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
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.