Cryptocurrency is the rage at the moment in the investment fields. I am not really the investment guru but when asked by one of my chums, decided to delve deeper into the well, safety side of things after featuring cryptocurrency in one of my previous post: How will blockchain change the world?.
But before we jump in, let’s bring everyone up to speed. Established in 2009 after the financial crash, bitcoin is a digital currency that has no central bank or regulatory authority backing it up. The coins don’t exist in a tangible form but are made by computers and stored in a digital wallet or on the cloud. They can then be exchanged and used in transactions.
There is a finite number of bitcoin that can be supplied – 21m – and there are currently 15m in circulation. Its price has fluctuated wildly since it was launched. Seven years ago, two pizzas were bought for 10,000 bitcoin. At its peak at the beginning of September this year each bitcoin was worth almost $5,000. As it can be used as an anonymous way to carry out cross-border money transfers, it has been linked to drug dealing and money laundering.
There are bitcoin ATMs that allow the cryptocurrency to be exchanged for cash, and an increasing number of businesses accept it. Lady Mone, co-founder of underwear brand Ultimo, launched a property development in Dubai with prices in bitcoin, while a London property developer is to allow its tenants to pay their deposits using it.
Guy Halford-Thompson, the founder of brokerage Quickbitcoin, says he would not be surprised if mainstream brokers and investors started to invest heavily in the near future. At the same time, the financial regulator has warned against a speculative frenzy over initial coin offerings (ICOs) – a digital way of raising funds from the public using cryptocurrencies such as bitcoin – because of their unregulated nature and lack of investor protection.
While some investors may be attracted by the massive rises this year, others will be wary of the volatility. In mid-January one bitcoin was valued at $800. By June this had gone to $3,000. One month later, it was at less than $2,000 and then almost $5,000 by the start of September. Two weeks later, it was at $3,200.
Electronic payments expert Dave Birch has said in the past that “one doesn’t invest in bitcoin, one gambles on bitcoin”. Those working in the area advise anyone planning on buying the currency to only invest as much as they are prepared to lose.
Concerns about the security of the cryptocurrency have continued to shadow it. Last year, almost 120,000 bitcoin worth around $78m (£58m)were stolen from Hong Kong-based Bitfinex, one of the most popular cryptocurrency exchanges, which resulted in a 20% drop in the value of the currency at the time.
Daniel Scott of Coincorner says the currency itself is secure, but the problem surrounds businesses in the industry and the wallets where the bitcoin are stored. “Unfortunately, IT security is a real-world issue, not just for bitcoin but within any industry that uses technology. You only have to do a quick Google search for recent hackings of large global companies to see that any company is open to security issues regardless of size or industry.”
When Jamie Dimon, CEO of JP Morgan, dismissed bitcoin as a currency for drug dealers and murders that would end up imploding, he compared its rise to an infamous bubble from the 1600s. “It is worse than tulip bulbs,” he said. Dimon was referring to one of the most notorious periods of speculation in history when the value of tulip bulbs rocketed amid a mania for the flowers. The popularity of the bulbs hit its peak in the 1630s.
They were traded “frantically”, according to the Rijksmuseum in Amsterdam, and some people even put their homes down as collateral. However, the market crashed in February 1637, leaving many investors penniless.
So if you want to take the leap, be careful. The extreme volatility, legality, light regulations and need for understanding make it very tricky. So look before you leap.
Check out another of my related post: Could we use blockchain to vote?