diamonds. It has been lauded as a way to save the country from its economic crisis. It has alternatively been labeled a public relations trick to distract the public from the real economic issues that the country is facing, as well as a way to take foreign investment and, perhaps speculatively, as a test for the use of
yBitcoin_2018 (MASTER).indd 52
5/1/18 12:15 PM
GBCs for larger nations not yet ready to deploy the technology themselves. But first and foremost for many cryptocurrency advocates, a government-backed version like the petro will not include the things that make something like Bitcoin truly valuable. For Jeffrey A. Tucker, the editorial director of the American Institute for Economic Research (AIER), there is no real point in a GBC like the petro. In a blog post for AIER’s website, Tucker addressed the viability of GBCs by examining the potential for Russia’s cryptoruble, the country’s own potential cryptocurrency. In the post, he asserted that one of the most important attributes of cryptocurrency is that it reduces centralized control. Today, the dollar acts as the world’s reserve currency, but because of national separation, there are many places in the world where it is not and will never be spendable. In contrast, Bitcoin’s decentralized nature, specifically its ability to be transacted across borders, grants it a much greater potential market capitalization. “The effort in Venezuela is no different from that of Russia,” said Tucker. “I don’t think it will become viable.” Tucker argued that the idea of backing a cryptocurrency with something physical, such as oil, creates unnecessary complications that offer no improvement for a market and would therefore most likely fall apart under real market pressures. He pointed out that the tight control with which most governments want to oversee their currency is precisely why cryptocurrencies have arisen as popular alternatives to fiat. “If I were advising governments, I would tell them not to waste their time with this measure,” Tucker said. “Instead, be the first country to fully embrace Bitcoin.”
yBitcoin_2018 (MASTER).indd 53
5/1/18 12:15 PM
Beyond Bitcoin: The Future of
By Giulio Prisco
The popularity of Bitcoin and the power of its underlying blockchain technology have given rise to many imitators, alternative cryptocurrencies that seek to duplicate Bitcoin, improve on its model or take the technology to another level. The vast majority of “altcoins” (a somewhat derogatory term for coins marketed as alternatives to Bitcoin) are “me too” coins, clones of Bitcoin without interesting or useful extra features. Typically, me-too coins quickly disappear into oblivion after enjoying a few months of popularity,
especially among the cryptocurrency enthusiasts and speculators who missed out on Bitcoin Many other altcoins are ultimately proven to be scams, unable to deliver on the value or purpose that they promise, and some have been known to infect the computers of gullible miners with viruses and malware. Therefore, readers should beware of investing energy or money in newly launched cryptocurrencies without conducting their own due diligence. However, some cryptocurrencies have introduced innovative and
unique features that represent real alternatives and complements to Bitcoin. It’s worth noting that the “real” value of a cryptocurrency depends on many factors, which include its usability as “digital cash” (for payments) and/or “digital gold” (for investment), its privacy and security, and the utility of the underlying blockchain technology for nonfinancial applications. For a cryptocurrency to be successful, it must perform much better than Bitcoin and other available tokens in at least one critical use case.
yBitcoin_2018 (MASTER).indd 54
5/1/18 12:15 PM
Room for Improvement Bitcoin can, and should, be improved upon in many ways. For example, without fundamental changes, the Bitcoin blockchain can only support a throughput of a few transactions per second, way fewer than the throughput supported by major credit card networks, which can process tens of thousands of transactions per second. Though Bitcoin offers a certain privacy to disciplined users who take appropriate measures, there are ways to de-anonymize Bitcoin transactions.
Last but not least, Bitcoin mining consumes a lot of energy. Switching the mechanism used to achieve distributed consensus from proof of work (or PoW, the consensus model performed by Bitcoin miners) to proof of stake (or PoS, a model that achieves consensus by having those with “stake” in the system create subsequent blocks) is seen as a necessary step to reduce the energy footprint of blockchain systems. A handful of cryptocurrencies have emerged that have either already established themselves or
are in the process of establishing themselves as serious alternatives to Bitcoin.
The Alternative Players Ethereum is a programmable platform with an internal currency dubbed “ether” (ETH). While Bitcoin scripting is limited by design in order not to clog the blockchain with inefficient programs, Ethereum was the first blockchain platform to support a “Turing complete” programming environment, which is able to implement all sorts of smart contracts,
yBitcoin_2018 (MASTER).indd 55
5/1/18 12:15 PM
Beyond Bitcoin: The Future of Cryptocurrency (Continued)
and is now the blockchain of choice for sophisticated applications in the financial sector and beyond. Recent examples of ambitious, nonfinancial applications include the Internet of Things, artificial intelligence, distributed computing and even NASA space networks. In November 2017, Ethereum inventor and co-founder Vitalik Buterin outlined his vision for “Ethereum 2.0.” Buterin described major changes in Ethereum’s architecture that are likely to be implemented over the next few years to improve Ethereum in terms of scalability, privacy, security and energy footprint. Buterin also said that Ethereum could switch from pure PoW to a hybrid PoW/PoS model in a forthcoming release. Enhanced throughput (or scalability) is probably the most critical improvement (over today’s Bitcoin and Ethereum) that cryptocurrencies can seek to achieve to become real forms of digital cash. In January, Zilliqa, a next-generation, high-throughput blockchain development project, released the first alpha version of its source code. Zilliqa is not operational yet, but it’s definitely worth watching.
Bitcoin and Ethereum can be used as anonymous cryptocurrencies, but only if the users really know what they are doing.
Finally, it's important to note that in the last couple of years a new family of cryptocurrencies has emerged: tokens that don't have their own blockchains but live on existing blockchains as special entities with independent features and valuation. The early development of cryptocurrencies has been strongly inspired by the libertarian, cryptoanarchic mindset of the cypherpunk movement. Bitcoin and Ethereum can be used as anonymous cryptocurrencies, but only if the users really know what they are doing. Most users don’t, and there are ways to de-anonymize their BTC and ETH transactions. Therefore, some privacy-oriented digital currencies, such as Zcash (ZEC), Monero (XMR) and DASH, can be expected to continue to rise in popularity and value. Zcash’s “zero knowledge” privacy technology, which has recently been integrated in Quorum, JPMorgan’s enterprise version of Ethereum, permits showing transactions to specific parties while hiding them from public view. In September 2017, blockchain development firm IOHK, led by mathematician Charles Hoskinson, launched Cardano, a new programmable blockchain with support for smart contracts. Ada (ADA), the platform’s native cryptocurrency, is traded on cryptocurrency exchanges. Cardano is widely considered as one of the most promising and innovative blockchains, growing fast. For supporters, Cardano represents a new blockchain phase beyond Bitcoin and Ethereum, in which features such as scalability, interoperability and on-chain governance play key roles.
Finally, it’s important to note that in the last couple of years a new family of cryptocurrencies has emerged: tokens that don’t have their own blockchains but live on existing blockchains as special entities with independent features and valuation. The first cryptocurrencies of this type were known as “colored coins” on the Bitcoin blockchain, but most modern cryptocurrencies are ERC20 tokens, tokens that comply with a specific set of rules so that they can live on the Ethereum blockchain. It seems plausible that independent cryptocurrencies could be launched on the Cardano blockchain as well. These days, there is no shortage of new cryptocurrencies launching, both spurred by and looking to advance beyond Bitcoin. Some have made the crypto ecosystem a better place and some have only added more detritus. Determining whether or not a given cryptocurrency is something that you want to invest in is a matter best left up to each individual investor. But with a knowledge of the coins that came first and an understanding of the vision and technology behind a given cryptocurrency, investors will be able to reward the tokens that are changing the decentralized world for the better.
yBitcoin_2018 (MASTER).indd 56
5/1/18 2:23 PM
yBitcoin_2018 (MASTER).indd 57
5/1/18 12:15 PM
From Bitcoin to Crypto Assets By Jeremy Gardner In 2009, an anonymous programmer or group of programmers using the pseudonym Satoshi Nakamoto released an open-source software that introduced an entirely new paradigm for asset creation and distribution. Bitcoin was born, and after nearly a decade, that software, the framework for the world’s first cryptocurrency, has been tweaked and copied to form hundreds of new cryptocurrencies — decentralized, digital tokens that are not controlled by any single entity. For those interested in creating their own cryptocurrencies, copying the codebase is the easy part. Gaining and maintaining value of the currency, and therefore a market share, is the real challenge.
Building on Bitcoin According to CoinMarketCap.com, as of press time, over 700 cryptocurrencies have eclipsed the $1 million market capitalization point and nearly 500 have a market capitalization of $10 million, while arond 20 have a cap over $1 billion. Despite the broad growth, Bitcoin still dominates the crypto-asset market, hovering around 40 percent of all market capitalization. The unique proposition of a cryptocurrency is fairly straightforward: to provide a financial incentive and reward for verifying transactions in a blockchain network (see page 20). In the early years of
this industry, when someone wanted to change or improve part of the software, they would have to make a new cryptocurrency to embody the change. However, if each innovation results in another cryptocurrency, and that innovation is then improved upon by the next cryptocurrency, then the former will likely lose its value with the latter taking its place in the market. This is why many new cryptocurrencies fail; innovation tends to outpace the adoption of the technology being innovated upon. A handful of computer scientists saw promise beyond these new alternative implementations of digital money and instead envisioned an ability to issue tokenized real-world assets on top of a blockchain. These additional tokenized assets would allow cryptocurrencies to be validated and backed by something beyond the intrinsic value of demand for the currency. New blockchain platforms such as Nxt, BitShares and the Bitcoin blockchain metalayer once known as Mastercoin, now known as Omni, were built. These allowed for the creation of tokens such as Tether, a U.S. dollar–paired blockchain asset built upon Mastercoin.
AppTokens, DApps and New Value Creation What followed these token-enabling protocols was an even more ambitious attempt to create a “Bitcoin 2.0” or “smart contract” blockchains.
From this, blockchains such as Ethereum, Lisk and Qtum have been born. What these smart contract blockchains do differently than cryptocurrency and token-focused blockchains is enable decentralized applications (abbreviated as “DApps”) in addition to real-world tokenized assets. Examples of DApps include Augur, a decentralized prediction market platform, and Golem, a distributed computing system, both of which exist on the Ethereum blockchain. Although decentralized applications are built upon other blockchains, they often require their own assets in order to create a provably honest consensus or incentive mechanism that replaces a central authority. These assets are known as application tokens, or “AppTokens” for short. These tokens are usually distributed through token sales or ICOs (initial coin offerings), in which anybody owning cryptocurrency can participate. Such offerings often raise well over a million dollars in a matter of a few days, or sometimes minutes, and often raise exponentially more. Each of these developments is part of a seismic shift in how value is created, represented and transmitted. The full ramifications of this shift will not be felt immediately. In fact, it may take years before they are fully felt. But when they are, and they surely will be, the perception of what value is will be forever changed.
ABOUT THE AUTHOR Jeremy Gardner is the co-founder of Augur, a decentralized oracle and prediction market platform built on the Ethereum blockchain. He is also the co-founder of the Blockchain Education Network, a student network leading Bitcoin and blockchain clubs on university campuses across the world.
yBitcoin_2018 (MASTER).indd 58
5/1/18 12:15 PM
yBitcoin_2018 (MASTER).indd 59
5/1/18 12:15 PM
How Bitcoin Created the New Crypto Asset Class By Craig Salm and Matthew Beck
In 2008, a pseudonymous developer by the name of Satoshi Nakamoto released a white paper to a small group of cypherpunks that would become the framework for Bitcoin, the first cryptocurrency and first true form of decentralized, digital money. 60 60
Born out of the global financial crisis of that time, Bitcoin was made up of more than just clever programming. The white paper combined important facets of computer science, cryptography, economics and network theory to create something that no single one of these disciplines alone could have formed. Over the last nine years, Bitcoin has amassed a globally dispersed and dedicated group of developers, miners, businesses and users who continuously work to improve its protocol. During this time, exponential growth in the number of users on the network has been rivaled by a similar trend in price, as the cost of a single bitcoin went from $0.003 in March 2010, when it first appeared on an exchange, to nearly $20,000 at its peak with a market capitalization of over $300 billion in December 2017. Described as a â€œpeer-to-peer electronic cash system,â€? Bitcoin allows anyone, anywhere in the world, to transact with nothing more than an internet connection. But Bitcoin is much more. It is the first
cryptocurrency network to attain a critical mass of global users, and its resilience in the face of adversity over the past several years is one reason some consider it to be more important than the internet itself.
yBitcoin_2018 (MASTER).indd 60
5/1/18 12:15 PM
This critical proof of concept demonstrated the power of decentralized systems with no single point of failure, which has led to an explosion in the development of second-generation blockchain protocols. Many of these protocols have been designed to expand upon the limited “value transfer” capabilities of Bitcoin by modifying its social, economic and/or technological constructs to satisfy entirely different needs. These differences have necessitated a new way to describe the currencies that operate these protocols; there are no longer just cryptocurrencies, but also crypto commodities and crypto tokens, which fall into the broader category of crypto assets (see previous page). Relatively new crypto asset networks, like Ethereum and Ethereum Classic, are Turing complete, geared toward decentralized applications (DApps) that can execute conditionbased payments through the use of smart contracts. Others, like Zcash and Monero, offer privacyenhancing features to protect the identities of individuals and entities storing and transacting wealth on their blockchains. Moreover, Filecoin and Storj, each billed as “Airbnb for file storage,” seek to demonstrate the value that distributed networks can provide as a more efficient data storage architecture, with built-in incentives for users who contribute unused file storage capacity. And these are just a few examples. So what is fundamentally driving the tremendous growth of this technology? In the investment world, we often talk about the power of compound returns — the idea that as an investment generates returns, the base of wealth grows, so any future
returns of the same magnitude on the larger asset base will also be larger in dollar terms. The concept of compound returns extends to knowledge as well, the power of which is incredibly profound and visible in the opensource, permissionless networks of many crypto assets. The adoption of new ideas is driven through selfselection based on the “survival of the fittest.” And with the global networks that these assets possess, ideas are not localized to a particular group of people, companies or geographic regions. Brilliant ideas can come from anyone who opts into that network from anywhere in the world. New innovations offering greater security, scalability, programmability, privacy, storage capacity, hashing efficiency and more can be proposed and, if accepted, built on top of already tested and proven concepts. In fact, this technology will likely evolve in many ways that we cannot possibly imagine yet. There are trade-offs that developers must consider in order to optimize each crypto asset to fulfill a unique use case, and this will often result in one of the above innovations being sacrificed for the benefit of another. This means it will be difficult for a single crypto asset to be optimized for all use cases simultaneously, and it is unlikely that there will be one winner across all dimensions. For this reason, we believe in a future of multiple crypto assets, each with unique comparative advantages that will enable them to play distinct roles in driving economic growth and in diversifying modern investment portfolios.
ABOUT THE AUTHORS Craig Salm and Matthew Beck, CFA, are associates at Grayscale Investments, LLC, a leading digital currency investment firm. Grayscale is the sponsor of Bitcoin Investment Trust (OTCQX: GBTC), Ethereum Classic Investment Trust and Zcash Investment Trust and the manager of Digital Large Cap Fund. For additional information visit www.grayscale.co.
yBitcoin_2018 (MASTER).indd 61
5/1/18 12:16 PM
How Experts Evaluate ICOs and New Cryptocurrencies By Michael Scott
During a quiet moment with a latte in hand at a local coffeehouse, I began reflecting on the unabated activity taking place in the initial coin offering (ICO) space. The past 18 months have seen a whirlwind of new crypto-related project launches tied to funding offerings, a trajectory that has been fascinating to watch unfold. At the same time, I find myself a bit alarmed by the fever pitch at which new projects and their associated ICOs are hitting the market. What immediately comes to mind is the irrational exuberance of the “dotcom boom” of the ’80s that led to the unrestrained acceleration of asset values. This period, which occurred roughly from 1997 to 2001, saw excessive speculation, a case of “too much too quickly.” I fear that the ICO boom is headed down this same path, with potentially dire consequences for the cryptocurrency space and its reputation if it continues unabated. I recently heard a wonderful podcast episode on which crypto
thought leader and ShapeShift CEO Erik Voorhees was interviewed by veteran journalist Laura Shin. In discussing the ICO frenzy, Voorhees suggested that we ought to allow market forces to direct the eventual outcome of this space while acknowledging the government’s role in weeding out bad actors. I tend to concur with Voorhees’s assessment, for it is consistent with one of my favorite sayings by Chinese philosopher Lao Tzu: “Governing is like frying a small fish. You can ruin it with too much poking.’’ With this steady stream of momentum around ICO-related projects, many industry enthusiasts are finding it increasingly challenging
to separate the “wheat from the chaff” when it comes to identifying those projects with a legitimate value proposition. Tied to this is the growing regulatory attention being directed toward rooting out scams in this space. This latter point has left some questioning the integrity of this exploding ICO landscape. Below are nine ways that experts are likely evaluating today’s dizzying array of ICO projects and their offerings. These points are not meant to be investment advice but rather brief considerations to assist you in navigating this nascent cryptocurrency landscape.
yBitcoin_2018 (MASTER).indd 62
5/1/18 12:16 PM
1. Experts identify and vet project founders and advisors: The entrepreneurial world is full of both good actors as well as charlatans. So it’s critically important to do a deep dive into who the key players of a project are in terms of their background, track records and ethics. A basic internet search is a great place to get started here.
2. Experts don’t get sucked in by fancy websites and white papers: Sure, it’s important to review them. But remain mindful of the fact that a fair number of these sites and collateral material, while possessing aesthetic appeal, are of the “sizzle but no steak” variety. The objective is to use flair to draw you in. Your mission is to identify the value proposition nuggets.
3. Experts observe and participate on social media channels: Yes, there is a lot of bloviation that takes place on these sites. But forums like Reddit, Telegram, Bitcointalk and even Twitter can provide some interesting insights to support your ICO/crypto project due diligence.
4. Experts “slow their roll”: In other words, they take their time to make a thoughtful, well-informed assessment without hurry or haste. Knee-jerk reactions to bright, shiny object projects in this emerging space can be a prescription for disaster.
5. Experts circulate at industry gatherings: There is no shortage these days of educational conferences, forums and Meetups regarding cryptocurrencies, ICOs and token projects. These are great places to mingle with insiders and further educate yourself on the intricacies of how these offerings work.
6. Experts read with intent: It seems like a day doesn’t go by without a major industry thought piece or new book being released. In addition to industry publications, keep an eye out for regular features in mainstream media outlets like Fortune, Forbes, The Economist and NPR, among countless others.
7. Experts can intuitively spot a red-flag ICO project. They then trust their gut: As a friend of mine is fond of saying, “Why is it that whenever we see a red flag, we run over to it and say, ‘Oh, what a beautiful red flag’?” My advice is to trust your gut. Often, if you do enough homework, people and projects reveal exactly who and what they are. Then it comes down to whether or not you’re going to accept what you inherently know.
8. Experts ask lots of questions: This is my most valued skill as a writer and journalist. I’m persistent and nosy as hell. And you should be, too, when it comes to your evaluation of ICOs and cryptocurrencies.
9. Experts avoid the hype: Let’s face it. The ICO/crypto world is very volatile. Getting caught up in the fever pitch of a new project, one replete with unrealistic expectations, can be detrimental to one’s mental health if it goes south. So don’t get lost in the hype. Just evaluate and have fun.
DISCLAIMER: The opinions expressed in this article do not represent those of BTC Inc., BTC Media or yBitcoin magazine, and should not be interpreted as investment advice.
ABOUT THE AUTHOR Michael Scott is a digital-economy writer specializing in blockchain technology and cryptocurrencies. A former healthcare executive, Scott’s journalistic background dates back to the early days of this movement and the launch of the Colorado Bitcoin Society. Over time, Scott has written extensively for numerous publications and platforms in this space, including Bitcoin Magazine, Nasdaq.com and Distributed.com, among others.
yBitcoin_2018 (MASTER).indd 63
5/1/18 12:16 PM
Crypto Assets as Investment Vehicles By Timothy Enneking, Managing Director of Crypto Asset Management LP
Most of us have heard or read about cryptocurrencies, blockchain technology, initial coin offerings (ICOs), Bitcoin millionaires and such, especially over the past year. That’s all well and good, but fads, including investment fads, come and go all the time. The real question: Is it time to invest in this new, dynamic — and perhaps confusing, revolutionary and highly speculative — asset class?
Crypto assets (and note that we are not restricting our discussion here to cryptocurrencies alone; see page 58 for more on the difference) are now almost nine years old, have moved past their infancy and are scaling up rapidly. That being said, there is still a lot of progress to be made — and it almost certainly will be made. But it remains to be determined at what speed, to what extent and in what areas. This new alternative asset class represents a paradigm shift, not just because of what it is, but because of the scale, scope of application and speed of adoption. The challenge in this sector is to balance that yield, diversification and lack of correlation with risk in a rational manner. Your goal should be to apply fiat best practices to crypto assets. Use the personal attributes that you have accumulated in the crypto space as you have used them in the fiat space all your professional life — but with a modicum of flexibility and creativity. Crypto assets as investment vehicles are structured very similarly to fiat vehicles. There are six main categories of crypto investments, listed below. In all cases, one can invest directly or through one or more existing funds.
Trading Just as stocks trade on exchanges, so too do cryptocurrencies. Here we also see blue chips; large, mid and small caps; and long and short strategies, with futures currently available and options virtually certain to follow.
yBitcoin_2018 (MASTER).indd 64
5/1/18 12:16 PM
Bitcoin vs. Gold
Bitcoin's Price Relative to Gold 2013 to 2018
Gold has long been the standard store of value, serving as the backing for the U.S. dollar until 1971. Bitcoin is many different things to many different people, but it is often thought of as “digital gold” because of its ability to act as a store of value in the new economy. Since the beginning of 2017, the price of one bitcoin has skyrocketed past that of an ounce of gold.
Initial Coin Offerings (ICOs) Essentially, ICOs are a type of crowdfunding. Viewed another way, ICOs are disintermediated seed, venture capital (VC) or private equity (PE) investments, i.e., investments that are raised, bypassing Silicon Valley in the U.S. and other traditional channels in other countries. Coins or tokens are directly purchased by the public. The tokens themselves represent the value of the ecosystem in which they are used, and not the company per se.
Private Equity (PE) PE in the crypto space is growing at a tremendous rate, with $3.7 billion invested in 2017. Mark Cuban, for instance, recently backed a $20 million venture fund in the sector, further demonstrating growing adoption. Most, but not all, of the PE investments in the crypto space focus on blockchain companies.
Lending Fixed-rate lending is conducted peerto-peer on various crypto exchanges. A few exchanges also extend credit
for leveraging long positions, lend currencies for short positions and do not offer a peer-to-peer structure. The daily interest rates on these fixed-income investments are far higher than what is available on fiat markets. Counterparty risk is minimized as lending is 100 percent secured with liquid assets at 1- to 30day terms. To our knowledge, there has never been a default. Lending can be an excellent way to enter the space while avoiding crypto volatility. At present, however, there is only one fund that offers a lending investment vehicle.
Index Virtually all crypto index funds (and there are several) track a single cryptocurrency. Most track bitcoin (BTC) only, but a few track a different large-cap cryptocurrency. The first professional crypto index, CAMCrypto30, tracks the largest 30 cryptocurrencies by market cap based on FTSE Russell rules. One fund offers a tracking share class for this index, which fills an important gap in the crypto space.
Fund of Fund (FoF) FoFs are one of the most recent additions to the crypto space, and there are now at least four different ones that are dedicated solely to this ecosystem. The advantage of these structures is the same in the crypto space as in the fiat space: the managers have greater expertise (presumably) in the crypto space than the average investor, and a single investment results in a diversified portfolio. Of course, this all comes at a cost, and the fee structures of FoFs in the crypto space are all much higher compared to the usual fee structure for an FoF in the fiat space.
Futures Although the advent of Bitcoin futures trading garnered most of the attention in December of last year, LedgerX was actually the first exchange to offer Bitcoin futures, back in September 2017. This is a rather esoteric form of investment in an already-esoteric space, so I would not recommend it for anyone but the most devoted aficionados.
ABOUT THE AUTHOR Timothy Enneking is the founder and managing director of Crypto Asset Management LP, which manages two cryptofocused funds, a “master” fund based in the U.S. and a “feeder” fund based in the Cayman Islands.
yBitcoin_2018 (MASTER).indd 65
5/1/18 12:16 PM
The Top 25 Cryptocurrencies By Christopher Tozzi The cryptocurrency universe is burgeoning. At the end of 2017, there were around 1,350 tokens in existence, an increase from about 1,200 just a few months earlier. So how can someone keep track of all of these cryptocurrencies? In truth, most people can’t. They follow the handful of well-known coins, such as bitcoin and ether. But those coins account for less than 1 percent of the current cryptocurrency ecosystem.
To understand the full potential of blockchain technology and the digital tokens that power blockchain frameworks, one needs a broader grasp of the cryptocurrency ecosystem. Familiarizing yourself with the many hundreds of cryptocurrencies in existence may not be feasible, but getting familiar with the cream of the crop is important for anyone who wants to participate in the digital economy.
Of course, there is debate about which cryptocurrencies deserve to be considered in the “top,” and this is just an opinion based on value proposition, real-world applicability and potential for future use.
The top-25 cryptocurrency projects are ranked by market capitalization at the time of press, per CoinMarketCap.
Bitcoin is the cryptocurrency that needs no introduction — even for people who don’t actually own or use any bitcoin. Designed in 2008 as the first digital currency managed through a decentralized database, bitcoin is now the most highly valued token by far.
yBitcoin_2018 (MASTER).indd 66
5/1/18 12:16 PM
4 3 Ripple (XRP) Ripple was released in 2012, long before many people were talking about the blockchain and digital currencies. However, it was not until 2017 that the project became a darling of cryptocurrency investors, who took note of it largely because mainstream banks began adopting its token, XRP, to facilitate transactions. In April of 2018, reports surfaced that the company offered financial incentives to two exchanges in return for listing its token. Still, that controversy did not appear to hamper Ripple’s value.
Bitcoin Cash (BCH) Born in August 2017 as a hard fork (see page 24) from Bitcoin, Bitcoin Cash was designed primarily to solve scalability challenges associated with the original. Bitcoin Cash features a larger block size, enabling faster transactions — even faster than those facilitated by SegWit, which Bitcoin adopted prior to the Bitcoin Cash fork. Cryptocurrency investors who believe that Bitcoin’s scalability issues will return as the size of the blockchain continues to grow have bet on Bitcoin Cash as a better alternative.
5 2 Ether (ETH) Ether, the native cryptocurrency of the Ethereum blockchain, may also need no introduction, at least among blockchain enthusiasts. Although the value of ether is dwarfed by that of bitcoin, some would say that ether’s long-term prospects are brighter because it is attached to the Ethereum blockchain, which was conceived as a platform for powering smart contracts and decentralized applications and has received interest from notable legacy institutions around the world.
EOS (EOS) Like Ethereum, the EOS blockchain was designed to power decentralized applications. However, EOS offers built-in features, such as cryptography tools, that can make life easier from a programmer’s perspective. There are other differences between EOS and Ethereum, too, such as their consensus mechanisms and their scalability strategies.
Top-25 cryptocurrency projects are ranked by market capitalization at the time of press, per CoinMarketCap.
yBitcoin_2018 (MASTER).indd 67
5/1/18 12:16 PM
The Top 25 Cryptocurrencies
Stellar is essentially a protocol for building decentralized currency exchanges that use the Stellar network as their distributed ledger. The platform, which describes itself as a nonprofit, has a stated goal of enabling extremely lowcost financial transactions. Founded in 2014, Stellar has already seen some implementations in the developing world.
Neo is a blockchain for building smart contracts, making it similar to Ethereum. Its popularity has been partially driven by speculation that the Chinese government will endorse it as an official cryptocurrency or permit NEO as a token for initial coin offerings (ICOs), which are otherwise banned in China.
Zcash was designed to solve the same privacy challenges as Monero was. The biggest difference between the two is that Monero mixes data from multiple transactions in order to obfuscate the identities of users, whereas Zcash avoids storing the data in the first place. Whether you believe Zcash offers better privacy features than Monero depends mostly on which underlying privacy strategy you deem more effective.
Sometimes called the “Asian Ethereum,” Qtum (short for Quantum) is a framework for building decentralized applications. Its early backers hail from major Asian technology companies, including Alibaba, Tencent and Baidu. Qtum’s go-to-market strategy is defined by a focus on mobile applications.
Steem’s developers describe it as a “smart media token.” The cryptocurrency powers the Steem network, which allows people to produce and share digital content. The publishers of content that is upvoted by Steem’s decentralized community are rewarded with steem tokens.
0x is a decentralized cryptocurrency exchange for Ethereum tokens. Unlike traditional exchanges, which require users to work through a central party to buy or exchange tokens, decentralized exchanges enable users to trade cryptocurrency without placing their transactions in the hands of a single party.
Top-25 cryptocurrency projects are ranked by market capitalization at the time of press, per CoinMarketCap.
yBitcoin_2018 (MASTER).indd 68
5/1/18 12:16 PM
One of the shortcomings of cryptocurrencies like bitcoin, at least in the eyes of some users, is that, although the identities of users are anonymous, transactions can often be traced. Monero was designed to provide greater privacy. Through features such as ring signatures, Monero obfuscates the identities of parties involved in a transaction. If you think that Bitcoin will fail in the long run due to privacy limitations, you may like Monero.
Introduced in 2014, Dash can perhaps be best described as a more centralized version of Bitcoin. Bitcoin and most other cryptocurrencies store transactions on a totally decentralized network in which all nodes are equal. In contrast, the Dash network has two tiers. The first consists of ordinary nodes, which mine currency and add blocks to the blockchain. The second tier is composed of so-called masternodes, which handle most of the transactions and control network governance. This is a rare setup for a blockchain network, but it has potential advantages for streamlining governance and performance.
11 Binance Coin (BNB) Binance is a cryptocurrency exchange based in China. It caters to professional investors with sophisticated trading tools, low fees and fast transactions.
10 Tether (USDT) Launched in 2015, tether stands out from other cryptocurrencies by reserving one U.S. dollar for each tether in existence â€” at least according to Tether Limited, which controls the token. Because the value of tether is linked to the dollar, the token can avoid certain types of regulatory oversight and volatility.
16 Augur (REP) REP, the token on the Augur platform, lets users earn rewards for correctly predicting the outcome of future events. In addition to providing a way for users to profit from accurate predictions, the platform aims to deliver crowdsourced insight into future events.
Top-25 cryptocurrency projects are ranked by market capitalization at the time of press, per CoinMarketCap.
yBitcoin_2018 (MASTER).indd 69
5/1/18 12:16 PM
17 Ardor (ARDR) As blockchains like Bitcoin and Ethereum grow ever larger, transactions become more costly and time consuming. Ardor aims to solve this problem by allowing decentralized applications to run on “child chains,” which secure transactions using a larger blockchain but do not necessarily depend on it for data storage and processing.
18 DigiByte (DGB)
Top 25 Cryptos
22 Aragon (ANT) Aragon uses the Ethereum blockchain to enable the creation of decentralized autonomous organizations (DAOs). It provides tools for creating smart contracts without having to code, as well as a governance framework for decentralized organizations.
21 Storj (STORJ)
The DigiByte blockchain employs five mining algorithms (most blockchains have only one) and claims to be spread across more than 100,000 nodes. This radical decentralization provides assurance against the risk that a malicious party could take over the blockchain by flooding it with nodes or exploiting vulnerabilities in the mining algorithm.
19 Kyber Network (KNC) Kyber is also a decentralized exchange. It enables payments to be issued with any token and be received as ether. Perhaps Kyber’s most interesting feature is support for forward contracts, which enable users to conduct a transaction in cryptocurrency at a future date based on the current value of the cryptocurrency. Forward contracts provide protection against price fluctuation.
Cloud-based storage services are a dime a dozen these days. Storj stands out from the crowd by using a decentralized network of computers, orchestrated via the blockchain, to build its storage cloud. Computer owners who make spare hard drive space available for the Storj network are known as “farmers.”
20 SALT (SALT) Short for “Secure Automated Lending Technology,” SALT tokens are used to borrow money against cryptocurrency assets. SALT’s value proposition centers on providing a way to obtain cash from cryptocurrency holdings without having to sell them.
yBitcoin_2018 (MASTER).indd 70
5/1/18 12:16 PM
23 Po.et* (POE) Po.et leverages the blockchain to manage ownership of digital creative assets. Authors, musicians, videographers and other producers of content can register attribution and licensing for their work on the Bitcoin blockchain, where publishers can easily access it. Po.et aims to prevent unauthorized copying of digital assets, help good work stand out from the crowd, enable custom licensing and payment processes, and streamline content distribution.
24 Filecoin (FIL) Filecoin is a decentralized storage cloud that allows users to rent out hard disk space. It varies from Storj in that it uses smart contracts to enforce storage rules and relies on a proprietary â€œprovable data possessionâ€? scheme rather than a traditional proof-of-work protocol.
25 MAD Network* (MAD) The MAD Network aims to upend digital advertising by using the blockchain to connect advertisers directly to content publishers. The platform also promises transparency and privacy for consumers by allowing them control over how personal data is shared with advertisers.
*Note: This cryptocurrency has had or currently has an alpha partner or marketing relationship with BTC Inc which owns yBitcoin.
yBitcoin_2018 (MASTER).indd 71
5/1/18 12:16 PM
Po.et and the Distributed, Tokenized Future of Media
THE MEDIA INDUSTRY IS BEING UPENDED. Media companies that once adapted successfully to the digital age must now embrace blockchain technology in order to meet a new set of challenges and grow into the distributed future. That dynamic is well understood by Jarrod Dicker, the CEO of Po.et — a project that includes many team members from BTC Inc, the publisher of yBitcoin — who sees Po.et’s blockchain-based content management network as the key to enabling innovative new models of revenue generation, attribution management and more within the media industry. In explaining how he started on the career path that has led him to this pivotal moment in the evolution of digital publishing, Dicker said his goal has always been to make big changes. That drew him into a career in journalism, starting at the Huffington Post in 2010.
“What was extremely interesting at that time was that there were conversations about traditional media being upended,” Dicker said. Large media companies were either finding new ways to reach audiences in the digital age or failing outright. Dicker added that his experience at the Huffington Post allowed him to witness firsthand how new content distribution practices, as well as novel advertising strategies like social marketing, were becoming essential parts of the new media industry. From the Huffington Post, Dicker moved on to jobs at Time and the content management system startup RebelMouse, before eventually landing at the Washington Post, where he served as vice president of innovation and digital strategy. “I was drawn there by the Bezos acquisition,” he said, referencing the fact that the Washington Post was acquired by Amazon founder Jeff Bezos in 2013. “It brought together everything I loved: journalism, technology and media.” Although Dicker said he was happy with the changes he was able to accomplish at the Post, the
position didn’t satisfy his drive to overhaul the entire media industry. “What I realized was that there needed to be something bigger,” he said. “We couldn’t change an entire ecosystem from one organization.” That led Dicker to Po.et, where he became CEO in February. Po.et, which was incubated by BTC Labs, a subsidiary of BTC Inc., is different in two main ways from the organizations that Dicker has worked at previously. First, because Po.et is a nonprofit foundation, “all of the dollars go back into building” the platform, Dicker explained. Second, Po.et is a communitybased organization, with a platform that is being built “by the community, for the community,” according to Dicker. “We want to give back to creators, help them build tools and make it all open source. We want to become the next layer of the internet that others build on.” For now, one of Dicker’s main tasks will be to grow the Po.et community and increase adoption of the platform. Frost, an open application programming interface (API) that allows anyone to register digital content on the Po.et blockchain,
yBitcoin_2018 (MASTER).indd 72
5/1/18 12:16 PM
Transparent Decentralized Secure Flexible
was released in early February, making Po.et widely accessible to the public for the first time. Frost is pivotal in what Dicker said will be an ongoing commitment to community engagement, central to Po.et’s growth strategy. “We’re going to continue to focus heavily on the community, and empower the community, and give them the tools and guidance they need to build something useful for them,” he said. He noted, too, that the community members already using Po.et were drawn to it organically, without the encouragement of marketing campaigns. “People are already building on Po.et, and that’s how you know you have something,” Dicker said. “With some marketing effort and with some business value for larger partners, this could be something big.” Dicker explained that the key to increasing engagement with Po.et and expanding its user base will be to focus on content creators, who can use the Po.et network to manage attributions for the digital assets they create — such as news articles, blog posts and videos.
Jarrod Dicker is taking his media expertise and applying it to the blockchain industry. Follow along with his latest thoughts on Twitter @jarroddicker
An embedded Po.et badge provides an easy way for publishers to validate their content against the Po.et network.
“If you’re a writer for any company, whether a traditional one or a large one, you will want intellectual property management and attribution ownership,” he said. He also pointed to the new types of advertising solutions that Po.et could enable as an attractive factor for media companies to embrace the platform. Today, advertisers and content owners have to work with intermediary agencies in the advertising industry to place ads and generate revenue from them. But with Po.et, advertisers could engage content creators directly. This model would make advertising more efficient for advertisers, while also empowering content creators with new compensation opportunities for their work.
Incentivization could come directly from Po.et’s native cryptocurrency, POE. The token is expected to serve as the economic layer for Po.et’s creative-works marketplace, driving participation and curation. Potentially, content creators can ask to have their content listed on the marketplace and pay a deposit in POE. They may also be compensated for their work in POE. When speaking about the current state of the media industry, Dicker drew comparisons to the music industry 20 years ago, on the eve of its disruption by Napster. At the time, music companies ignored the writing on the wall, and Napster arrived and “blew up the industry,” Dicker said. Dicker sees Po.et as the solution that will help media companies to keep control of the reins of the industry while adapting to new challenges. “Let’s not wait for the Napster of media and content to come about,” he said. “Let’s instead build Po.et so we can evolve the media model.” DISCLAIMER: BTC Inc., the parent company of yBitcoin magazine, is an investor in Po.et.
yBitcoin_2018 (MASTER).indd 73
5/1/18 12:16 PM
Top Five Cryptocurrency Exchanges By Rachel Wolfson Exchanges are where the majority of cryptocurrency users first interact with their tokens, and they serve as the critical point between investors and the digital economy. But they aren’t all created equally. Interface, rates, medium of exchange — these are all variables that should be considered when searching for the right exchange for you. To give a sense of the landscape, we’ve compiled a list of some of the best cryptocurrency exchanges, along with the pros and cons of each.
For beginning and advanced users, known for its strong security features
Appeals to global users and offers a wide range of cryptocurrencies
The U.S.-based cryptocurrency exchange Bittrex is known for being one of the world’s top-three exchanges based on trading volume. Bittrex has been operating since 2014 and, at the time of this writing, experiences 24-hour trading volumes just under $300 million. Bittrex allows users to trade over 190 cryptocurrencies at a time and handles one of the largest BTC trading volumes. One of the best features of Bittrex is the security of its platform. Bittrex claims to follow all laws and regulations required, to this point, by U.S. governmental bodies, and all accounts must be verified in order to make withdrawals. Additionally, Bittrex utilizes an elastic, multistage wallet strategy to ensure that 80 to 90 percent of funds are stored offline and kept safe from hackers. Also, two-factor authentication is required for all withdrawals. The Bittrex account verification process is relatively quick and simple, with two account options to choose from. There is a basic account that lets users withdraw funds worth up to 3 BTC per day. There is also an “advanced” account option that allows users to withdraw funds worth up to 11 BTC per day. Once an account is set up, Bittrex appears to deliver fast and secure trading services. Another benefit of Bittrex is that users decide the rates at which they want to trade. Bittrex then charges a small service fee of 0.25 percent. However, users interested in trading fiat currencies are unable to use Bittrex, as it is a “crypto only” exchange.
Changelly is a Bitcoin and cryptocurrency exchange that has been operating since 2015, attracting over 1.5 million registered users from around the world. One of the most appealing features about Changelly is that the platform makes it easy to obtain various cryptocurrencies. The exchange provides users with an instant and seamless way to buy and exchange over 90 coins. Changelly only requires an email address in order to exchange coins, meaning users don’t have to give out personal information. Changelly is known for using bots to connect users in real time to some of the best cryptocurrency exchanges in the market. At the time of this writing, the service processes more than 15,000 transactions daily with a monthly turnover of around 60,000 BTC. Changelly offers a customizable payment widget for any crypto service that wishes to increase its turnover. The exchange provides its affiliate program with an appealing revenue share mechanism as it’s a partner with Mycelium, Jaxx, CoinMarketCap, CoinPayments, Uquid debit card, Coinomi and other prominent companies. Changelly charges a commission fee of 0.5 percent on each trade. In addition to the commission, a miner’s fee is also paid by the user and is deducted directly from their crypto balance. However, all you need in order to buy from Changelly is a credit or debit card or any Changelly-supported cryptocurrency. Users will also need a wallet to receive newly acquired coins.
yBitcoin_2018 (MASTER).indd 74
5/1/18 12:16 PM
4. OKEx Appeals to global users and offers a wide range of cryptocurrencies
3. Binance For beginning and advanced users, known for its strong security features Binance focuses on crypto-to-crypto exchange, offering a vast selection of over 140 cryptocurrencies. Investors like Binance because it offers coins that often aren’t listed on other exchanges, including Bitcoin Gold, IOTA and Walton Coin. Binance also charges a flat fee of 0.1 percent on each trade, which is one of the lowest fees on an exchange anywhere. And if users pay using the Binance token (BNB), a 50 percent discount is applied to the trading fee, bringing it down to 0.05 percent. It’s important to note that Binance is strictly a cryptocurrency exchange, so accounts cannot be funded with fiat currency. However, there is no limit on the amount of cryptocurrency funds you can deposit. There are also no fees on any deposits. Yet some investors have noted that Binance can be a bit overwhelming with so many coins to choose from. Also, Binance’s interface can be somewhat confusing, as the main dashboard displays several high-level charts and graphs.
OKEx, owned by OKCoin, is one of the largest cryptocurrency exchanges and allows users to trade both crypto and fiat-backed tokens. The platform is well funded and backed by well-known investors in the space, such as Tim Draper and Mandra Capital. OKEx is a frequent champion of the industry in terms of total trading volume, serving more than 20 million customers in over 100 countries. The innovative platform has been launching new products regularly to meet ever-changing market needs. OKEx is one of the pioneers to launch futures trading in the industry and the first to create a Bitcoin Cash market. Though OKEx may not have the fanciest web interface and mobile app, the platform does provide solid essentials and great market liquidity, which explains its popularity. Also, its adoption of advanced technologies — such as global server load balancing and distributed server clusters — and strict compliance have made OKEx one of the most solid and reliable exchanges available. Additional OKEx products include a wallet, vault and block explorer. OKEx also offers multi-platform support, as users can access it on iOS, Android, Mac OS X and Windows. Additionally, OKEx offers some of the lowest fees in the industry. There is a 0.03 percent fee for opening a new position, and nothing is charged for the closing transaction.
yBitcoin_2018 (MASTER).indd 75
5/1/18 12:16 PM
Top Five Cryptocurrency Exchanges (Continued)
Best for beginning users, with a wide range of features
The well-known Coinbase exchange caters to 7.4 million users and counting. It is available in 32 countries worldwide. Founded in 2012, Coinbase allows users to buy and sell the most popular cryptocurrencies, including bitcoin, ether and litecoin. One of the main advantages of Coinbase is its easy-to-use platform, which attracts many newcomers looking to acquire their first bitcoins. Beginners can immediately buy cryptocurrencies on Coinbase using PayPal and other major credit cards. The platform offers benefits and services such as purchases of up to $1,000 worth of BTC per week, instant transfers among users, insured deposits, debit cards and wallet services. In a nutshell, Coinbase is a one-stop shop for
cryptocurrency holders (many of whom are newcomers). Although Coinbase doesnâ€™t charge a fee to use its wallet service, transferring cryptocurrency to an address outside of the platform may result in a network fee, which is set by the blockchain community. For U.S. customers, Coinbase charges a base rate of 4 percent for all transactions. While Coinbase is considered to be one of the safest exchanges, the company still controls usersâ€™ bitcoins until users remove them and store them in their own wallets. However, large amounts of bitcoin, ether, Bitcoin Cash or litecoin can be stored in the Coinbase Vault, which can be protected by multiple users.
yBitcoin_2018 (MASTER).indd 76
5/1/18 2:24 PM
yBitcoin_2018 (MASTER).indd 77
5/1/18 12:17 PM
The Past, Present and Near Future of Cryptocurrency Regulation By Andrew Hinkes, Esq.
If the recent past has been any indication, the legal landscape for the treatment of crypto assets in the United States will continue to evolve quickly. Below, find one lawyerâ€™s musings (none of which should be considered legal or investment advice) about how the law regarding crypto assets may move forward in the coming year.
Regulatory Oversight of Token Sales Kicks into High Gear Although testimony before Congress by the chairmen of the Commodity Futures Trading Commission (CFTC) and the U.S. Securities and Exchange Commission (SEC) recently indicated that neither intended to completely shut down the crypto space, both regulatory bodies should be expected to continue the trend of enforcement of existing laws that we saw in 2017, and the market should expect attempts to create new regulations to address regulatory gaps. While the enforcement of regulations may eliminate some strategies currently used by offerors of tokens, the benefits for consumer protection and presumed decrease in reputation-damaging scams should far outweigh the limitation on capital generation. The SEC in particular is expected to continue enforcement to facilitate its twin aims of protecting investors and facilitating capital formation. Token sales or initial coin offerings (ICOs) will probably be viewed by the SEC as the offering of securities if the issuer or promoter promises profits (no matter the mechanism behind those gains), or if the issuer markets the token with
a promise that it will be listed on a trading exchange. Regulators have made it clear that they view most ICOs as investment opportunities and intend to regulate them that way. This should drive token sellers to seek counsel and offer tokens to the market through regulated or exempted offerings, which will, in many cases, limit the scope of initial token purchasers to accredited investors or non-U.S. purchasers. The market should expect increasing private suits and regulatory enforcement against token issuers who offer tokens as being anything but securities, or offer products without seeking legal advice from qualified counsel. This, however, does not signal the death of token sales as fundraising vehicles; regulatorily compliant token sales will continue to use legally recognized exemptions from registration under the securities laws and eventually will include properly registered tokenized securities. While creative issuers may try novel means to distribute tokens in attempts to avoid being categorized as securities, these strategies are speculative and of unclear effect. Issues regarding secondary trading, fiduciary duties and custody will continue to challenge market participants and regulators, and mishaps in these areas will bring even more lawsuits.
The Future of Funds and Exchanges It is unlikely that retail-oriented funds like index or exchange-traded funds (ETFs) for cryptocurrencies will be approved until issues regarding liquidity, valuation, asset custody, asset creation and redemption are addressed.
Previously, the SEC refused to permit the creation of Bitcoin ETFs because the SEC is unable to effectively surveil the crypto trade markets for manipulation and the markets are not regulated; these circumstances have not and will likely not be rectified in the near future. The CFTC will regulate crypto assets sold on forward contracts and by options and futures, but will not regulate spot trading of crypto. Based on the CFTCâ€™s approach and experience with hyper-volatile assets, it should be expected that the crypto-derivatives market will expand faster than retail investment funds. Exchanges have been a key area of vulnerability in the crypto environment. Expect exchanges to be a continuing area of interest to regulators, who will evaluate the compliance of cryptocurrency exchanges including their data reporting; capital requirements; cyber security standards; measures to prevent fraud and price manipulation; Anti-Money Laundering (AML), Know Your Customer (KYC) and Office of Foreign Assets Control (OFAC) compliance; and trading of restricted shares. Admittedly, exchanges exist in a regulatory netherworld where neither the SEC or CFTC have appropriate power to fully regulate their behavior. The SEC and CFTC, along with the Department of Justice, Federal Reserve and Consumer Financial Protection Bureau, are expected to cooperate and identify gaps in their respective jurisdictional reach and to seek power from Congress to address those gaps, including delineation of which regulator has jurisdiction over certain activities. New rules or an
yBitcoin_2018 (MASTER).indd 78
5/1/18 12:17 PM
expansion of a regulator’s existing powers to address exchanges are a likely first place to expect new laws. A total shutdown of domestic exchange activity is unlikely; although new restrictive laws regulating exchanges may cause a temporary plunge in prices and volume, even a total shutdown would not destroy crypto markets, as most domestic trading volume would migrate to international exchanges and to emerging decentralized exchange platforms.
Cryptocurrency and Tax Laws Since the issuance of IRS Notice 2014-21, crypto assets have been taxed as property (see page 82), with gains and losses taxed at applicable capital gains rates. The IRS did not require cryptocurrency exchanges to provide form 1099-B to disclose gains and losses, but instead obligated individuals to self-report; a fraction of the expected number of taxpayers reported gains and losses from cryptocurrency trading,
which prompted the IRS to issue a summons in late 2016 to Coinbase, one of the larger trading platforms used in the U.S., seeking a comprehensive set of records for its U.S. customers. After litigation, Coinbase agreed to turn over a limited subset of data requested by the U.S. government related to 14,356 Coinbase users who transacted over $20,000 in either USD or crypto assets between 2013 and 2015. This signaled to the market that increased attention on tax reporting is expected to continue, whether bolstered by further summonses for data to be used by the IRS for enforcement or otherwise. The result of this increased attention is likely to be a wave of crypto traders disclosing taxable gains and losses and potentially restating their prior year’s taxes to include undisclosed gains. Assessment of penalties, enforced collection actions, placement of tax liens and possible prosecutions of those traders may follow. But taxpayers may benefit from clarity as to certain frequently criticized
aspects of the IRS guidance applicable to crypto assets. There is no guidance to suggest whether crypto-to-crypto trading qualifies for deferred taxation through 1031 exchanges. As property, crypto assets must be valued at the fair market value in each transaction, but the current guidance suggests that markets should be used for valuation, even though the markets providing crypto asset trading liquidity are unregulated and manipulated, and the various markets around the world tend to vary materially in asset pricing at any given time. In the relatively short history of cryptocurrencies, regulators have approached these assets by attempting to enforce the laws as they exist. In the course of so doing, lawmakers have come to understand the unique features and implications of these systems and will likely begin to focus on enforcement while seeking to adapt existing laws and to explore gaps in their respective regulatory regimes. It is an effort to protect consumers and bring order to markets.
The world’s attitude toward cryptocurrency is constantly evolving, and international regulators are far from consistent in how they view their citizens’ use of decentralized, digital tokens. This map offers a quick glance at how cryptocurrencies have been treated by rulemakers around the world to date.
*Designations per BitLegal.io, accessed on January 24, 2018
ABOUT THE AUTHOR Andrew Hinkes, Esq., is partner at Berger Singerman LLP and an adjunct professor at the New York University Stern School of Business and the New York University School of Law.
yBitcoin_2018 (MASTER).indd 79
5/1/18 12:17 PM
Bitcoin India Leads an Emerging Epicenter for Digital Asset Services
India is prime Bitcoin territory. For its population of over a billion, of whom an estimated 250 million are unbanked, blockchain-based digital assets such as bitcoin and ether have always offered a pathway to increased financial inclusion and a greater role in the global economy. But following the demonetization of its currency — an unprecedented move that wiped out 86 percent of India’s cash — the popularity of digital, mobile wallets have surged. Bitcoin India, an exchange and digital asset wallet service provider based in what is now one of the world’s most rapidly growing economies, strives to provide the easiest and most secure digital currency value-added services for Indian consumers and merchants.
A Complete, Full-Service Platform Bitcoin India is the world's largest platform for buying and selling digital assets for Indian rupees. As both an exchange and a digital asset wallet, Bitcoin India offers a place to securely store, send and receive digital assets like bitcoin with minimal fees, one that can process digital asset payments to any merchant. For miners, Bitcoin India owns and operates a global mining pool and also provides hosted mining services and “PickAxe” Mining Packs with weekly payouts. “The launch of ‘PickAxe’ — Bitcoin Mining Packs — marks the beginning
of a new blockchain-based digital assets era: one of privacy, through zero-knowledge and transactional transparency,” the company announced. As a full-service provider, Bitcoin India also offers mining hardware that is hosted in its data centers. The company’s offerings feature Bitmain’s flagship miner, the Antminer S9. “Bitcoin India is growing each quarter, with 100-plus employees now,” said Bitcoin India CEO Sykam Reddy. “It’s the one-and-only startup from India providing these types of products and services under one umbrella, the types of tools that every person requires in the crypto space, such as a full-stack digital asset exchange and trade platform, digital asset wallet services, a merchant payment gateway, club membership, mining services and a mining pool.” Unlike many of the startups emerging from the country, Bitcoin India has an active presence on social media. The company’s Bitcoin India Club, launched in February, is almost a social network in itself, with membership perks including support, prizes, referral commissions and even stickers and T-shirts. Other membership benefits include 100 GH/s mining hash power for one year, assistance with stuck transactions and international debit cards. “Since the inception of Bitcoin India, we’ve started adding the world’s most popular digital assets —
through Bitcoin, Ethereum, Litecoin, DASH, Bitcoin Cash, Ripple, NEM, IOTA, Monero and Dogecoin — to our portfolio,” said Reddy. “And we are now in the process of adding over 20 more digital assets that will be available very soon.” Bitcoin India is focused on making its offerings widely available to a country that increasingly relies on mobile technology to communicate, work and live. “We have web, Android and iOS apps available for users,” said Reddy. “We accept Indian rupees on both the web and mobile applications. Now, merchants can accept digital assets through our app and receive rupee deposits daily.”
Fueling India’s Growth Bitcoin India has established itself as a one-stop shop for digital asset users in India, an emerging ecosystem that seems poised to play an important role in the future of the blockchain-based world. It’s worth noting that the Indian government is considering a proposal to introduce its own fiat cryptocurrency similar to private cryptocurrency, such as bitcoin. According to sources familiar with the matter, the proposal was discussed by a committee of government officials, and the panel found the idea of setting up and running blockchains for financial services a potentially useful one. This new fiat
yBitcoin_2018 (MASTER).indd 80
5/1/18 12:17 PM
Sykam Reddy, Bitcoin India CEO www.bitcoin-india.org
cryptocurrency would be managed by the Reserve Bank of India (RBI) and may be called “Lakshmi.” The Indian government is not alone. In fact, governments and central banks all over the world are gradually warming up to the idea of leveraging the unique advantages offered by blockchain technology — namely, low-cost transactions permanently recorded in tamper-proof distributed ledgers — to modernize their financial systems. That will take time and the governments are unlikely to support important features that make Bitcoin and other digital assets appealing to end-users, such as mining and near-anonymous, paperwork-free transactions. Therefore, Bitcoin, Ethereum and at least a few other digital asset platforms are likely to continue to prosper in India. As cybersecurity becomes paramount, blockchain technology seems to have piqued interest among state governments as a technology to protect sensitive data. In the Indian state of Andhra Pradesh, Chief Minister N. Chandrababu Naidu has said that the government would allot $15.6 million to create a separate startup fund for budding entrepreneurs who can develop blockchain-based applications to store government documents on a decentralized database. “Our trading platform is a true exchange where the users can set
their own price to buy and sell digital assets,” explained Reddy. “Currently, we have exchanges for bitcoin to Indian rupee, ether to bitcoin and ether to rupee markets, and we are in the process of adding another 30 or more markets soon.”
Currently, we have exchanges for bitcoin to Indian rupee, ether to bitcoin and ether to rupee markets, and we are in the process of adding another 30 or more markets soon.
As Bitcoin India continues to serve the growing market and maintain its own growth, Reddy will focus on giving back to those in need. “While we grow, we are giving back to society,” he said. “We’re providing to charities that aid victims of natural disaster through the Bitcoin India Foundation. We’ve also adopted many government schools located in rural locations in Andhra Pradesh and have been providing needed items like shoes, belts, ties, books, chairs, drinking water and computers to create digital classrooms for a brighter future. Recently, we were able to help a 13-year-old little champ get treatment for his severe blood disorder.” That fundraising campaign exceeded its target of 1.5 million rupees, equivalent to $23,000. The Bitcoin India Foundation is described as an independent, private philanthropic foundation dedicated to assisting the underprivileged in India, particularly children and youth. Bitcoin India’s philanthropic efforts are all part of its commitment to playing an integral and responsible role in its community. Whether it serves Indians through digital asset exchanges or assistance for the needy, Bitcoin India’s star is rising.
yBitcoin_2018 (MASTER).indd 81
5/1/18 12:17 PM
A Tax Guide to Cryptocurrency By Andrew Kernosky
When it comes to tax accounting in the United States, the Internal Revenue Service (IRS) has mandated that cryptocurrency is to be treated as property.
This means that it is subject to capital gains taxes and, depending on whether the specific cryptocurrency was held for a year or more, that proceeds from its sale can be considered either a short-term or long-term capital gain. The long-term capital gain rate is a more favorable tax rate than your ordinary income tax, but applying it requires you to hold the unit for at least a year. If you are holding a unit of cryptocurrency for less than a year, it will be taxed at the same rate as your income tax bracket.
Calculating Your Taxes In order to calculate your cryptocurrency gain, you will need to track the dollar amount that you bought it for, plus any additional purchase costs. So if you buy one unit of the cryptocurrency for $100 and there was a 1 percent processing cost, your total basis would be $101. You will then take the sale price and subtract the basis from it to calculate the capital gain. If you sold the same share for $150 with that processing cost of 1 percent, your capital gain would be $47.50 (that would be $150 minus $1.50 minus $101). The capital gain is what is taxed at the capital gains rates, not the total of the final sale, which is why it is crucial to determine your basis and the holding period. The IRS has not mandated accounting processes for tracking your holding period capital gains as of the time of this writing, but the most common approaches would be “First In, First Out” (FIFO), “Last In, First Out” (LIFO) and “Highest Price, First Out” (HPFO). While FIFO and
LIFO are pretty self-explanatory, HPFO means that regardless of holding period, you are trying to minimize capital gains initially by having the highest-price units sold first. While this may sound like a good idea at first, you may run into issues with short- and longterm gains depending on how long of a holding period you have. (Depending on your level of income, it is the difference between owing no capital gains tax or owing 10 to 12 percent capital gains tax.) You will want to try to stick to an accounting method for as long as you can. Otherwise, you will face additional scrutiny from the IRS if you are constantly changing methods without reason. If you are going to use the HPFO method, consider using an Excel spreadsheet to track your purchase and sale transactions, noting the date, price, transaction costs and total units. There are also a whole host of services that can help sort this out using exchange data.
yBitcoin_2018 (MASTER).indd 82
5/1/18 12:17 PM
Knowing Your Losses Just as important as calculating your gains, it is also critical to know when to harvest losses. If your cryptocurrency portfolio experiences losses, it is worth determining when it will be most advantageous to “take your lumps” by selling off these losing cryptocurrencies to harvest losses and bundling them with short- or long-term gains. Part of the reason behind this is if you have more than $3,000 of losses in excess of your capital gains, you will have to carry that loss forward against future capital gains. You will be able to take $3,000 of capital loss against your ordinary income each year if there is no capital gain to offset. Another important thing to consider is that your capital losses do not have a
limitation on the number of years they can be carried over into, so it may be advantageous to liquify failed initial coin offering (ICO) tokens sooner rather than later, especially if you think they will never recover in value. The idea is to reap the benefits of the capital losses against any gains you have, instead of holding on to worthless coins throughout the years. Even more so, the biggest reason you will want to harvest losses right away is that your losses will retain their character, meaning long-term losses carried over to the next tax year will be applied to long-term gains in the next year before reducing the shortterm gains, meaning that your taxadvantaged long-term gains will get reduced before your shortterm gains do. Don’t sit on losses instead of liquidating them when
they are short-term capital losses to preserve your long-term capital gains first. You should always be looking at your portfolio and deciding whether or not you should be harvesting your losses.
The Future of Cryptocurrency Tax Laws Many believe that tax laws have always been a reactionary solution and seldom a proactive solution, and this has never been more apparent than in the tax treatment of cryptocurrency. While the IRS has posted a notice about cryptocurrency (known as “Notice 2014-21”), there are still several questions that have to be answered and will most likely be determined by the tax courts and private letter rulings in the coming years.
ABOUT THE AUTHOR Andrew Kernosky, EA, is a cryptocurrency enthusiast and tax consultant and owner of Archer Tax Group. He writes frequently about the intersection of cryptocurrency and tax laws and has represented dozens of cryptocurrency traders, holders and miners.
yBitcoin_2018 (MASTER).indd 83
5/1/18 12:17 PM
How to Ensure Bitcoin Security
By Andreas M. Antonopoulos
Bitcoin allows anyone to be their own bank. If that sounds like a potential scenario for chaos, it’s only because you haven’t yet heard of the great lengths to which Bitcoin users can go to ensure the security of their “one-person banks.” By following a handful of basic security guidelines, Bitcoin users can achieve a level of security to protect their money that is beyond the capabilities of the banking world as we know it. The truth is that banks are barely able to keep accounts secure. Although banks promise to make deposited funds available upon request, none of them could actually withstand a run in which all depositors decide to simultaneously withdraw their funds. In that respect, bank funds are just an abstract reference to value. The funds they protect are just numbers in a ledger, while the actual money is out on loan to the banks’ borrowers. Bitcoin is different. Once bitcoins are sent to your address, you control them entirely; you maintain them, and when you want to use them for a purchase, they are there for you. With Bitcoin, possession provides 100 percent of control. But with this great power comes great responsibility. Having the keys to unlock a bitcoin is equivalent to possessing a chunk of precious metal. Which means if you misplace it, have it stolen or mistakenly send the wrong amount to someone, you would have as much recourse as if you dropped cash on the sidewalk and didn’t notice until you got home. Bitcoin is different enough from anything that has come before that we need to think about its security in a novel way, too. However, Bitcoin has capabilities that cash, gold and bank accounts do not. A bitcoin
wallet, containing the private keys necessary to access bitcoins, can be backed up like any file. It can be stored in multiple copies, even printed on paper for hard-copy backup. A backup of Bitcoin keys is as good as possession of the original keys. You can’t “back up” cash or precious metals. Banks can recover funds for you, but only at their own discretion. And they can also confiscate funds, adding a risk that doesn’t exist in Bitcoin. So, what should end users do to secure their bitcoin wallets?
Do Not Store Money on an Exchange Many people purchase their first bitcoin from an exchange, where they can trade their country’s currency for bitcoin or other cryptocurrencies. However, keeping your currency on an exchange is dangerous because exchanges can and do get hacked. An exchange is just that, a place to exchange cryptocurrency. It’s not a safe place to store your savings. With traditional investments, a brokerage house buys, sells and manages the assets for its clients. With digital assets, there is nothing to manage. There are no prospectus, no dividends, no management. They simply facilitate the exchange between two parties. As soon as you complete the trade, move your cryptocurrency (and cash for that matter) off the exchange and into a wallet you independently control. This is as simple as creating a new wallet and withdrawing the cryptocurrency to an address controlled by that new wallet. Remember: Your Keys, your bitcoin. Not your keys, not your bitcoin.
Choose a Wallet for Which You Control the Keys One indication that you control the keys is that the wallet asks you to make a backup when you receive the first incoming payment. The most secure device most people possess is their smartphone. For new users, a mobile wallet is the best choice, balancing ease of use and security. Examples of mobile wallets that allow you to control the keys: iOS: Airbitz, breadwallet, Copay, Jaxx, Mycelium Android: Airbitz, Copay, Jaxx, Mycelium, Samourai
Back Up Your Keys Today, most bitcoin wallets will prompt new users to create a backup of their keys. Sadly, many people skip this step, which can lead to loss if a device is misplaced or stolen. Backing up can be as simple as using a sheet of paper to write down 12, 18 or 24 backup words (mnemonic words) displayed by your wallet and storing them in a secure, fireproof and tamper-evident location such as a home safe or bank vault. Some wallets don’t use mnemonic words but still provide a backup feature; check their websites for details. Regardless, before you back up, be sure you’re in a secure environment, away from prying eyes and cameras. Your backups are your keys.
Balance the Risk of Loss and Theft While most users are rightly concerned about the threat of theft, loss is an even bigger risk. Data files get lost all the time, but if they contain bitcoin, the loss is much more painful.
yBitcoin_2018 (MASTER).indd 84
5/1/18 12:17 PM
Some users further protect their backups with encryption, passphrases and PINs, but more is not always better. In the effort to secure their bitcoin wallets, users must be very careful not to go too far and end up losing the bitcoins instead. In the summer of 2010, a well-known Bitcoin awareness and education project lost almost 7,000 bitcoins. In an effort to prevent theft, the owners had implemented a complex series of encrypted backups. In the end, they accidentally lost the encryption keys, making the backups worthless and losing a fortune. Like hiding money by burying it in the desert, if you hide it too well you might not be able to find it again. Balance the risk. Bitcoin has capabilities that cash, gold and bank accounts do not. A bitcoin wallet, containing your keys, can be backed up like any file.
Use Two-Factor Authentication Many first-time users will use a webbased wallet or online service as their Bitcoin bank. Unfortunately, this has led to a rash of thefts from Bitcoin users, almost all due to compromised desktop computers. Hackers will install trojans and keyloggers looking for access to well-known Bitcoin sites. As soon as users log on, their own computer will compromise the account and surreptitiously transfer all of their money to another Bitcoin address. Once stolen, there is no recovery, as Bitcoin transactions are not reversible. The most effective defense against this attack is using what is known as a “two-factor authentication scheme” (2FA) or using a smartphone application to generate onetime codes. Google Authenticator and Authy are two
such services worth looking into. Many wallets now incorporate 2FA as a standard feature, be sure to use it.
Spread the Risk Would you carry your entire net worth in cash in your wallet? Most people would consider that reckless, yet Bitcoin users often keep all of their bitcoins in a single wallet. Instead, users should spread the risk among multiple and diverse bitcoin wallets. The prudent user will keep only a small fraction — perhaps less than 5 percent — of their bitcoins in an online or mobile wallet as “pocket change.” The rest should be split between a few different storage mechanisms, such as multisignature and hardware wallets.
Use Physical Storage or Hardware Wallets Bitcoin keys are nothing more than long numbers, sometimes displayed as a series of words. This means that they can be stored in a physical form, printed on paper or etched on a metal coin. Securing the keys then becomes as simple as securing the physical copy of the Bitcoin keys. A set of Bitcoin keys that are printed on paper is called a “paper wallet,” and there are many free tools that can be used to create them. Paper wallets are not backups of your online keys, they are new keys, generated securely offline and used specifically to store bitcoins offline. This type of storage is sometimes referred to as “cold storage.” Another way to store bitcoins securely is through hardware wallets. These hardware wallets allow nonexpert users to attain an almost foolproof level of security. Unlike a smartphone or desktop computer,
a purpose-built bitcoin hardware wallet has only one function: to hold bitcoins securely. The devices don’t run general-purpose software and have simple interfaces that work to limit opportunities for compromise. These devices range in cost from $25 to $220 and are available for purchase online.
Use Multisignature Wallets Multisignature, or “multisig,” is a powerful feature that was added to the Bitcoin protocol in 2012. Like a bank’s safe deposit box, where two keys are simultaneously used to unlock a single box, Bitcoin’s multisig feature allows users to secure their bitcoin using multiple keys. Unlike a bank’s safe deposit box, which offers limited configurations, Bitcoin can currently support up to 15 total keys with any configuration of required signers. Currently the most popular multisignature configuration is “2-of-3,” where you hold two keys and a wallet provider or another third party holds the third. The most popular configuration for businesses is “3-of-6,” where three executives in a company each hold one key, two keys are stored at different off-site cold storage locations and the last is held by a third party for recovery purposes only. In summary, Bitcoin is a new and complex technology. The industry has grown considerably over the past eight years, demonstrating an incredible rate and breadth of innovation. Over time, we will develop better security tools and practices that are easier to use by nonexperts. For now, Bitcoin users can employ many of the tips above to enjoy a secure and trouble-free Bitcoin experience.
ABOUT THE AUTHOR Andreas M. Antonopoulos is the author of Mastering Bitcoin (published by O’Reilly Media), considered by many the definitive technical guide on Bitcoin, and The Internet of Money, a book for everyone about why Bitcoin matters. He is currently writing Mastering Ethereum, due for publication in late 2018. He is an expert in security and distributed systems, an entrepreneur and a coder. He can be contacted on Twitter @aantonop or at antonopoulos.com.
yBitcoin_2018 (MASTER).indd 85
5/1/18 12:17 PM
Five Security Habits for a More
Anyone riding the cryptocurrency wave is likely enjoying once-ina-lifetime returns. But the longterm benefits of those returns are dependent on the way you manage your crypto portfolio. Where and how are you managing it? Investing in cryptocurrencies is not as easy as buying stock in an existing brokerage account. One day this will change, but in the meantime, you have to do some extra work and guide yourself into safe, smart cryptocurrency investing. Identical crypto portfolios may not necessarily have the same current or future value when
viewed through the lens of security. Some people choose to be 100 percent responsible for their own crypto assets, while others let someone else take responsibility. Decisions about who secures your cryptocurrencies and how will ultimately dictate how valuable those assets will be. A less secure portfolio has a higher risk of loss and is, therefore, less valuable. To give you a better sense of how to protect your crypto assets and make sure that your portfolio will be as valuable as possible, here are five habits that ensure optimum cryptocurrency security.
Valuable Cryptocurrency Portfolio
By Kirk Phillips, CPA, CMA, CFE, CBP
ABOUT THE AUTHOR Kirk Phillips is an entrepreneur, a Certified Public Accountant (CPA) and a Certified Bitcoin Professional (CBP) obsessed with Bitcoin as a tool to disrupt existing business models and transform accounting. Author of The Ultimate Bitcoin Business Guide, an inspirational reference for entrepreneurs and small- to medium-sized businesses, he weaves risk management into business process outsourcing, crypto-business consulting and education. He can be reached at TheBitcoinCPA.com.
Using a password manager like LastPass to blend ease of use and security for accessing and using cryptocurrency exchanges, online wallets and other platforms is critical. Buying cryptocurrency on an exchange and sending it to a wallet could require simultaneously using two, three or even more platforms at the same time. A password manager is the only way to do this with speed and efficiency.
Keep an inventory or a master list of all of your exchanges, wallets and coins. A simple portfolio, for instance, would be a Coinbase account with ether, bitcoin and litecoin. However, someone with 67 coins who uses 11 exchanges and 23 wallets has a more complex crypto portfolio. What happens if you back up your passphrases and always follow best practices but forget you actually own a coin or the wallet where itâ€™s stored? This can happen faster than you think as your portfolio grows more complex. A master inventory list works as a cross-check with your portfolio apps which may not provide that level of detail.
yBitcoin_2018 (MASTER).indd 86
5/1/18 12:17 PM
4 SECURITY DIVERSIFICATION Everyone understands the phrase “don’t put all your eggs in one basket.” To most people in this space, it means don’t put all your money in a single cryptocurrency. But in this context, the basket can be thought of as a wallet, and you don’t want to put all of your bitcoin into a single one. A good, diverse wallet strategy should include storing your major cryptocurrency holdings in a minimum of two, if not three or more, wallets. Security diversification also extends to hardware wallets, and every investor should own and use a TREZOR, Ledger and KeepKey regardless of whether they are used in conjunction with another digital wallet.
While it may seem overwhelming at first, it’s a good practice to create multiple exchange accounts even if you aren’t ready to make a trade on every platform (see page 74). You’ll naturally find that the more cryptocurrencies you invest in, the more exchanges you’ll need to be on, because not all coins are listed on all exchanges. Even though crypto should never be held on an exchange, many people still do this for multiple reasons. Sometimes a desktop wallet isn’t stable or reliable yet, or it may be the only choice outside of an exchange, therefore an exchange may be the second-best storage option for security diversification. Also, think about which exchanges you trust more than others when using them for storage.
The ultimate backup for PINs, passwords, private keys and recovery phrases is offline, through paper wallets, recovery phrase cards and stainless steel or titanium storage options. If it’s offline, then it has to be physical, which means it has to be securely stashed away. Buy a high-quality, fireproof safe heavy enough to make theft impractical and/or bolt it to a wall. Then duplicate every backup in your home or office safe and store it in a bank safe deposit box. The cold-storage backup in your safe is a backup to the safe deposit box and vice versa. If your safe is stolen or otherwise lost to catastrophe, then the safe deposit box is your backup plan. Conversely, if the bank seizes or freezes access to your safe deposit box, then your safe is your backup plan. It is, admittedly, ironic to use a bank for crypto storage, but there is no safer third-party storage for the cost.
yBitcoin_2018 (MASTER).indd 87
5/1/18 12:17 PM
Four Questions to Ask About Your New Cryptocurrency Wallet While digital currency is not a new concept — most U.S. dollars were already digital even before the invention of Bitcoin — a money based purely on cryptography is. One of Bitcoin’s unique qualities is that within its protocol, “ownership” is not based on the rule of law, or user accounts, or even identity. It is solely based on math. Bitcoin addresses, strings of seemingly random numbers and letters, can have bitcoins attached to them. These bitcoins can be spent if someone proves to know
another seemingly random, but mathematically corresponding, string of numbers and letters: the “private key.” Whoever owns a private key owns the corresponding bitcoins. So, needless to say, these private keys are very important — and potentially valuable — sets of letters and numbers. If you own any bitcoins, you need to keep your private key safe. Private keys are typically stored in digital wallets. As new cryptocurrencies have been created,
private keys have continued to allow investors to secure and access any and all of their digital tokens. Today, wallets come in all sorts of shapes and sizes, on all types of different platforms, associated with a range of cryptocurrencies. Different kinds of wallets can store keys in different ways, often specifically designed for particular use cases. The kind of wallet you will want to use depends on the type of cryptocurrency user you are. Here are some questions to ask that will help you identify your needs.
LONG TERM OR
WHAT LEVEL OF
If you don’t plan on using your cryptocurrency for regular payments but instead plan to store it safely as a long-term investment or savings, you could consider a paper wallet. These are pieces of actual paper that have private keys printed on them. If generated securely (which, it should be noted, is easier said than done), paper wallets have a great advantage in that the keys are not stored on a computer at all. This means your wallet cannot be hacked into or otherwise digitally compromised. Of course, you will need to take good care of the paper wallet itself as it is not protected from being physically stolen, lost in a fire or otherwise destroyed by real-world elements. It is possible to make copies of the piece of paper as backups and store these elsewhere.
If you do want to use your cryptocurrency for payments but also require top-notch security for your private keys, purchasing a hardware wallet is a good option. Hardware wallets are devices specifically designed to sign cryptocurrency transactions but not much else, which should make them impossible to hack into. Hardware wallets do typically need to be used in combination with some other wallet, and this often requires some level of trust. But, at least, the hardware wallet keeps private keys safe.
yBitcoin_2018 (MASTER).indd 88
5/1/18 12:17 PM
HOW RELIANT ARE
YOU ON BITCOIN?
For hardcore Bitcoin users who want to partake in the Bitcoin network without a real need to trust third parties at all, a full node wallet is the way to go. These wallets are the only wallets that keep track of the entire Bitcoin blockchain and fully validate all transactions themselves. Many argue that this is really how Bitcoin is supposed to be used, as you, for example, don’t need to trust anyone else to tell you what your balance is or whether an incoming transaction is valid. The downside is that a full node can be a relatively heavy load for your computer to handle. Getting started with a full node requires that you download and verify well over 100 gigabytes of blockchain data, which will likely take over a day even with newer computers. That’s why there are more userfriendly and accessible options as well. Known as “light clients” or “simple payment verification (SPV) wallets,” most mobile wallets and some desktop wallets don’t verify the entire history of a cryptocurrency blockchain and therefore don’t need to download all of its data. Instead, they require only transaction data that’s directly relevant to you. This has some slight trust implications, as you are to some extent trusting whoever is providing this data, while privacy typically suffers as well. But it is much easier to get started with and to use one of these wallets, and since you hold on to your own keys, your money should be safe barring any hacks.
An even more accessible option is web wallets. Web wallets themselves come in different flavors, for which trust is the main differentiator. Some web wallets are relatively safe, as they let you generate your keys on your own computer and store them in your web browser. This is not really recommended for large amounts, as it is easier to hack than many alternatives. But it is very quick and easy, and probably fine for smaller amounts and day-to-day spending. And finally, there are custodial wallets. Typically a type of web wallet, and often a de facto part of a cryptocurrency exchange, custodial wallets hold on to the private keys for you. In these cases, you are not at all protected by the security offered by the cryptocurrency’s system itself. Rather, you are fully trusting the service that offers the wallet.
Most dedicated cryptocurrency users likely utilize a combination of the above options, similar to how many people have a savings account, a checking account and some cash in their pockets. Where your savings account (say, a paper wallet) may be best for holding serious funds that are meant for long-term storage, the cash in your pocket (say, a web wallet) is meant for daily purchases. After answering and evaluating the questions above, you should be on your way to making the most practical choice for your cryptocurrency needs.
yBitcoin_2018 (MASTER).indd 89
5/1/18 12:17 PM
yBitcoin_2018 (MASTER).indd 90
5/1/18 12:17 PM
yBitcoin_2018 (MASTER).indd 91
5/1/18 12:18 PM
Gem’s Vision for Empowering Consumers to Cross the Crypto Chasm The skyrocketing popularity of cryptocurrency over the past year has been heralded by many analysts and pundits as undeniable success of the growing decentralized movement. But the reality is that crossing the chasm from early adopters and speculators to mainstream usage has proved quite challenging for an industry that seeks to reinvent how people communicate, transact and share value.
Gem, a Los Angeles–based blockchain startup founded in 2013 in the early days of the decentralized movement, is launching a new cryptocurrency platform this summer that the company hopes will bridge that gap by recruiting millions of new mainstream users to join and drive the movement forward. “We believe that every person is valuable. Everyone has something to contribute to their larger community,” said Micah Winkelspecht, founder and CEO of Gem. “In the new decentralized economy, we have an opportunity to reshape how that value is captured and exchanged, in a way that directly rewards the people who create that value, and not institutions. That’s what this movement is about.” The company’s growing team of veteran blockchain and cryptocurrency engineers is building on its experience of deploying blockchain
Micah Winkelspecht, third from right, with his team at the Gem office.
Our goal is to empower individuals to take control of their money and return the economic benefits of their data back to them. and wallet technology for consumerfacing cryptocurrency startups and large companies alike — including giants such as Toyota, Capital One, Mercer and Philips. With its new product, though, the company is taking a more direct approach. “Our goal is to empower individuals to take control of their money and return the economic benefits of their data back to them,” said Winkelspecht. “It’s about giving power back to individuals and giving them direct access to the new distributed economy.” Decentralization brings inherent challenges that companies like Gem must address to make the new
economy more accessible to everyone. These challenges include navigating the sheer number and complexity of tools and services, managing complex cryptographic keys, educating people about the risks and benefits, and designing products that target more than just the tech-savvy audience — in other words, making the whole interaction more human. Winkelspecht agrees. He believes that users need an all-in-one cryptocurrency platform that gives them a complete view and control of all their digital assets, with a designcentric approach that will bring the token economy to the mainstream.
yBitcoin_2018 (MASTER).indd 92
5/1/18 12:18 PM
The Only App You’ll Ever Need in Crypto Gem’s new people-centered platform is built on four pillars: providing a unified view of a person’s digital wealth, empowering people to control their own assets and identity, crafting an experience for people to discover new tokens and decentralized apps, and connecting people to the projects, companies and communities driving the movement forward. While Gem’s vision is ambitious and forward-looking, the company recognizes that cryptocurrency investing is still driving the early adoption of the most avid users of blockchain technology today. That’s where Winkelspecht believes Gem can make the biggest immediate impact. “We want to make it easier for people to be better informed about their choices in the space and really understand what they are investing in,” Winkelspecht said. Gem will start by launching a comprehensive portfolio-management solution that will use APIs to provide consumers with a single entry point for tracking all of their crypto investments and their net worth — “Like Mint for crypto,” Winkelspecht said. The portfolio will integrate with 22 cryptocurrency exchanges, and that’s just for starters. Gem is also creating a universal token wallet that’s designed to make it easier for users to trade cryptocurrencies of their choosing without the complexity that is traditionally required when setting up a multi-token wallet, and without the security drawbacks of hosted wallets. Initially, the Gem wallet will support bitcoin, ether and any other ERC20 tokens. The company expects to rapidly add support for other tokens. Gem is also creating a discovery tool where consumers can explore, track and research more than 1,500 cryptocurrencies. More Than Just Trading Tokens Winkelspecht says that ultimately, cryptocurrency is not just about money and trading, it’s about participating in a whole token-based economy of products and services. “Crypto investment is like trading oil. It can be traded as a speculative
commodity, but eventually, that fuel will be consumed to power the economy,” said Winkelspecht. “Tokens are the fuel of the new distributed economy.” As Gem expands its platform, consumers will be able to experience a broad range of new apps and services beyond wealth management. Ultimately, Winkelspecht believes Gem will be the primary user interface for people to access the new economy, like a new web browser for the decentralized internet. Putting the User Front and Center One of the toughest challenges to overcome in this space is the dichotomy between security and ease of use. Winkelspecht believes that it’s largely a false dichotomy. “Users shouldn’t have to compromise between having a great user experience and taking control of their digital identity,” he said. “As an industry, we need to bridge the gap between the early adopters and their needs and the majority mainstream audience. We need to deliver a better user experience.” Gem’s solution is to put the user front and center in designing the platform, using detailed surveys of both crypto investors and the crypto curious, an in-depth analysis of more than 100 wallets and portfolios, and consumer feedback to build the product. Winkelspecht recognizes that the very nature of decentralized technologies requires end users to take more responsibility for their assets than they would with centralized services. But he believes that this burden can be minimized to make crypto investing easier for the average consumer without compromising security. “There is always a trade-off that exists with decentralized technologies; there is a little extra work that the user needs to do to keep their own key,” Winkelspecht said. “But we try to minimize that work and educate the user through that process.” Looking back over the past five years, Winkelspecht believes the new product will cement Gem’s role in the digital ecosystem as
Gem's all-in-one cryptocurrency platform will begin rolling out with a portfolio, which will launch in private beta in May. Sign up for early access at https://gem.co.
Users shouldn't have to compromise between having a great user experience and taking control of their digital identity. being the trusted interface between users and their access to this new world. “It’s really just about giving power back to the individual,” said Winkelspecht. “I felt like the best way we could possibly do that was to go directly to the consumer and provide a great experience that would allow people to take control over their own money and their own identities in this new economy.” Gem plans to release its new consumer-friendly platform this summer, beginning with a private beta of its portfolio manager in May. Sign up for early access at https://gem.co.
yBitcoin_2018 (MASTER).indd 93
5/1/18 12:18 PM
Category Guide to Crypto Wallets
By Shawn Gordon
Once you know your basic digital wallet
needs, you still face an array of choices
and decisions. Here’s a practical analysis of the top-five wallet categories (hardware, desktop, paper, web and mobile wallets), along with some suggestions for specific wallets to consider.
1 HARDWARE WALLET: TREZOR The TREZOR hardware wallet requires an initial investment from users, a little over $100, but for many it is the preferred method of keeping private keys safe. Hardware wallets tend to be small, flash-drive-style devices that plug into computers through a USB connection. Users then interact with the wallet, and therefore with their private keys and cryptocurrency, through a web interface and have to rely on internet-connected services to actually acquire cryptocurrency. But strictly for the storage of private keys, hardware wallets are a go-to solution for semi-casual cryptocurrency users, as they are not connected to the internet and are therefore safe from hacks, but still allow for relatively easy access. 94
TREZOR’s web interface is called TREZOR Wallet, which can be downloaded as a Google Chrome extension or run through the standalone TREZOR Bridge. The TREZOR itself will prompt users for a PIN number, which they create on first use, choosing between four and nine digits. They are also provided with a 24-word recovery passphrase to record on a card and store just in case. The TREZOR supports bitcoin, ether, dash, litecoin, zcash and more cryptocurrencies, and the parent company has a partnership with MyEtherWallet (more on that below). Other popular hardware wallet providers include Ledger and KeepKey, and their offered devices differ in price points, supported tokens, ease of use of the web interface and device hardware.
When it comes to desktop wallets, there are plenty of choices, but Exodus is the most intuitive and easy to use, making it our favorite option for new users. Desktop wallets store a user’s private keys on their hard drive, hypothetically giving them full control over their keys and, therefore, their cryptocurrency. But it should be noted that hard drives are vulnerable to hacks. Still, a computer is harder to misplace or lose than a hardware wallet and is less vulnerable to cyberattack than, say, a mobile wallet. It may be the right answer for some users but shouldn’t be a primary solution for holding all of one’s crypto savings. When it comes to Exodus specifically, the interface is simple to navigate and customize. Users can easily configure which cryptocurrencies they are using, and the home screen displays a handy chart of their portfolio and the value of each token in relation to others. Exodus supports 29 currencies with another 22 either in process or planned, and a “wallet” section allows users to add or remove the cryptocurrencies that are shown, keeping the display crisp. The “exchange” section lets users swap between anything within their portfolio with one click and access a clear description of the conversion rate. While there is no matching mobile app, Exodus is easily the most robust and user-friendly desktop wallet available. Other popular desktop wallets include Electrum, mSIGNA and Copay.
yBitcoin_2018 (MASTER).indd 94
5/1/18 12:18 PM
High-Profile Cryptocurrency Exchange Hacks Many of those who are new to the cryptocurrency ecosystem buy and keep their tokens on an exchange. While this practice may be convenient, it leaves a user’s funds at risk for theft. Over the years, cryptocurrency has seen its fair share of hacks, and some of the most high-profile ones have burned consumers for millions.
Paper wallets might seem like an odd entry on this list, but they are actually as simple and secure as it gets. As you might imagine, creating a paper wallet is a matter of printing off your private and public keys and storing them safely. As long as the keys are generated securely, keeping them off the computer offers a security advantage over any other option listed here. At the same time, it’s imperative to store a paper wallet in a safe and hazard-proof location. Many users will make copies of their paper wallets and store at least one backup. But this solution tends to appeal to those who are planning to store their cryptocurrency for a long time, without a need to access it on a regular basis, and may not be ideal for new or casual users. Mycelium is unique in that it is a hardware USB device that a user plugs directly into their printer, which then produces their paper wallet. This system ensures that keys are generated securely and safe from hacking. There are also sites like BitAddress.org and WalletGenerator .net that will create printable paper wallets for free.
BitPay is a major Bitcoin payment processor, and as such, its mobile wallet only supports the use of bitcoin and Bitcoin Cash, so it might not be the right solution for those interested in regularly engaging with the wider cryptocurrency ecosystem. But it is one of the most popular solutions for using bitcoin on the go. Mobile wallets are not recommended for the storage of large amounts of cryptocurrency over long periods of time. Like anything else secured on a mobile device, private keys on your phone are relatively susceptible to theft. But when it comes to sending and receiving small amounts of cryptocurrency on the go, it’s hard to imagine a more convenient method. The BitPay wallet is very userfriendly and it does offer multisig protection, offsetting the security concerns for mobile wallets by requiring multiple signatures before a transaction can be executed. Samourai, Bitcoin.com and Abra are also popular mobile wallets. Jaxx is another popular and powerful mobile wallet solution, with desktop, tablet and extension versions as well.
yBitcoin_2018 (MASTER).indd 95
5/1/18 12:18 PM
Glossary Bitcoin Core: the reference implementation, or computing standard, for Bitcoin
decentralized autonomous organization (DAO): an organization that is run automatically according to rules encoded as smart contracts and without the guidance of a single authority. Not to be confused with “The DAO,” which was a venture capital fund that was hacked in 2016 for one-third of its funds, totalling about $50 million.
initial coin offering (ICO): a fundraising mechanism that offers cryptocurrencies representing portions of a new project in exchange for initial investment
multisig: short for “multisignature,” an algorithm that allows a group of users to sign a single document in a more efficient way than soliciting distinct signatures from each user. It is often applied to cryptocurrency wallets.
ERC20: a set of token standards that all coins built on the Ethereum blockchain must follow. Since it was developed in 2015, the majority of new tokens have been developed to comply with ERC20 standards.
a cryptocurrency protocol, enforced by an algorithm, that seeks to achieve consensus among distributed users by choosing the creator of the blockchain’s next block based on their ability to complete a difficult computation that can be verified by the network
a system of rules run by the nodes that constitute a given network. For instance, Bitcoin Core is a protocol and Bitcoin Unlimited is a protocol, but both cannot be run by a single node as they have conflicting rules.
“To the Moon”:
a feeling attributed to those who invest in cryptocurrencies based on a fear of missing out on easy profits or technology that is changing the world’s economic dynamics
a phrase evoked by cryptocurrency enthusiasts when speculating as to where the profits and/or technological advances behind the digital economy will take them
proof of work (PoW):
Fear of Missing Out (FOMO):
a term stemming from a 2013 post in the Bitcointalk.org Bitcoin forum titled “I AM HODLING” (an apparent misspelling of “I AM HOLDING”) that has come to define the philosophy of those bitcoin or other cryptocurrency investors who choose to keep their coins, rather than buy, sell and trade them for short-term profits or losses
proof of stake (PoS): a cryptocurrency protocol, enforced by an algorithm, that seeks to achieve consensus among distributed users by choosing the creator of the blockchain’s next block based on their stake within the network
Turing complete: node: a data point or device within a larger network. Any computer that is connected to the Bitcoin network is referred to as a node, and those that fully enforce all of Bitcoin’s rules (or protocols; see below) are referred to as “full nodes.”
a term used to describe a programming language that is sophisticated enough to simulate a Turing machine, a mathematical model that can simulate any computer algorithm. It is often used as a barometer for the power and robustness of a given programming script. While Ethereum is Turing complete, Bitcoin is not.
yBitcoin_2018 (MASTER).indd 96
5/1/18 12:18 PM
yBitcoin_2018 (MASTER).indd 97
5/1/18 12:18 PM
[ The Westin St. Francis : San Francisco ] The New Event Unlocking the Global Potential of Decentralized Business Our inaugural flagship event will bring together East and West in the heart of Silicon Valley to build partnerships and solve the toughest challenges facing the global enterprise community. Join 1,000-plus senior leaders from established companies, early stage startups, investors and media for two days of content, meetings and networking as we work together to accelerate the growth of enterprise blockchain applications. Register and save 20 percent using the discount code â€œyB20â€? Interested in speaking or sponsoring? Email firstname.lastname@example.org
yBitcoin_2018 (MASTER).indd 98
5/1/18 12:18 PM
[ The Schermerhorn Symphony Center : Nashville ] Building on Blockchain Success to Advance the Healthcare Industry
The third annual Distributed: Health conference will bring together the brightest minds in healthcare and digital innovation to reimagine how blockchain technology will streamline and transform the entire healthcare ecosystem. Join more than 700 senior-level decision makers and industry leaders for a two-day forum focused on creating a critical dialogue around the disruptive potential of this groundbreaking technology. Register and save 20 percent using the discount code â€œyB20â€? Interested in speaking or sponsoring? Email email@example.com
yBitcoin_2018 (MASTER).indd 99
5/1/18 12:18 PM
yBitcoin_2018 (MASTER).indd 100
5/1/18 12:18 PM
yBitcoin introduces Bitcoin’s story and its most reputable companies to discerning readers worldwide. A free quarterly publication showcasin...
Published on May 16, 2018
yBitcoin introduces Bitcoin’s story and its most reputable companies to discerning readers worldwide. A free quarterly publication showcasin...