FIN320 Final Study Guide ：Help me complete the study guide with each questions

Blockchain, Crypto, and Fintech

Professor Lamont Black FIN320 Week 10

Fintech

•  Fintech is short for “financial technology”

•  Startups disrup'ng finance – Big data – Algorithms

•  Using technology to transform business and personal finance

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History of Financial InnovaJon •  History of money – From barter to gold to paper

•  History of inves'ng – Shares in the East India Company in London

•  History of banking – ATMs – Credit scoring – Mobile banking

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Faces of Financial InnovaJon

•  Entrepreneurs

•  Entrepreneurs partnering with large firms

•  Internal innovaJon at large firms

•  Small firms – Cross River Bank in NJ – Burling Bank in Chicago

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Places of Financial InnovaJon

•  U.S. – New York, Silicon Valley, Chicago

•  Developed countries – London, Singapore, Hong Kong

•  Developing countries – Subsaharan Africa – Mexico

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3 Types of Fintech •  Money – Bitcoin – Blockchain – M-Pesa

•  Credit – Peer-to-peer lending

•  Personal finances – Robo-advising

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Money Is Going “Cashless” •  More retail companies going cashless

•  Local: Epic Burger in Chicago (David Friedman) –  Not an easy transiJon –  But it lowered armed robbery and break-ins –  No more counterfeit bills –  Revenue shor`all offset by lower cost: no bank fees and weekly

armored car pickups

•  Issue: unbanked. FDIC 2015 Survey –  9 million households didn’t have bank accounts (a growing #) –  60% of HHs without account or cards said they didn’t have enough

money to keep in the account –  Fewer free checking accounts and higher monthly service fees

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FIN320

Could we have MONEY without BANKING?

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Bitcoin, Bitcoin, Bitcoin

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From Bitcoin to Blockchain

•  Bitcoin is now widely condemned –  Jamie Dimon (Sep 2017): “Bitcoin is a fraud” – Warren Buffej (May): “Probably rat poison squared” – Bill Gates (May): “As an asset class, you’re not producing anything”

•  But blockchain is the technology behind Bitcoin

•  Where is this headed?

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Valuing Bitcoin (by L. Black) •  Recent valuaJon

–  Similar to a start-up “unicorn” –  SpeculaJve valuaJon based on a big crazy idea

•  Near-term valuaJon –  Similar to gold –  A digital store of value, a safe haven for money –  Designed as a soluJon for global financial instability

•  Long-term valuaJon –  Similar to the Japanese yen –  A digital means of payment, a global reserve currency –  Electronic payments rail for internaJonal trade and finance

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The Birth of Bitcoin •  How should investors learn about Bitcoin?

•  Read the Satoshi Nakamoto white paper (November 2008) –  hjps://bitcoin.org/bitcoin.pdf

•  Title: “Bitcoin: A Peer-to-Peer Electronic Cash System” •  Opening line: “Commerce on the Internet has come to rely almost

exclusively on financial insJtuJons serving as trusted third par'es to process electronic payments.”

•  Global financial crisis of 2008-2009 –  Failing banks, bailouts, massive expansion of money supply

•  The big crazy idea: Bitcoin is digital cash for the digital age

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Bitcoin 101 •  How can digital cash circulate without trusted third parJes?

1. Transac'ons are ANNOUNCED TO THE NETWORK

–  “transacJons must be publicly announced…”

2. Transac'ons are VERIFIED BY THE NETWORK

–  “and we need a system for parJcipants to agree on a single history” –  This solves the double spend problem

“We define a COIN as a chain of digital signatures.” –  a record of ownership transfer

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Bitcoin 201 •  A payments system based on “cryptographic proof”

•  A “P2P distributed 'mestamp server to generate computaJonal proof of the chronological order of transacJons.”

•  “Each owner transfers the coin to the next by digitally signing

–  A) a hash of the previous transacJon –  B) the public key of the next owner

•  The hashing is “proof-of-work” with “one-CPU-one-vote”

•  “Nodes express their acceptance of the block by working on creaJng the next block in the chain…”

•  Bitcoin is a cornerstone in the long-term blockchain infrastructure

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The Evolving Crypto Investor •  Early: Direct invesJng

–  This is individuals/insJtuJons invesJng their own money –  The “retail techies” (miners and early adopters) –  The “traders” (prop money; e.g., Cumberland DRW) –  The “lemings” (retail uninformed)

•  Recent: Indirect invesJng –  This is invesJng other people’s money –  A.k.a, asset management –  The “crypto funds” (high net worth and insJtuJonal) –  5 to 10% aggressive risk in por`olio

•  Future (10+ years): Retail comes full circle –  This is wealth management –  Crypto becomes a legiJmate “retail alternaJve investment” safe haven –  3 to 5% of reJrement por`olio

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Cryptocurrencies and ICOs •  Ini'al coin offerings (ICOs) join the concept of money and

financial contracJng

•  “Smart contracts”

•  Think crowdfunding – issuer provides coins for money –  AlternaJve to VC and IB; In between Kickstarter and equity

•  Ethereum raised $18M in 2014 by issuing ETH for BTC •  DePaul student entrepreneurs want to do it too

•  Entrepreneurs can raise money by crea'ng money

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Blockchain ApplicaJons •  TransacJons

–  Large: Cross-border trade (e.g, Quorum), Nasdaq –  Small: Internet of things

•  AudiJng

–  “AccounJng on the cloud”

•  Data and security –  A new paradigm for storing informa'on (truth)

•  Property rights –  Real estate and vehicle Jtle –  Land rights

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A Crypto-Blockchain Community

•  Chicago has a history of financial innovaJon

•  Prime market for business applicaJons

•  InnovaJve universiJes

•  Unique opportunity to build a cryptocurrency and blockchain community

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Other Fintech InnovaJons

•  Mobile payments (Venmo, Zelle, Mpesa)

•  Online lending (Peer-to-peer)

•  Robo-advising (Bejerment, Wealthfront)

•  Theme: data, automaJon, arJficial intelligence

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M-PesaM-

•  The use of cell phone minutes as money in Subsaharan•  The use of cell phone minutes as money in Africa

Subsaharan•  Leapfrogging tradiJonal financial insJtuJons

•  Solving a social need Africa

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Credit

Peer-to-peer lending (P2P) Peer-to-peer lending (P2P)

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Bank

Borrower

Creditor

Borrower

Small Credit OriginaJon •  Personal loans online •  Small business loans (“business banking”)

•  Using technology to underwrite credit risk –  “small business credit scoring” in the 1990s

•  Who provides the credit? A bank or non-bank? Pros/cons? –  Quicken and Guaranteed Rate (mortgages) –  Avant, Enova, and Argon Credit (personal loans) –  LendingClub and Prosper (peer-to-peer loans) –  PayPal and Square (from payments to credit) –  Venmo?

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-advising

Siri helping you with your finances

helping you with your finances

–  Bejerment •  InvesJng startups (invest in ETFs) –  Bejerment – 

Wealthfront

–  Acorns

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