Beneath the Bitcoin mystique

IT’S been dubbed the biggest bubble in history, outdoing Tulip Mania, which rocked the Dutch economy in the 17th century.

We are in a Bitcoin boom but will it be followed by Bitcoin bust?

Mystique and confusion surrounds this digital cryptocurrency, whose price has skyrocketed to $22,000 in Australia and seems to be only heading in one direction.

Investors all over the world are rushing to get their hands on this trendiest slice of socalled money, created by powerful computers making complex mathematical computations called bitcoin “mining”.

But the jury is well and truly out on whether this Bitcoin bonanza is just another “get rich quick”-style scheme that will see those bragging now about their exponential returns eventually end up with their tail between their legs.

It was created by Satoshi Nakamoto — the name used by the unknown person who is believed to have developed this digital currency — and he’s on track to become the world’s first trillionaire.

Handsome money-making twins Cameron and Tyler Winklevoss — famous for coming up with the grand idea of one the world’s biggest social media platforms, Facebook — have already been dubbed the “world’s first Bitcoin billionaires.”

They first purchased Bitcoin back in 2013 when many of us hadn’t even heard of the word, buying almost 92,000 coins for what now looks like a measly $US120 each.

They have now trans- formed that $11 million outlay into more than $1 billion. Not a bad return. And cryptocurrency has caught the eye of other highprofile names including Hollywood heart-throb Ashton Kutcher, billionaires Mark Cuban and Richard Branson, former boxing champ Mike Tyson and rapper Snoop Dogg.

Dual Geelong Cats premiership coach Mark “Bomber” Thompson said Bitcoin had given him purpose in life for the first time since he finished coaching.

“I’ve been actively investing for 10 months and was watching for a while before that,” Thompson told News Corp Australia.

“A lot of people think it’s a hoax but there’s a lot of substance to it.

“For the first time in a while I’ve found something that fulfils me. I enjoy doing it — it’s competitive — you win or lose money and sometimes it’s cha- otic and your mind is just going crazy, and I like that.

“It’s like a stockmarket but everyone thinks Bitcoin is the whole thing, when it’s not.

“Bitcoin is only the framework upon which this technology was built on — and it’s the technology that is the most important.

“It’s called Blockchain and they say that Blockchain is going to have more impact than the internet had for the world when it started, and I believe it because all of a sudden you’ve got these people who are really intelligent, who are computer experts, that have come up with these ideas and are turning them into reality, which is going to make the world a better world. And that’s what I invest in.”

Asked how much he had invested in Bitcoin, Thompson, who recently pocketed a $7 million property development windfall, said: “You don’t have to invest too much for it to go into double digits, mate — if you pick smartly.”

But for the average Aussie investor who remains unsure of whether this digital currency craze is sheer madness or the next big thing, it is worth considering Reserve Bank of Australia’s chief Philip Lowe’s words this week.

The man who oversees the nation’s benchmark interest rates slammed cryptocurrencies including Bitcoin.

“So the current fascination with these currencies feels more like a speculative mania than it has to do with their use as an efficient and convenient form of electronic payment,’’ he warned.

The nation’s top banker quashed any hopes for Bitcoin to be used for mainstream payments by everyday consumers.

It was too volatile, the number of payments that can be handled was too low, there were governance issues — and the transactional costs in making a payment using bitcoin were too high.

Among experts he from alone in this view.

Commsec’s senior economist Ryan Felsman said people had been caught up in the euphoria surrounding bitcoin.

“It’s a technology that going is far forward may be adopted as an alternative form of currency and certainly though on the counter to that, what we are seeing currently is exponential increases in bitcoin outcomes in terms of return,’’ he said.

“It’s speculative and unregulated so investors need to be very cautious about this, particularly those with a low-risk profile,” Mr Felsman said.

“While it’s rising at present it could eventually fall again and it’s very much a momentum trade at the moment.”

Mr Felsman urged retail investors to speak to a financial planner and get their views before taking any action and said breaking into the Bitcoin market remained a tough task.

“There's a finite amount of bitcoin for starters and gaining access to invest in it is particularly challenging,’’ he said.

There are only 21 million bitcoins that can be “mined” today.

The Currency Shop’s Justin Rampono also urged investors to understand the risks before diving in and said, “It is fundamentally different to equities, bonds or term deposits and it’s important to understand these differences.”

But despite cryptocurrencies still being relatively novel in Australia, the taxman is watching closely to ensure it is specifically itemised in tax returns.

An ATO spokesman said it should be treated like an any other asset for income tax purposes and will be considered for capital gains tax if profits made. “Where you use Bitcoin to purchase goods or services for personal use or consumption, any capital gain or loss from disposal of the Bitcoin will be disregarded provided the cost of the bitcoin is $10,000 or less,’’ he said.