The cu­rios­ity of dig­i­tal cash

Claire Brown­well re­veals some tips and notes of cau­tion if you want to join the dig­i­tal cur­ren­cies’ wild ride

Calgary Herald - - FRONT PAGE - cbrownell@post­media.com Twit­ter.com/clabrow

In­vestors who bought cryp­tocur­ren­cies early on faced plenty of doubters, but to­day they’re laugh­ing all the way to the bank.

The price of bit­coin has had plenty of ups and downs dur­ing its tur­bu­lent his­tory, but if you bought and held $1,000 worth of the currency five years ago and sold it on Mon­day, you would have about $374,000 to­day.

In July, Bloomberg re­ported that an un­known trader turned a US$55-mil­lion in­vest­ment in ether, the dig­i­tal currency pow­er­ing the Ethereum blockchain, into US$283 mil­lion over the course of a month.

Over the past three months, the col­lec­tive mar­ket cap­i­tal­iza­tion of the 800- odd cryp­tocur­ren­cies in ex­is­tence has in­creased to US$146.5 bil­lion on Sept. 11, from about US$25 bil­lion on April 1.

De­spite the huge in­crease in value, main­stream con­sumers have yet to take to these dig­i­tal as­sets in sig­nif­i­cant num­bers. To the av­er­age per­son, cryp­tocur­ren­cies re­main con­fus­ing and un­fa­mil­iar.

If you think that’s go­ing to change and you see room for cryptocurrency val­u­a­tions to climb even higher, here’s a guide to buy­ing and trad­ing bit­coin, ether and the hun­dreds of oth­ers in ex­is­tence. Be­fore you get too car­ried away, we have some notes of cau­tion as well.

BUY­ING BIT­COIN

Bit­coin made it the­o­ret­i­cally pos­si­ble for two par­ties to ex­change dig­i­tal value with­out re­quir­ing a bank, gov­ern­ment or third party. In prac­tice, it’s not quite that sim­ple.

For one thing, we all get paid in cur­ren­cies is­sued by cen­tral banks, not bit­coin, which means in­vestors need a way to con­vert their money into a cryptocurrency, which usu­ally means buy­ing it through an ex­change.

Canadian in­vestors have an ad­di­tional chal­lenge: It can be hard to find a cryptocurrency ex­change that ac­cepts loonies. Canada’s Quadriga lets in­vestors buy bit­coin us­ing In­terac online, an elec­tronic funds trans­fer or a bank wire, but re­quires ac­count and iden­tity ver­i­fi­ca­tion in some cases.

If, in the spirit of things, you’d rather keep your bank ac­count out of the trans­ac­tion, a bit­coin ATM might be the way to go. Avail­able in cities across the coun­try, bit­coin ATMs al­low you to de­posit cash in ex­change for cryptocurrency, al­beit for higher fees than an ex­change would charge.

Once you’ve made the trans­ac­tion, con­grat­u­la­tions, you now own bit­coin, which you can prove is yours thanks to a shared dig­i­tal ledger called the blockchain. The ex­change or bit­coin ATM will have is­sued you a bit­coin ad­dress, which is like an email ad­dress peo­ple can use to send you money.

If you want to send money to other peo­ple, you need one more thing: a pri­vate key, sim­i­lar to the pass­word you would need to open up your email ac­count.

Pri­vate keys are is­sued by pieces of soft­ware called bit­coin wal­lets and pro­vide math­e­mat­i­cal proof that trans­ac­tions came from a wal­let’s owner. Sim­ply choose a bit­coin wal­let provider and down­load its app on your smart­phone.

The most com­mon way to ex­plain bit­coin wal­lets is to de­scribe them as sim­i­lar to bank ac­counts, but that’s mis­lead­ing, said An­thony Di Io­rio, chief ex­ec­u­tive and co-founder of Jaxx, a multi-crypto-currency wal­let.

Un­like a bank ac­count — or a phys­i­cal wal­let — bit­coin wal­lets don’t “hold” your money. Your bit­coins are stored on the blockchain, with the bit­coin wal­let sim­ply fa­cil­i­tat­ing trans­ac­tions.

Some wal­lets man­age your pri­vate key on their servers, while oth­ers give you the op­tion of stor­ing it your­self in a file, hard­ware wal­let or pa­per wal­let to keep your bit­coins safe if the wal­let gets hacked.

“We’re a world wal­let that doesn’t hold onto peo­ple’s money,” Di Io­rio said. “You are per­son­ally re­spon­si­ble for se­cur­ing your key.”

WHAT ABOUT OTHER CRYP­TOCUR­REN­CIES?

Bit­coin is the best-known cryptocurrency, but there are 800-plus oth­ers out there.

Some were in­vented to solve prob­lems with bit­coin, some pro­vide a spe­cific func­tion such as giv­ing a user ac­cess to cloud stor- age, and some act to cer­tify eq­uity own­er­ship in a startup.

At US$27.9 bil­lion, Ethereum has the se­cond-largest mar­ket cap­i­tal­iza­tion next to Bit­coin. It’s grow­ing so quickly, how­ever, that many cryptocurrency watch­ers are pre­dict­ing Ethereum will one day de­throne Bit­coin in a re­ver­sal they re­fer to as the “flip­pen­ing.”

In­vented by a Univer­sity of Water­loo dropout, Ethereum has a flex­i­ble pro­gram­ming model that al­lows de­vel­op­ers to use its blockchain to make de­cen­tral­ized ap­pli­ca­tions and self-ex­e­cut­ing “smart con­tracts.”

An al­liance of ma­jor cor­po­ra­tions and fi­nan­cial in­sti­tu­tions is work­ing to­gether to study po­ten­tial uses for Ethereum.

The third- largest cryptocurrency by mar­ket cap­i­tal­iza­tion is Bit­coin Cash and it’s just a mon­t­hand-a-half old.

Bit­coin Cash is the re­sult of a bit­ter, years-long dis­pute over how to han­dle the grow­ing num­ber of trans­ac­tions as bit­coin be­comes more pop­u­lar.

Some peo­ple didn’t like the tech­ni­cal fix im­ple­mented by bit­coin’s core de­vel­op­ers, so they copied the cryptocurrency’s code, gave ev­ery owner of bit­coin an equal num­ber of Bit­coin Cash to­kens and launched a com­pet­ing ver­sion us­ing their pre­ferred so­lu­tion to the scal­ing prob­lem.

Other pop­u­lar cryp­tocur­ren­cies in­clude: Rip­ple, which pro­vides the tech­no­log­i­cal in­fra­struc­ture for fi­nan­cial set­tle­ments; Lite­coin, an al­ter­na­tive to Bit­coin launched with the in­ten­tion of cre­at­ing a “sil­ver to Bit­coin’s gold;” and Dash, a cryptocurrency that focuses on pro­vid­ing quick and anony­mous trans­ac­tions.

BUY­ING OTHER CRYP­TOCUR­REN­CIES

Let’s say you think Rip­ple’s fi­nan­cial set­tle­ment in­fra­struc­ture technology is about to take off, or you want to send and ac­cept dig­i­tal tips in Do­ge­coin. The Jaxx wal­let lets you trade 15 dif­fer­ent cryp­tocur­ren­cies within the app, while wal­lets associated with cryptocurrency ex­changes can hold and ex­change a va­ri­ety of to­kens.

Di Io­rio said the mas­sive in­crease in cryptocurrency value in re­cent months has in­spired a lot of new users to sign up for Jaxx, putting the com­pany on track to pull in $1 bil­lion in sales in this year. Jaxx now has about 500,000 users.

“It’s boom­ing,” Di Io­rio said. “It’s been crazy.”

If you want to in­vest in a brand new cryptocurrency, it’s pos­si­ble to do so through an ini­tial coin of­fer­ing, or ICO.

For ex­am­ple, Water­loo, Ont.based mes­sag­ing app Kik just launched an ICO with its cryptocurrency called Kin in the hopes it will in­crease in value as users earn it and trade it.

Sid Kalla, a re­searcher with Smith + Crown, a crypto­fi­nance an­a­lyst, said it’s im­por­tant to do your re­search be­fore in­vest­ing in any cryptocurrency, but ICOs re­quire even more scru­tiny.

Be­cause val­u­a­tions are so high right now, it’s become pos­si­ble for untested en­trepreneurs with half­baked ideas to raise a lot of money they don’t nec­es­sar­ily de­serve.

“It’s hard to pick good win­ners, be­cause the good projects have val­u­a­tions that go up very high, which lim­its how much up­side po­ten­tial you could have,” Kalla said. “Like any bub­ble, you don’t know where the top is.”

BUYER BEWARE

Sim­ply put, cryp­tocur­ren­cies are not for you if you want a de­pend­able, low-risk in­vest­ment that al­lows you to sleep well at night.

For in­stance, over the course of a week­end from Sept. 7 to Sept. 11, Bit­coin lost eight per cent of its value fol­low­ing news that the Chi­nese gov­ern­ment plans to shut down the coun­try’s cryptocurrency ex­changes.

The volatil­ity of cryp­tocur­ren­cies is “like penny stocks squared,” Kalla said.

“You have to ask your­self, what is the rea­son for in­vest­ing? If the rea­son is, ‘I think Ethereum is go­ing to go up in price 20 per cent by the end of this month,’ then I would say don’t buy it,” he said. “Even if you think this is go­ing to be the next big thing, that doesn’t mean it’s go­ing to be the next big thing next year.”

If you do man­age to quadru­ple your money in a month, re­mem­ber you owe the tax­man his cut. The Canada Rev­enue Agency has made it clear it con­sid­ers such prof­its to be cap­i­tal gains, 50 per cent of which are tax­able.

Jamie Golombek, man­ag­ing di­rec­tor of tax and es­tate plan­ning at Canadian Im­pe­rial Bank of Com­merce, said the anony­mous na­ture of cryptocurrency trad­ing won’t help if the CRA starts ask­ing ques­tions about where you got the money for that fancy new car.

“If some­one tries to con­vert a sub­stan­tial amount of bit­coin into real currency — like Canadian dol­lars — pre­sum­ably there will be a record of that and the CRA may ask where that money came from,” Golombek said. “Not re­port­ing it is tax eva­sion and it’s il­le­gal.”

You have to ask your­self, what is the rea­son for in­vest­ing? ... Even if you think this is go­ing to be the next big thing, that doesn’t mean it’s go­ing to be the next big thing next year.

TOMOHIRO OHSUMI/ BLOOMBERG

A bit­coin ATM stands at the Coin Trader re­tail store in Tokyo. Dig­i­tal cur­ren­cies may look more en­tic­ing af­ter bit­coin soared in value.

An em­ployee uses a smart­phone dur­ing a demon­stra­tion of buy­ing bit­coin from an ATM in Tokyo. Main­stream con­sumers have yet to use cryp­tocur­ren­cies in great num­bers, though they have been gain­ing buzz among in­vestors.

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