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Asset Highlight ASSET HIGHLIGHT: BITCOIN Bitcoin has already proven to be a disruptive economic force, a fact that has at least partly driven a substantial increase in price, market-cap and transaction volume of the platform’s core token, bitcoin. In addition to its potential as a platform, Bitcoin has also emerged as an investable crypto-asset. To properly assess the investment potential of this emerging asset, we need context. In the following document we provide said context via: a quick overview of the platform and its component parts; a discussion about current and future growth drivers; an examination of price, volume and transaction trends; a look at bitcoin as a portfolio tool; and finally a brief overview of some of the largest risks to the platform. CS CoinShares Research CS Research ASSET HIGHLIGHT: BITCOIN Lead Analyst (AC): Christopher Bendiksen TABLE OF CONTENTS Visual Table of Contents 2 Approaching a Valuation of Bitcoin 16 Store of Value 16 Bitcoin Background 5 Asset Performance & Correlations 17 Tech & Architecture 6 Investment case of US$ 10,000 17 Bitcoin Core, Governance, BIPs & Forks 6 Volatility 17 Technology 6 Risk-Adjusted Returns 18 Preventing Double-Spending 7 Returns Compared to Common Assets 19 Mining 7 Correlations of Returns per Asset 19 Chronology 7 Byzantine Generals' Problem 7 Blocks 9 Mining versus non-Mining Nodes 9 Transactions & Identity 9 Risks 20 Key Relationships 9 Privacy 10 Block Reward Tapering 20 Scaling 20 Harmful Legal or Regulatory Action 21 Running a Full Node is Costly and Technically Challenging for Most Users 21 Growth Opportunities 12 Competition & Technological Obsolescence 21 Hostile State-Level Adversaries 21 Sound Money 10 Brand Theft 21 Most Valuable Use Cases 10 Additional Risks 21 Medium of Exchange 12 Network Effect 12 Store of Value 13 Crypto Reserve Currency 13 Speculative Value 14 22 Transaction Volume as an Indicator 14 Summary Exchange Volume 15 Search Trends 15 Glossary 23 None of the commentary or analysis contained herein is meant to constitute financial advice. This document is meant to be used as a foundational guide to Bitcoin and its potential. All analysis is meant to provide emerging trends and observations that may offer value in developing your own investment thesis, though past performance is not indicative of future performance. Please consider all risks carefully prior to making any investment, especially in an evolving asset like bitcoin. 30 Nov. 2017 | Copyright © 2017 CoinShares CoinShares Research 2 CS Research ASSET HIGHLIGHT: BITCOIN VISUAL TABLE OF CONTENTS pg. 9 pg. 11 Simplified Block Constituents Network Growth vs. Value ($) To win a block (and the bitcoin reward), a miner must run the information from the previous Users Squared $200 BN block through a hashing algorithm, then combine Network Value ($) Block Block $160 BN the hash with information from all the valid $120 BN Prev Hash Nonce Prev Hash transactionsNonce it intends to include in the next Correlation: $80 BN block, plus a number called a nonce, and hash the 0.94 Network Value combined input again. The hash output of these $40 BN TX TX … TX TX … three components combined must equal a Users Squared $0 BN number below a certain numerical threshold for the network to accept the block as valid (Fig. 1). Nov-11 Nov-12 Nov-13 Nov-14 Nov-15 Nov-16 Nov-17 pg. 15 pg. 13 Network Value vs. Exchange Vol. $ Q3 17 Weekly BTC ($) Volume By Trading Pairs - Top 10 Exchanges by Volume Network Value ETH/BTC LTC/BTC XMR/BTC ETC/BTC DASH/BTC Exchange Volume USD $2.0 BN $1.5 BN Exchange Volume $1.0 BN Correlation: 0.91 $0.5 BN Network Value $0.0 BN Jul-15 Jul-16 Jul-17 Week 1 Week 3 Week 5 Week 7 Week 9 Week 11 Week 13 Dec-13 Jul-14 Jan-15 Jan-16 Jan-17 Nov-17 pg.16 pg. 17 2022 Min. BTC Price Req. to Facilitate 5%, 10% or 25% of Global Stored Value Bitcoin Annual Returns $50,000 Price Of Coin ($) $48,027 2011 2012 2013 $37,500 1733% 144% 5474% $25,000 $19,211 2014 2015 2016 $12,500 $10,884 $9,605 -58% 37% 131% $0 2017 TD As of: 30-Nov 5% 10% 25% 991% 30-Nov pg. 18 pg. 18 pg. 17 7 - 2 Yr Sharpe Ratio Of Bitcoin Bitcoin Volatility 2011 - 2017 Performance Of $10K Invest In 2014 30-Day Rolling Annualized Standard 0.80 Deviation of Daily Returns 150.0% Bitcoin $132,115 0.60 112.5% S&P 500 $14,324 0.40 75.0% Nasdaq $16,458 0.20 37.5% Gold $10,628 0.00 0.0% 7 6 5 4 3 2 Brent $5,753 2011 2017 2012 2013 2015 2016 # Of Years 2014 30 Nov. 2017 | Copyright © 2017 CoinShares CoinShares Research 3 CS WHAT IS NEEDED IS AN ELECTRONIC PAYMENT S Y S T E M B A S E D O N CRYPTOGRAPHIC PROOF INSTEAD OF TRUST, ALLOWING ANY TWO WILLING PARTIES TO TRANSACT DIRECTLY W I T H E A C H O T H E R WITHOUT THE NEED FOR A TRUSTED THIRD PARTY SATOSHI NAKAMOTO BITCOIN: A PEER-TO-PEER ELECTRONIC CASH SYSTEM CoinShares Research 4 30 Nov. 2017 | Copyright © 2017 CoinShares CS Research ASSET HIGHLIGHT: BITCOIN BITCOIN BACKGROUND The first public version of the Bitcoin whitepaper was "The Times 03/Jan/2009 Chancellor on brink of second published 31 October 2008 on the metzdowd.com bailout for banks" [3] as part of its coinbase parameter cryptography mailing list. Its title was Bitcoin: A Peer- (more on the coinbase later), as well as the first ever to-Peer Electronic Cash System [1]. Being but one of a bitcoin transaction: a 50 BTC mining reward sent to vast multitude of digital money proposals circulating the address 1A1zP1eP5QGefi2DMPTfTL5SLmv7DivfNa. on the mailing list at the time, at first, the paper Nakamoto's choice of text inclusion has been received only limited attention and enthusiasm from interpreted in several ways including as a critique of the community. fractional reserve banking and the current monetary system, but what it certainly proves beyond any doubt is that no bitcoins could have possibly existed before 3 THE LEGEND January 2009. No pre-mine, no ICO. Over the course of Like many other schools of thought, the creation 2009, the popularity of Bitcoin grew substantially and history of Bitcoin has taken on a certain mythical hundreds of nodes were added to the network. In the quality, made possible only through true mastery early days individuals could profitably ‘mine’ using only of cryptography: standard CPUs with all full nodes also acting as mining nodes. The first mining difficulty increase happened Legend has it that Satoshi Nakamoto began on 30 December 2009, almost exactly one year after working on the Bitcoin protocol in early 2007, Bitcoin first went live. during the final phase of the great bull run of the The second year saw an explosion of value added to 2000's. Although recent, its entry into the realm the Bitcoin ecosystem. Exchanges were created; the of legend stems from the seemingly flawless first commercial bitcoin transaction took place (the anonymity techniques employed by Bitcoin's now infamous 25,000 BTC pair of Papa John's pizzas); mysterious creator. Even though Nakamoto is on a Bitcoin Wiki was written; the first escrow bitcoin record claiming to be a man born on 5 April 1975, trade was conducted; the first portable bitcoin living in Japan [2], and communicated extensively transaction was sent between two Nokia N900 mobile with multiple members of the Bitcoin community, computers; pooled mining was made available; the he left no definitive evidence linking himself to first bitcoin call option was sold, and the first bitcoin any verifiable identity. This has lead to the now short sale was initiated with a loan of 100 BTC, both common belief that the name is in fact a facilitated by the newly created #bitcoin-otc trading pseudonym, perhaps even for an entire working channel on freenode IRC; and finally, the Bitcoin group. economy passed US$ 1MM when the bitcoin price touched US$ 0.50 on MtGox. At the time, Nakamoto volunteered few if any clues to the public regarding the existence of the By 28 January 2011, a quarter of all bitcoins had already Bitcoin project, but retrospective analysis has still been issued. Twelve days later, bitcoin reached parity enabled a fairly comprehensive event timeline to with the U.S. Dollar on MtGox. Development of the be reconstructed. The first significant event in protocol was rapid and many early quirks and bugs had Bitcoin's public history is probably the registration already been resolved. This was also the year of the of the bitcoin.org domain on 18 August 2008. first alternative coin (altcoin), with Namecoin Around the same time, Satoshi was successfully launching in April 2011. communicating with known members of the Cypherpunk community on whose inventions THE LEGEND (cont.) Bitcoin partially rests, notably including Wei Dai Up until 2011, Satoshi Nakamoto kept in close and Adam Back, inventors of b-money and correspondence with members of the Bitcoin Hashcash, respectively. None of them admits to community, regularly communicating with a knowing Nakamoto's identity. [Continued >>] growing list of code contributors via email and various blog and forum posts. But in the summer The Bitcoin codebase was first released November 9, of 2011, citing discomfort about Bitcoin's sudden 2008 on SourceForge.net as an open source project thrust into the international limelight with the available for contribution by anyone interested and Wikileaks scandal, and after receiving a message otherwise capable of persuading the community of the from volunteer co-developer Gavin Andresen that utility of their code.
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