Trader in Residence and All About Bitcoins

February 2, 2014

Trader in Residence – TiR

The DeGroote Trading Centers will be hosting Trader in Residence, a speaker series being industry professionals in DeGroote to discuss their success in their field of business. The series takes places Tuesdays at 5:30PM in the Ron Joyce Center, RJC, in room 136 and is also viewable via a 2 way camera in the Gould Trading Floor located at 122A in the DeGroote School of Business, DSB.

Drinks and food will be provided at the DSB location.

For further information regarding the series please visit: https://trading.degroote.mcmaster.ca/trader-in-residence/

The list of upcoming speakers is as follows:

Tuesday February 4 – Omar Masud of ScotiaMocatta

 All About Bitcoins

By Jerry Qian

There is a famous problem in computer science known as the Byzantine Generals Problem (or the Two Generals Problem) first posed in 1975. Imagine a situation where two generals have to coordinate an attack on a city, and the only way to successfully make the attack is by simultaneously attack the city via sending messengers through the city. The problem arises if the messengers are captured by the city, causing the two generals to either not receive the correct message no matter how many messengers are sent by either side.

In 2009, a solution to the Byzantine Generals Problem was proposed by Satoshi Nakamoto, a mysterious online identity who introduced the bitcoin protocol to the internet. The way the bitcoin protocol tries to solve this problem is by introducing a Distributed Consensus Asset Ledger in which all of the involved parties reach consensus on the balance of bitcoins via solving a complex mathematical problem, known as Proof-of-Work, and distributing the solution to everyone else in the network. Once a correct solution has been found, that solution becomes integrated into the Proof-of-Work, and subsequent solutions to this problem must incorporate the solutions that came before it. This way, people in the network reaches consensus not through direct communication, but through simple rules and mathematics. As more proofs (or blocks) are added, the problem increases in both difficulty and the computational power required, meaning it would be very hard for any one party to subvert the integrity of the system. Every 10 minutes, the system generates a certain number bitcoins and awards it to the party first able to find the correct proof to the block, after which the process repeats itself. The number of bitcoins is not infinite however; a hard limit of 21 million bitcoins is set, and the number of bitcoins awarded decreases in relations to how fast and difficult the solutions are being churned out.

Once a person has bitcoins, he or she can use it to trade for goods and services. Initially, people bartered bitcoins with each other for goods, settling loans, etc. The first major trading platform for bitcoins is Silk Road, an anonymous black market for trafficking weapons, drugs, and other illicit activities. Silk Road was subsequently shut down by the American federal government in October of 2013 with the arrest of the head Silk Road moderator and the seizure of nearly 30 000 bitcoins (today worth approximately 25 million USD. However, there are other legitimate businesses who are dealing with bitcoins. Overstock, and most recently TigerDirect, has announced they are willing to accept bitcoins as a means of payment. In its first 24 hours since making the announcement, Overstock, an online shopping platform, reported $130 000 in bitcoin sales. A variety of smaller local businesses (bars, hair salons, shops, etc) have also introduced bitcoins as a means of payment.

At the start of 2013, the price of a bitcoin hovered just above $10 USD, but fueled by Chinese investors near the end of the year this number jumped to $1 000 USD, peaking at $1 200 USD. The price volatility strikes concerns for potential investors and regulators who fear of a bubble burst. In December 2013, the Chinese government placed strict restrictions on buying bitcoins with the Yuan, although this control has recently been loosened, allowing people to use the Yuan to buy bitcoins again. In America, there have been important hearings by the Fed and the NY Banking Regulation on bitcoin. Right now, the stance is more of a wait-and-see situation, as regulators are beginning to sense bitcoins as a potentially powerful and revolutionary tool capable of boosting the economy. Other countries are also paying attention to how dominant players such as US and China are approaching bitcoins in terms of regulations.

Why should anyone use bitcoins? Perhaps that is the million dollar question right now. One very real avenue people can use bitcoin is transferring wealth across borders. Currently, exchanging one currency to another involves a lot of fees. With bitcoin, however, one can use it as an intermediary between two currencies. This means, as long as someone is willing to trade bitcoin for their local currency, one could make the exchange regardless of what the price of bitcoin is. Another reason to adopt bitcoin is its safety feature. Holding bitcoins is very much like using debit and credit cards; however, all transactions are irreversible and there are no institutions setting withdrawal limits on accounts. This means for retailers, they are guaranteed to receive their money almost instantly, no matter how large the transaction is. Perhaps what is most striking is the economics behind bitcoins. Since the number of bitcoins is more or less set in any given time and prices are generally stable, speculations aside, the value of bitcoins could be driven by how fast it is being exchanged for goods and services. As a simple analogy, if an object is used to trade one good for another, that object is more valuable if the goods are traded 10 times than it is if they are only traded once in the same time period. If people simply hold onto bitcoins and do not use them for trade, it is obvious that the bitcoins would not be as valuable to people in the real world. Of course, this would depend on how well the global economy is doing.

DeGroote on Facebook DeGroote on Twitter WMA LinkedIn