IN­VEST­ING: CRYTOMANIA AND THE SEC­OND COM­ING

Bit­coin and about 800 other cryp­tocur­ren­cies are in the news again. Is it fi­nally time for in­vestors to take a hard look at an in­tan­gi­ble cur­rency?

The Peak (Hong Kong) - - Contents - STORY RYAN AN­DREWS

Bit­coin and 800 other cry­tocur­ren­cies are in the news again. We - and in­vestors - take a hard look at the in­tan­gi­ble cur­rency

Were the waspish Win­klevoss twins ac­tu­ally onto some­thing? Their gen­eral un­like­abil­ity (as por­trayed in The So­cial Net­work) made them a topic of mirth – but they did de­velop the con­cept be­hind Face­book. They were also the first pub­lic faces to ex­tol the virtues of bit­coin. Peo­ple scoffed and waited for the demise. Af­ter all, they were tan­gled up in a set of law­suits sur­round­ing the ori­gins of Face­book, which was un­seemly. How could bit­coin be wor­thy of at­ten­tion?

But bit­coin hit an all-time high last month, af­ter un­der­go­ing some ups and downs that had seem­ingly spelled its end. Had you bought a bit­coin for US$967 (HK$7,542) on Jan­uary 1, 2017, by June 1 that same bit­coin would have been worth US$2308. In the sum­mer of 2010, one bit­coin was worth just six US cents. It’s not hard to see why bit­coin is back in the news. Is it time to re­con­sider this dig­i­tal cur­rency, or one of the many more it has spawned?

There are plenty of op­tions, with around 800 cryp­tocur­ren­cies in ex­is­tence and a to­tal mar­ket value of around US$80 bil­lion. The cur­ren­cies get­ting the most at­ten­tion at the mo­ment are bit­coin and ether, while the oth­ers are still re­garded war­ily. In 2014, for ex­am­ple, Pot­coin was launched out of Canada, with the aim of as­sist­ing those wish­ing to buy and sell le­gal mar­i­juana out of Colorado. In June this year, Pot­coin spon­sored a trip by for­mer NBA star Den­nis Rod­man to North Korea (his fifth trip), with Rod­man wear­ing a Pot­coin t-shirt. The cur­rency in­creased from US$0.11 to US$0.20 in one day. The stunt has been dis­missed by cryp­tocur­rency in­vestors, but it also points to the risks and con­fu­sion in the cryp­tocur­rency mar­ket.

“Ini­tially in the In­ter­net era you had thou­sands of com­pa­nies fail, but the ecosys­tem flour­ished. I think that’s what will hap­pen with a lot these cryp­tocur­ren­cies,” says Itai Damti, co-founder and CEO Asia Pa­cific at Lev­er­ate, a ser­vices provider for forex firms. Like many of the com­pa­nies that saw their dot­com bub­ble burst due to poor man­age­ment, he won­ders if these cryp­tocur­rency com­pa­nies can demon­strate good lead­er­ship. “Peo­ple are go­ing to lose a lot of money”, Damte says, which might not be a bad thing.

Which brings us to bit­coin, which was cre­ated with a white pa­per in 2008 and be­come the dig­i­tal cash of the In­ter­net. Bit­coin chal­lenged a num­ber of com­mon as­sump­tions about money. It is anony­mous, has near zero fees, is coun­try ag­nos­tic, un­reg­u­lated, has no in­fla­tion and is open. But it is fi­nite, with lost coins im­pos­si­ble to re­place. And it is also very volatile.

“Vo­latil­ity is sim­ply the fi­nan­cial re­al­i­sa­tion of un­cer­tainty. There’s a lot of un­cer­tainty re­gard­ing the fu­ture of bit­coin. It could be reg­u­lated or pro­hib­ited into obliv­ion. It could be­come the next gold stan­dard. It could be re­placed by more mod­ern cryp­tocur­ren­cies. Un­til we have a bet­ter idea whether this is truly the sec­ond com­ing of the In­ter­net, or a very clever Ponzi scheme, some­thing in be­tween or some­thing else, we’ll keep wit­ness­ing mas­sive price swings,” says Alexan­dre Beaulne, a for­mer data sci­en­tist in the fi­nan­cial sec­tor in Hong Kong who is now a cryp­tocur­rency en­tre­pre­neur. He also points to a large schism in the bit­coin com­mu­nity re­gard­ing the is­sue of scal­a­bil­ity, and about things like trans­ac­tion fees and de­lays that users now ex­pe­ri­ence.

In June, af­ter a se­ries of bear­ish re­ports by firms such as Gold­man Sachs and Mor­gan Stan­ley, both bit­coin and ethereum ex­pe­ri­enced mas­sive drops in value, with Coin­base, a cryp­tocur­rency ex­change, go­ing off­line due to trad­ing de­mand. More pes­simistic in­vest­ment an­a­lysts re­gard bit­coin and ethereum as hav­ing lit­tle prac­ti­cal use, and there­fore will be sub­ject to non-stop vo­latil­ity based solely on sen­ti­ment.

In May, the Win­klevoss twins had their pro­posal to cre­ate an ETF, the Win­klevoss Bit­coin Trust (trad­ing un­der the ticker name COIN) re­jected by the US Se­cu­ri­ties and Ex­change Com­mis­sion. The idea be­hind the ETF was to help in­vestors buy bit­coins but shield them from ex­treme fluc­tu­a­tions.

But the SEC made a de­ci­sion Fri­day to pre­vent the pro­posed ETF, the Win­klevoss Bit­coin Trust, from join­ing a stock ex­change, cit­ing “con­cerns about the po­ten­tial for fraud­u­lent or ma­nip­u­la­tive acts and prac­tices” in bit­coin trad­ing. The spon­sors of the ETF, the Win­klevoss twins had pro­posed that the bit­coin-only fund would trade like a reg­u­lar stock un­der the ticker sym­bol “COIN.” That re­jec­tion was one of the re­ported rea­sons for a bear­ish re­port by Mor­gan Stan­ley on the fu­ture of bit­coin.

De­spite these is­sues, Beaulne and oth­ers in the cryp­tocur­rency game re­main bullish.

“For a risk mod­er­ate, or even risk averse in­vestor, I do think it makes sense to in­vest a tiny por­tion into bit­coin. Bit­coin has been proven to work over the past eight years; it’s no longer an ex­per­i­ment,” says Leon­hard Weese, pres­i­dent of the Bit­coin As­so­ci­a­tion of Hong Kong. “It is, how­ever, ex­pected to be highly neg­a­tively cor­re­lated with other as­sets, such as stocks or bonds. If our fi­nan­cial sys­tem goes bust,

bit­coin’s gains might com­pen­sate for the losses in other ar­eas. It is also an ex­cel­lent hedge against a col­lapse in the com­mod­ity or real es­tate mar­ket, or even the col­lapse of en­tire cur­ren­cies”.

Damte agrees it still pays to buy bit­coin in 2017, for a num­ber of rea­sons. It’s still very new and has a lot to prove but has evolved from an es­o­teric in­ven­tion to what it is to­day, be­ing fea­tured on CNN and CNBC. “You see amaz­ing progress, you al­most lose track of how it hap­pened it hap­pened so fast. A lot of in­sti­tu­tional in­ter­est, even if they don’t fully em­brace it, it’s sort of a cer­ti­fi­ca­tion for the fact that bit­coin or this cryp­tocur­rency space has the right to ex­ist,” Damte says.

Damte be­lieves there will be an­other cor­rec­tion in cryp­tocur­rency just like the dot­com bub­ble, which ended up be­ing good for the In­ter­net. “It would be much health­ier for the pub­lic im­age of bit­coin for the price to set­tle and be­come a bit more sta­ble.”

Bit­coin more or less in­vented the blockchain and the sec­ond­gen­er­a­tion of cryp­tocur­ren­cies. Among the en­trepreneurs and in­vestors in­ter­ested in the sub­ject, blockchain and cryp­tocur­ren­cies are re­ferred as “the sec­ond com­ing of the in­ter­net.” A blockchain is sim­ply a pub­lic ledger of all trans­ac­tions of a given cryp­tocur­rency. The “block” comes from the fact that trans­ac­tions are grouped to­gether to be added to the ledger, and “chain” comes from the fact groups of trans­ac­tions (a.k.a. blocks) are added one af­ter the other in the ledger (i.e. a chain of blocks).

The most pop­u­lar of these new blockchains is ethereum, whose value to­ken (cur­rency) is called ether. Ether has also seen a me­te­oric rise. Je­han Chu, man­ag­ing part­ner at Jen Ad­vi­sors, a blockchain-fo­cused early-stage ven­ture cap­i­tal and cryp­tocur­rency fund, likens the dif­fer­ence be­tween bit­coin and ether as to that of gold and oil. Whereas bit­coin pri­mar­ily func­tions as a cur­rency, ether is used to power ap­pli­ca­tions on the ethereum blockchain, like dig­i­tal oil. Ether is used to power a num­ber of dif­fer­ent ma­chines on the ethere­rum plat­form, just as oil pow­ers ma­chines. (Ethere­rum is a gen­eral plat­form on which any ap­pli­ca­tion and code that you can imag­ine can be built. It’s a uni­ver­sal op­er­at­ing sys­tem. In essence it’s the peo­ples IOS.)

Flex­i­bil­ity and low trans­ac­tion costs are among the ben­e­fits of working on ethere­rum. “Send­ing money costs a great deal of money, and you can’t send 10 cents. With blockchain you can, with bit­coin you can, with ethereum you can,” says Chu. “There are dif­fer­ent types of value, not just fi­nan­cial value. In­tel­lec­tual prop­erty value, con­tent value even iden­tity value. It’s a new par­a­digm on how in­for­ma­tion can be trans­ferred..”

As with bit­coin, ethereum is sup­posed to cut out mid­dle­men on trans­ac­tions, fi­nan­cial or oth­er­wise. The ex­cite­ment that ethereum pro­duces is pal­pa­ble; “It’s the next level. It’s in the spirit of bit­coin, but with a big­ger pur­pose. Take the con­cept of bit­coin and cre­ate a whole pro­gram­ming lan­guage on top of it with the abil­ity of in­di­vid­u­als to is­sue stocks or se­cu­ri­ties to each other,” says Damti

There are other dif­fer­ences be­tween bit­coin and ethereum. The amount of bit­coin pro­duced is lim­ited while the ethereum sup­ply is un­lim­ited. Ethereum has a much

richer pro­gram­ming lan­guage that al­lows any­one to cre­ate codes to mine the cur­rency, while bit­coin has pro­grams that are im­pos­si­ble to write. Bit­coin is bet­ter known and the com­mu­nity is larger. The ethereum com­mu­nity is smaller with more de­vel­op­ers and less spec­u­la­tors. In re­al­ity they’re not com­peti­tors, they co­ex­ist and solve dif­fer­ent types of prob­lems.

Bit­coin, ethereum and its cousins have al­ready found wide­spread ac­cep­tance in Asia. Ja­pan and Korea have taken big steps to in­crease bit­coins le­git­i­macy, thus mak­ing it eas­ier to trade, ex­change and ac­cept. Ja­pan treats it like any other cur­rency. Tai­wan has also been very ac­cept­ing. The Cen­tral Bank of China is de­vel­op­ing a dig­i­tal cur­rency and Sin­ga­pore has pub­lished their dig­i­tal cur­rency tri­als.

All this ac­tiv­ity has made the ecosys­tems around blockchain and cryp­tocur­ren­cies “highly ma­ture” in a short time, says Weese of the Bit­coin As­so­ci­a­tion, who adds that in Hong Kong, bit­coin is easy to buy, but reg­u­lated in­sti­tu­tions are not al­lowed to deal with it. Banks here con­tin­u­ously block trans­fers and freeze ac­counts of ex­changes and traders, mean­ing that the ecosys­tem is not as ma­ture as its Asian coun­ter­parts, and a lot of trad­ing is done with cash.

Hong Kong does have its ad­van­tages. “Rule of law, a high den­sity of high level pro­fes­sional in­dus­tries from bank­ing and fi­nance to sup­ply chain and lo­gis­tics – that den­sity of in­dus­try lends it­self well to blockchain,” says Chu. As an es­tab­lished tra­di­tional fi­nan­cial hub, Hong Kong is also uniquely po­si­tioned to be a bridge be­tween new and old fi­nance.

So where does that leave the av­er­age in­vestor? “I’m bi­ased, but I think the risk for an in­vestor right now is to not take a look at cryp­tocur­ren­cies. The tech­nol­ogy truly has the po­ten­tial to rev­o­lu­tionise the econ­omy as we know it. It would there­fore be ir­re­spon­si­ble for an in­vestor not to pay at­ten­tion or ded­i­cate a small frac­tion of its port­fo­lio to cryp­tocur­ren­cies. With that said, there is both a lot of un­cer­tainty and ir­ra­tional ex­u­ber­ance in cryp­tocur­ren­cies at the mo­ment, so it would also be ir­re­spon­si­ble to pro­ceed with­out cau­tion,” says Beaulne.

It seems that a bite-sized be­gin­ning in bit­coin might be the best way into these still-murky wa­ters.

ABOVE Hong Kong­based Asia Nex­gen launches a phys­i­cal store in Hong Kong on Fe­bru­ary 28, 2014, en­abling cus­tomers to pur­chase bit­coin and store it in their dig­i­tal bit­coin wal­lets. ABOVE RIGHT Peo­ple at­tend a bit­coin con­fer­ence at the Jav­its Cen­tre in New York on April 7, 2014.

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