How to get rich off bitcoin - or risking to lose it all while trying
BITCOIN is on everyone’s lips this week and the price has gone nuts - shooting past US$ 17,000 ( RM71,400) per bitcoin in last Thursday’s trading. It has rocketed up US$ 5,000 in less than a week, prompting wall-towall news coverage that is giving Senator Al Franken, Russia, the FBI and even President Donald Trump a run for their money.
The value of the digital currency - or cryptocurrency - is up about 15 times this year.
If you were around during the frenzy of the late 1990s dotcom bubble, the bitcoin mania might have a familiar cast: A new technology that was misunderstood yet spawning hundreds of companies and resulting in speculative trading.
Here’s a primer that might help demystify the new phenomenon for you investor types. Q: What is bitcoin? A: It is an electronic form of currency that has no physical presence anywhere in the world. There are no physical “coins” like dimes, nickels and quarters. Bitcoins, like other cryptocurrencies, exist on the Internet.
“It is fundamentally a piece of computer code and software that verifies transactions,” said JR Lanis, an attorney with Drinker Biddle. “It can be any kind of transaction. It serves a purpose and derives its value by verifying transactions. That is the technology.”
Essentially, it is code that says, “this is what it is.” Q: Why has the price gone crazy? A: This one is easy.
Limited supply. And, apparently, unlimited demand - at least for the moment.
People are buying up bitcoins, driving up the price of the 16.7 million coins in circulation to a total value of US$ 265 billion as of midday Thursday. That’s not quite the size of Bank of America, but getting there.
“It’s speculative,” Lanis said. “People think that the price is going to continue to go up indefinitely.” Q: Will it? A: That would be a first. Even shares of Amazon.com (whose founder and chief executive, Jeffrey P. Bezos, owns The Washington Post) dropped like a stone after the dot- com bubble burst. Amazon has since surged to become one of the market’s big winners.
Unlike almost any stock or bond, the floor value of a bitcoin is zero. It does not pay interest. There is no asset value attached to it except what the market gives it. It has no central bank supporting it. What it does have is a faithful following, which has its own value, just as gold has had for thousands of years. Bitcoins have value because a community believes in it.
“Bitcoin is really a fascinating example of how human beings create value and is not always rational,” former Federal Reserve chairman Alan Greenspan said during an interview on CNBC earlier this week. “It is not a rational currency in that case.” Q: How can I buy bitcoins? A: Two ways. First, you can go on websites such as Coinbase or Gemini that trade digital currency and open an online account.
That’s what Leya Yusupov, a 37-year- old mother who lives in Queens, did.
“I downloaded the Coinbase app, and created a password. Then I connected my account with my bank account,” said Yusupov, who bought her first shares in August. “You can also use a credit card, but you can buy more bitcoin if you have a bank account as your payment.” The Coinbase fee for her purchase was US$ 48.47.
“In the beginning, they don’t let you buy a lot,” said Yusupov, who has a finance degree from St. John’s University. “As you buy more and have verification when you put in your ID, they see you buying more and boost your limit.”
She stores them in her “digital wallet,” which can be used with mobile payment systems.
But buying bitcoin is about to get much easier. The Nasdaq Stock Market will start a bitcoin futures site on its commodities trading platform in 2018. The Chicago-based CME Group and the Chicago Board Options Exchange will begin trading bitcoin futures any day now.
“It will become easier once you start trading it as a commodity, like oil or gold,” Lanis said. Q: Can it be hard to buy bitcoins? A: Yes. This isn’t like going on Charles Schwab, Scottrade or E-Trade and buying and selling stocks.
Not all the cryptocurrency trading sites, known as coin exchanges, are built for average folks like me.
“The platforms aren’t great,” Lanis said. “The sites you go on to buy it are fairly rudimentary. They aren’t set up like the stock market sites.”
David Drake, chairman of LDJ Capital, a family office, said that a money transferring licence and other regulatory licences are necessary to operate a business with cash transfers and escrow. Most bitcoin platforms don’t have that license. Q: What can I use it for? A: Right now, storing value and speculating - mostly.
“People are seeing it much more as an investment than as a daily form of currency,” Lanis said.
Bitcoins can be used to buy merchandise anonymously, without a middleman and involving lower or no fees and no banks, but it’s not that widely used. It’s not easy when you have a “currency” whose value fluctuates wildly. — WPBloomberg