Money is No Ob­ject

BIT­COIN—IT’S THE WORD ON EV­ERY­ONE’S LIPS. BUT WHAT IS IT AND WHY DOES IT MAT­TER? Je­han Chu IN­VES­TI­GATES

Hong Kong Tatler - - Real Estate -

Ev­ery­one knows money doesn’t grow on trees. But can it grow on the in­ter­net? That’s the HK$64 bil­lion ques­tion, and if you’re one of the grow­ing num­ber of bit­coin be­liev­ers, the an­swer is a re­sound­ing yes. Made in­fa­mous by sor­did tales of on­line drug bazaars, wildly fluc­tu­at­ing val­ues—in De­cem­ber last year, bit­coin peaked at US$1,200 per coin be­fore crash­ing to about US$600 shortly after—and hack­ing hor­ror sto­ries, it’s hard to be­lieve the dig­i­tal cur­rency has a mar­ket cap greater than the GDP of Laos.

But bit­coin has come a long way since its un­tamed ado­les­cence, and th­ese days you’re as likely to read about it on a Bloomberg ter­mi­nal or in The Wall Street Jour­nal as in Wired mag­a­zine. Thou­sands of for­tunes have been made on bit­coin’s wild rise, and some think the party has just be­gun.

Four years ago, Florida pro­gram­mer Las­zlo Hanyecz bought two piz­zas for 10,000 bit­coins­— worth around US$30 at the time— in what is cred­ited as the first bit­coin pur­chase. To­day, he could use the same num­ber of bit­coins to buy a Tus­can villa and a pri­vate plane—and still have enough left over for seats on the Vir­gin Galac­tic space­craft. At the time of writ­ing, 10,000 XBT (the ac­cepted code for bit­coin) was worth not US$30 but US$5.84M. And with tril­lion-dol­lar in­dus­tries be­gin­ning to take no­tice, it’s only nat­u­ral that bit­coin has traded in its cam­pus hoodie for a suit and tie.

What is bit­coin? The con­cept was in­tro­duced in 2008 by Satoshi Nakamoto—a

pseu­do­nym for a still-un­known per­son or group of peo­ple—in the dis­cus­sion pa­per Bit­coin: A Peer-to-peer Elec­tronic Cash Sys­tem. In short, it’s a global “cryp­tocur­rency”, a dig­i­tal cur­rency that makes use of data en­cryp­tion to reg­u­late the gen­er­a­tion of cur­rency units in­de­pen­dently of a cen­tral bank. New trans­ac­tions are added to a pub­lic ledger of bit­coin trans­ac­tions in a process know as “min­ing”. Your “wal­let”—stored on your mo­bile phone or a com­puter—con­tains the dig­i­tal cre­den­tials for your ac­count and al­lows you to con­duct trans­ac­tions.

Bit­coin is much more than a global dig­i­tal cur­rency—and even its sta­tus as a cur­rency, com­mod­ity or some­thing else en­tirely is the sub­ject of much de­bate. It en­ables users to make fee-free trans­ac­tions quickly and di­rectly with each other, with­out cor­po­rate reg­u­la­tion and gov­ern­ment cur­rency con­trols—and with­out the need for cur­rency con­ver­sion. Though it’s cer­tainly not an anony­mous sys­tem, as all trans­ac­tions are pub­lic by na­ture, bit­coin has been lauded for pro­vid­ing a rel­a­tively high de­gree of anonymity for users.

De­spite a rash of high-pro­file thefts, a scep­ti­cal and gen­er­ally con­fused pub­lic, and the fact that it’s not backed by any cen­tralised cur­rency or com­mod­ity, bit­coin has proved re­silient. Since the be­gin­ning of the year, more than US$150 mil­lion in ven­ture cap­i­tal has surged in from top firms such as An­dreessen Horowitz and Google Ven­tures, which are bet­ting that bit­coin is the next hot tech in­vest­ment. Main­stream me­dia men­tions of bit­coin have tripled since last year, and large re­tail­ers, in­clud­ing travel gi­ant Ex­pe­dia, have started to ac­cept bit­coin as pay­ment.

Bit­coin is now mak­ing its way into the lux­ury life­style space, too. Bit­premier, founded by for­mer banker Alan Sil­bert, is a web­site ded­i­cated to sell­ing big-ticket items, such as a 10-carat fancy yel­low di­a­mond for 507 XBT (US$300,000) or a 36-me­tre megay­acht for 17,670 XBT (US$10.3 mil­lion). It’s famed for clos­ing the sale of a Bali villa for a ru­moured 800 XBT (US$500,000 at the time). “Bit­premier’s launch was im­por­tant be­cause for the first time, the buy­ing power of your bit­coins was ex­tended to more unique items that pre­vi­ously weren’t avail­able for bit­coins,” says Sil­bert.

Sim­i­larly, Coin­tem­po­rary, an on­line art project founded by artists Valentin Ruhry and Andy Boot, presents one art­work per week for pur­chase only in bit­coin. Says Ruhry, “I am a big fan of con­cep­tual and post­stu­dio art, and bit­coin is one of the great­est con­cep­tual art pieces that I have stum­bled on in a long time. We play with the fluc­tu­a­tion of the cur­rency as we de­nom­i­nate all prices in bit­coin. This en­ables col­lec­tors to buy works for a po­ten­tial lower price. It may be con­ve­nient for the col­lec­tors, but is in fact our artis­tic com­ment on the state of the cur­rent art mar­ket.”

Ven­ture cap­i­tal­ists and twin brothers Cameron and Tyler Win­klevoss—the Con­nectu founders who filed a law­suit in 2004 against Face­book for copying their idea for a so­cial net­work—have emerged as celebrity ad­vo­cates of the cur­rency. As large-scale in­vestors in the cur­rency, they’ve paid in bit­coin for seats on the Vir­gin Galac­tic space­ship and launched an ETF (elec­tron­i­cally traded fund) to bring bit­coin in­vest­ing to the masses. Tyler Win­klevoss ex­plains, “I think a lot of high-net-worth in­di­vid­u­als are pretty well ed­u­cated on bit­coin—be­cause it’s too risky not to be. A lot of peo­ple are happy just gain­ing ex­po­sure to the as­set as op­posed to hold­ing it di­rectly, so we wanted to pro­vide an easy and se­cure way of do­ing so. In­vest­ing in an ETF is no dif­fer­ent than buy­ing a share in, let’s say, Ap­ple.”

But for those ea­ger to jump into the bit­coin arena, ex­er­cis­ing safety and cau­tion is strongly rec­om­mended. High vo­latil­ity cre­ates op­por­tu­ni­ties for deft traders, but it can be a trap for the over­con­fi­dent. Like any high-risk/high-re­ward in­vest­ment, the old rules still ap­ply—in­vestors should only spend what they are will­ing to lose. Beyond the in­vest­ment risk, a healthy re­spect for and com­mit­ment to dig­i­tal se­cu­rity is im­por­tant. While bit­coin tech­nol­ogy is as se­cure as it gets, there are thieves ly­ing in wait to pen­e­trate your com­puter and email, and even break into Face­book ac­counts and pose as your old friends who need a spot of help. Be­cause of the ir­re­versible na­ture of bit­coin trans­ac­tions, once your coins are gone, they’re gone for good; there is no cus­tomer ser­vice depart­ment to call to re­trieve them.

“Di­ver­sify. Don’t put all of your coins in one place,” says dig­i­tal se­cu­rity ex­pert Leon­hard Weese, pres­i­dent of the Bit­coin As­so­ci­a­tion of Hong Kong. “Weigh be­tween se­cu­rity and con­ve­nience.” Amid the rapid de­vel­op­ments of the fi­nan­cial world, the clas­sic in­vest­ing ad­vice still ap­plies.

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