Session 4 · Crypto, Bitcoin & Stablecoins FIN310

Basics • Keys & wallets • Bitcoin mining/supply • Stablecoins (types, reserves, risks) • Money-supply effects • Policy (U.S. & global) • CBDC vs. dollar stablecoins • De-dollarization
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1) What is “Crypto” (in one slide)?

  • Cryptoasset = a digital token on a distributed ledger (blockchain). Some aim to be money (e.g., Bitcoin); others power apps, games, or financial rails.
  • Blockchain = shared database that many computers maintain. New entries are accepted via a consensus rule (e.g., proof-of-work or proof-of-stake).
  • Why people care: open access, programmable payments/finance, 24/7 settlement, cross-border speed, new business models — with risks (volatility, hacks, fraud, leverage).

Families (very simplified)

TypeExamplesWhat for?
Payment/Store of valueBitcoinPeer-to-peer value transfer, scarce supply narrative
Smart-contract platformsEthereum, SolanaProgrammable apps/DeFi/NFTs
StablecoinsUSDC, USDTDollar-like token for trading and payments
You’ll see where these connect to money aggregates and policy.

2) Keys, Wallets & Security — “Not your keys, not your coins.”

Public vs. private key

  • Public key / address — where others can send assets (like an email address).
  • Private key — proves you can move the asset (like the password). Never share it.
  • Signatures — you sign a transaction with your private key; the network verifies with your public key.

Wallet types

  • Custodial (exchange holds keys) — easier UX, platform risk.
  • Self-custody (you hold keys) — more control, more responsibility.
  • Hardware wallets — keys in a device that stays offline; phish-resistant.
Security basics: strong passphrases, beware phishing, 2FA, test small amounts first.

2b) Self-Custody & Safety — No helpdesk on-chain

Core realities

  • Finality: most crypto transfers are irreversible.
  • No bank recourse: losing a private key / seed phrase usually means losing the asset.
  • Attack surface: phishing, fake apps, malware, SIM-swap, malicious smart contracts.

Protection checklist

  • Hardware wallet for meaningful balances; keep the seed phrase offline (never cloud/email).
  • Multisig or social recovery for shared/treasury funds.
  • 2FA + allow-listing if using custodial exchanges; withdraw to known addresses only.
  • Verify contract addresses on the issuer’s official site; avoid random links.
  • Test sends first; keep software/firmware updated; beware airdrops and “support” DMs.
  • Stablecoin specifics: read redemption terms, issuer disclosures, and proof-of-reserves/attestations.
Rule of thumb: custody risk ↓ as operational discipline ↑ (hardware, backups, procedures).

3) Bitcoin — Mining, Issuance & Supply

How mining works (proof-of-work)

  • Miners bundle transactions into a block and compete to find a valid hash. First to solve earns block reward + fees.
  • Issuance halves ~every 4 years (“halving”) → a capped supply of 21 million BTC by design.
  • Costs: electricity + hardware → economic floor for large miners.

Why people hold BTC

  • Scarcity narrative (fixed cap), portability, censorship-resistant settlement.
  • But: price volatility, regulatory shifts, and technological risks.
We focus on concepts; this is not investment advice.

3b) Bitcoin vs. USD Stablecoins — What’s the difference?

DimensionBitcoin (BTC)USD Stablecoins (USDT/USDC/…)
Goal / Design Decentralized, scarce digital asset; peer-to-peer cash vision; “digital gold” narrative. Track $1.00; payment/settlement rail with dollar-like price.
Price behavior Free-floating, volatile. Pegged to $1 via reserves + redemption; low volatility if reserves/liquidity hold.
Backing No issuer; value comes from consensus & scarcity (code/economics). Fiat-backed (cash/T-bills/MMFs) or crypto-collateralized; issuer promises redemption.
Supply policy Capped 21M; issuance halves ~4y (proof-of-work). Elastic: minted/burned vs. dollars deposited/redeemed with issuer.
Who runs it? Open network of miners/nodes; no company in charge. Issuer/company or DAO + custodians; subject to legal terms and regulators.
Security base Proof-of-work hashpower; highly censorship-resistant. Trust in issuer reserves, banking partners, and smart-contract design.
Best use cases Long-term holding, censorship-resistant transfers, diversification thesis. Payments, trading collateral, 24/7 settlement, cross-border dollar rails.
Key risks Volatility; regulatory climate; custody mistakes. Reserve quality/liquidity; de-peg/run risk; counterparty/legal risk; smart-contract risk.
M1/M2 linkage Buying BTC with deposits reduces bank deposits; not counted in M1/M2. Tokens not in M1/M2; deposits can shift to issuer reserves (T-bills/MMFs or bank deposits).

Why many people like Bitcoin

  • Programmed scarcity (21M cap) and predictable issuance.
  • Neutral, permissionless network with global settlement.
  • Self-custody possible; no reliance on an issuer.
Trade-off: price swings are large; it’s not a stable unit of account.

Why many prefer stablecoins for payments

  • Dollar price stability for invoices, payroll, and trading.
  • Fast settlement across exchanges and borders; composable with crypto apps.
  • Familiar accounting (denominated in $).
Trade-off: you trust the issuer + banking stack; read disclosures.

Bitcoin Games

📈 Bitcoin Supply Game ⛏️ Bitcoin Mining Game

Tip: If your LMS blocks iframes, keep the buttons above so students can open the games in a new tab.

🎥 Quick explainer on Stablecoins — watch this first

4) Stablecoins — What, Why, How

What is a stablecoin?

A token designed to track a reference (usually the U.S. dollar). Users like the “crypto-speed” of transfers with less price volatility.

Why people use them

  • Fast, low-friction settlement across exchanges and borders.
  • Bridge between traditional dollars and crypto apps.
  • Sometimes higher yield on reserve assets (indirectly, via issuers’ holdings).

How they keep the peg (models)

ModelBackingNotes
Fiat-backedCash, bank deposits, T-bills, MMFsRedeemable $1 in/$1 out with the issuer. Needs audits, liquidity, risk controls.
Crypto-collateralizedOn-chain collateral (e.g., ETH)Over-collateralized; can be volatile; uses smart-contract rules/liquidations.
AlgorithmicRules/market incentivesNo (or partial) collateral; historically fragile under stress.

4a) Who Makes Stablecoins & Who Profits?

Who creates them?

  • Fiat-backed issuers (companies like Tether, Circle, Paxos, etc.) mint/burn tokens against dollars (or T-bill/MMF cash) held with banks/custodians.
  • Crypto-collateralized protocols (e.g., MakerDAO/DAI) mint tokens against on-chain collateral, with over-collateralization + liquidations.
  • Payment brands (e.g., PayPal’s PYUSD via Paxos) integrate stablecoins into existing user networks.

How do issuers earn money?

  • Interest on reserves (“the float”): cash/T-bill/MMF income while tokens circulate.
  • Fees: issuance/redemption, network/spread, institutional services.
  • Scale effects: larger supply → larger interest income (minus hedging/custody/audit costs).
Founders/shareholders profit like any fintech: revenue – expenses; no “mining rewards.”

Do early inventors get rich?

They can, but via equity in the issuing company or protocol tokens, not by printing money. The economic value comes from trust, compliance, banking rails, distribution and risk management.

Student-life lens

  • Using a top-tier USD stablecoin for tuition transfers or international family support can be cheaper/faster—but read the issuer’s terms and your country’s rules.
  • For campus clubs/treasuries: prefer multisig, publish the receiving address, and keep a fiat runway in a bank account.

4b) Can I Create a Stablecoin & Get People to Use It?

Reality checklist (fiat-backed)

  • Form a compliant entity; hire counsel for KYC/AML, money transmitter/licensing requirements in relevant jurisdictions.
  • Secure banking & custodians willing to hold reserves (cash/T-bills/MMFs).
  • Write/audit the smart contracts (mint/burn/blacklist/upgrade policies).
  • Publish frequent attestations (and ideally audits) about reserves.
  • Line up market makers, exchanges, and wallets for distribution/liquidity.
  • Design redemption SLAs, fees, and playbooks for stress events.
Short answer: yes, but it’s a fintech/regulatory project first, then a smart-contract project.

Crypto-collateral model (on-chain)

  • Over-collateralize with liquid assets; build oracle feeds; implement liquidation engines.
  • Expect higher capital costs and potential de-peg during stress; governance/risk is everything.
Avoid “algorithmic” designs that rely on reflexive mint/burn loops without hard collateral—those have repeatedly failed.

Will anyone use mine?

  • People adopt the coin that has the best redemption, transparency, and integrations.
  • Payments is a network-effects game: merchants, wallets, and exchanges matter more than code elegance.
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Stablecoins: Issuance, Collateral & Redemption (read this first)

Stablecoins are tokens pegged to $1, designed for payments and transfers—not for price appreciation. Their stability comes from how they’re issued, collateralized, and redeemed.

Quick example
Alice wires $10,000 to the issuer → issuer mints 10,000 tokens to Alice’s wallet. Later, she sends 10,000 tokens back to redeem → issuer wires ~$10,000 (less any fees) to Alice.
Key risks (teach these)
  • De-peg: If reserves or confidence falter, price can break from $1 temporarily.
  • Liquidity: Can the issuer meet large/fast redemptions?
  • Transparency: Are reserves attested/audited? What are they invested in?
  • Legal/operational: Who may redeem? What are fees/limits and timelines?
Note: Emphasize payments & stability, not speculation. Stablecoins ≠ “number-go-up” assets; they aim to track $1 via collateral + redemption.