In­ter­est in the cryp­tocur­rency Bit­coin is grow­ing – some e-tail­ers even ac­cept it as a form of pay­ment. The value of the cur­rency has shot up re­cently. But is now a good time to in­vest?

Finweek English Edition - - FRONT PAGE - By Mar­cia Klein

the me­te­oric rise in the price of Bit­coin means it can no longer be ig­nored as a pos­si­ble in­vest­ment op­tion. But only the very brave would put their money into this cryp­tocur­rency, also known as a dig­i­tal cur­rency, right now. The price has risen in part due to un­cer­tainty over the fu­ture of main­stream in­vest­ments, and in part due to the grow­ing ac­cep­tance of cryp­tocur­ren­cies as an in­creas­ing num­ber of peo­ple, and in­sti­tu­tions, start to take them se­ri­ously.

Cen­tral banks, big com­pa­nies and fi­nan­cial in­sti­tu­tions are all look­ing at es­tab­lish­ing dig­i­tal cur­ren­cies and new dig­i­tal cur­rency start-ups and Ini­tial Coin Of­fer­ings (ICOs) are be­com­ing preva­lent.

But with a Bit­coin cost­ing be­tween $2 400 and $2 600 since 1 July, and gain­ing 150% in value in the first six months of this year with wide­spread warn­ings of a Bit­coin bub­ble, it takes a very brave in­vestor or day trader to buy it at this price.

The move to dig­i­tal cur­rency, how­ever, is a real­ity and get­ting into a rel­a­tively new (it has been go­ing since 2009) and grow­ing in­vest­ment trend might be ap­peal­ing to in­vestors.

A New York Post blog­ger who took a snap­shot of Bit­coin trad­ing found the cur­rency is mostly be­ing taken up by peo­ple in the US, fol­lowed by China, but noted that the “most sur­pris­ing” par­tic­i­pat­ing coun­try was South Africa, which ac­counted for 2.5% of sales.

Given our eco­nomic sit­u­a­tion, it is easy to see why we are look­ing for al­ter­na­tive in­vest­ments.

But Bit­coin is not for those look­ing to spread risk. It is a risky in­vest­ment and a fer­tile play­ground for traders who thrive on volatil­ity.

The cur­rency is also very dif­fi­cult to un­der­stand, but in­vestors don’t nec­es­sar­ily need to know how Bit­coins are mined or how the tech­nol­ogy be­hind cryp­tocur­ren­cies works.

They do, how­ever, need to un­der­stand how to safely keep their Bit­coins (in dig­i­tal wal­lets, with keys) and need to un­der­stand the trad­ing en­vi­ron­ment. In the Bit­coin en­vi­ron­ment, there are ca­pac­ity (blockchain size) is­sues, which are af­fect­ing trans­ac­tion costs and the abil­ity to scale, and the Bit­coin com­mu­nity is cur­rently at a bit of an im­passe on how to go for­ward.

This may or may not be solved on 1 Au­gust, when a Bit­coin Im­prove­ment Pro­posal (BIP148) will try to force Bit­coin min­ers to un­dergo a user-ac­ti­vated soft fork – where some pre­vi­ously valid blocks/ trans­ac­tions in the blockchain are made in­valid, and the rest are kept valid. De­pend­ing on how peo­ple re­act, this could re­sult in the cur­rency los­ing value, and cur­rent Bit­coin own­ers are be­ing ad­vised to keep their Bit­coins off­line un­til it passes.

In the past few weeks the Bit­coin price crashed well be­low $2 000 and sub­se­quently soared as signs emerged that the im­passe would be bro­ken.

Dig­i­tal cur­rency Ethereum ex­pe­ri­enced sim­i­lar volatil­ity. The risk in­her­ent in th­ese cur­ren­cies was made clear in mid-July when trad­ing plat­form CoinDash raised $12m in an ini­tial coin of­fer­ing, only to find that $7m was hacked and stolen.

fin­week asked two ex­perts for their views:

1. Is it worth in­vest­ing in Bit­coin now, given the re­cent price move­ment?

Shane Maguire, di­rec­tor at 45ive Me­dia and con­trib­u­tor to bit­coin­, says it isn’t a good time to in­vest “given the hype around Ini­tial Coin Of­fer­ings, given the price surge and all the start-ups”. He be­lieves the price is not sus­tain­able, and he ex­pects a pos­si­ble 60% to 70% price re­duc­tion when the bub­ble bursts.

Werner van Rooyen, head of mar­ket­ing and growth at Luno*, a Bit­coin ex­change, says the to­tal mar­ket cap of Bit­coin was around $15.5bn at the be­gin­ning of the year and is now at around $40bn. It is, how­ever, off its June high of $47bn. So it is not at an all-time high and some in­vestors are tak­ing ad­van­tage of the re­cent dip.

It’s im­pos­si­ble to pre­dict what the price will do, he says. He sug­gests, firstly, that in­vestors should not in­vest more than they can af­ford to lose, and, sec­ondly, ig­nore short-term fluc­tu­a­tions and in­vest a fixed rand-amount on set in­ter­vals. “We’re see­ing an in­crease of in­sti­tu­tional in­vestors and hedge funds who in­vest a small per­cent­age of their to­tal net worth in dig­i­tal cur­ren­cies like Bit­coin.”

Bit­coin is not for

those look­ing to spread risk. It is a risky in­vest­ment and a fer­tile play­ground for traders who thrive on volatil­ity.

2. Is it a prob­lem­atic in­vest­ment be­cause it is so dif­fi­cult to es­ti­mate value and be­cause there is so much price volatil­ity? Yes, says Maguire, as the value be­hind the coin is “noth­ing you can hold or touch, but there is value in it in the sense that the net­work proves value”. There are some tech­ni­cal ways to mea­sure value, in­clud­ing things like to­tal elec­tric­ity of the Bit­coin net­work and min­ing prof­itabil­ity.

Van Rooyen says the price “is sim­ply de­ter­mined by sup­ply and de­mand, like ev­ery­thing else”.

“The volatil­ity at­tracts in­vestors with a cer­tain risk ap­petite since many traders can profit from the price move­ments,” he ex­plains, adding that while fluc­tu­a­tions may seem high, over­all volatil­ity has been de­creas­ing.

3. Where should in­vestors go to buy Bit­coin?

Ac­cord­ing to bit­coin­, there are two li­censed ex­changes, Ice Cubed and Luno. You can trade with other users on lo­cal­bit­coins. com and can even get Bit­coins at a BTM, a Bit­coin ATM. The first one in South Africa has been in­stalled in Kyalami.

If you sell things online, you can also earn Bit­coins by giv­ing buy­ers the op­tion to pay in the dig­i­tal cur­rency, as a num­ber of lo­cal online sites al­ready do.

Van Rooyen warns that buy­ers should do re­search into the com­pa­nies (or in­di­vid­u­als) where they buy or store their Bit­coins. “Bit­coin is at­trac­tive to fraud­sters for the same rea­son that it’s at­trac­tive to in­vestors: it’s a dig­i­tal cur­rency that can eas­ily be sent any­where in the world.”

4. What are the fees and trans­ac­tion or hid­den costs?

Van Rooyen says there is no fee to make a de­posit from your South African bank ac­count to Luno, but you will in­cur a small fee when­ever you con­vert be­tween rand and Bit­coin and also when­ever you send or re­ceive Bit­coins. “This fee is paid to Bit­coin min­ers and de­pends on how busy the Bit­coin net­work is,” he ex­plains.

There is an R8.50 fee when you with­draw your money into your bank ac­count. Be­cause trans­ac­tion costs vary ac­cord­ing to con­ges­tion on the net­work, fees are cur­rently quite high due to the scal­ing is­sues, Maguire says.

5. Among other cryp­tocur­ren­cies, are there any worth in­vest­ing in now? There are a grow­ing num­ber of in­ter­est­ing op­tions with good tech propo­si­tions, says Maguire. While Ethereum has been grow­ing ex­po­nen­tially, he said a lot of the price rise re­flects spec­u­la­tion.

Other in­ter­est­ing cur­ren­cies in­clude Civic – a start-up by South African and Bit­coin Foun­da­tion chair­man Vinny Ling­ham, which re­cently raised $33m in an ICO.

Steem, a so­cial net­work run­ning on its own blockchain, en­ables you to earn cryp­tocur­rency by blog­ging, post­ing and cu­rat­ing con­tent.

“An­other cryp­tocur­rency to look out for is Stratis – a plat­form work­ing on so­lu­tions to make blockchain tech­nol­ogy eas­ily avail­able for en­ter­prise,” Maguire says.

Van Rooyen adds that he is in­ter­ested in Ethereum, “not as a cur­rency, but as a smart con­tract net­work”.

6. Bit­coins are catch­ing on as an ac­tual cur­rency – do you con­sider them an in­vest­ment, a cur­rency or both? Bit­coin is a means of pay­ment and stor­age of wealth (an al­ter­na­tive as­set class), says Van Rooyen. “It has char­ac­ter­is­tics of money, but also of a lim­ited re­source. The best de­scrip­tion so far is to liken it to a dig­i­tal ver­sion of gold: some­thing that is scarce, some­thing that has value and can be ex­changed into lo­cal cur­rency in most places around the world.”

Maguire adds: “I see it as a tech­nol­ogy layer. Cur­rency is one ap­pli­ca­tion for that tech­nol­ogy but there are many other ap­pli­ca­tions be­ing de­vel­oped right now, like trans­fer of prop­erty, for ex­am­ple, which can be done 10 times cheaper than cur­rent sys­tems.” ■

“Bit­coin is at­trac­tive to fraud­sters for the same rea­son that it’s at­trac­tive to in­vestors: it’s a dig­i­tal cur­rency that can eas­ily be sent any­where in the world.”

Werner van Rooyen Head of mar­ket­ing and growth at Luno

Vinny Ling­ham Founder of Civic and chair­per­son of the Bit­coin Foun­da­tion

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