Bitcoin: what’s behind the hype
The mysterious virtual currency has soared in value, but how does it work – and is investing in it worth the risk?
IT SEEMS to be popping up in various conversations – dinner parties, news bulletins and water-cooler talk. But it’s also one of those things that has most of us baffled – just what exactly is this bitcoin thing everyone’s on about? In a nutshell, bitcoin is a virtual currency – or cryptocurrency to use the technical term. It doesn’t exist in the real world and can be used only digitally to buy goods and services.
It made headlines again some weeks ago when early adopters cashed in on a good run. If you’d invested just 45c in it seven years ago your investment would’ve been worth more than R50 000.
But before you lament missing out on the bitcoin boom, console yourself with this: many financial experts are sceptical about its value and it’s often used to trade in illegal activities.
In fact Jamie Dimon, head of US investment bank JPMorgan Chase & Co, recently caused an uproar among bitcoin evangelists when he referred to the cryptocurrency as fraudulent.
Bitcoin is controversial for various reasons but mostly for the drastic fluctuations in its value, which can soar or plummet within days.
The technology behind it is mostly Greek to us so it’s perhaps fitting that the word “crypto” comes from the Greek word for “secret” or “hidden”.
But is it a way to make your fortune, or a financial bubble set to burst? We decode the basics so you can join the conversation at the next braai.
WHAT IS IT?
It’s not a tangible form of currency like coins or notes. It’s virtual money exchanged electronically by users around the world.
The coins you see on bitcoin reports and logos are only an illustration. Even though bitcoin has nearly cornered the market in cryptocurrency, other digital currencies also exist, such as ethereum, litecoin and dash.
In bitcoin’s case, the name also refers to the electronic network in which the digital currency is moved around and saved. The bitcoin system is run by a decentralised network of computers and makes use of advanced, super-safe technology.
Anyone with a computer or smartphone can buy and trade in bitcoin.
Traditional currency is regulated by a government but bitcoin has no such thing. Instead it’s literally just a network of people using it, which is why its value can shift so dramatically in short periods.
Cryptocurrency isn’t based on something with “fundamental value”, says Andró Griessel, a financial planner and managing director of ProVérte Wealth & Risk Management.
“It remains just a transfer mechanism to move payments from one point to another.”
Because it’s not regulated or supported by a government, critics don’t consider cryptocurrency to be a proper currency, Griessel adds.
WHERE DOES IT COME FROM?
Bitcoin is said to have been started by a mysterious genius known as Satoshi Nakamoto.
He apparently created the software for the bitcoin on his personal computer in 2008, and the network was started in 2009.
Few records exist of him besides emails between him and later bitcoin developers. The elusive computer programmer keeps such a low profile that many believe Nakamoto is a pseudonym – or that he doesn’t really exist at all.
WHY HAS IT GROWN SO FAST?
In the past seven years the value of bitcoin has grown by an average of 445% a year. The monthly record is 65% growth month on month but the value also dropped by 32% within the space of one month.
It’s actually due to clever marketing that bitcoin grows so quickly – people pay thousands for bitcoin thanks to the spin behind it.
The story has become one where anyone can become rich simply by taking risks and learning new and advanced computer technology.
What makes the story even more intriguing is that it’s a world of secrets and being clever at outsmarting others.
An estimated 16 million bitcoin are doing the rounds, but the nature of the system is that it can never exceed 21 million.
The secretive nature of bitcoin appeals to those who want to rebel against the established order, according to Joel Comm, a marketing expert and internet entrepreneur.
It’s also easy to use for cross-border trade because it doesn’t have to follow the rules of established currencies.
SHOULD I TRY IT?
Cryptofever has certainly caught on locally. South Africans bought bitcoin to the value of R340 million just a few months ago on Luno, a local bitcoin trading platform, according to Afrikaans newspaper Rapport.
A great danger is that people who can’t afford it “will bet all their money on this”, Griessel says.
If you do want to invest money in bitcoin his advice is, “Take 1 to 2% percent of your savings and do it but accept that you might lose everything.”
The value of some cryptocurrencies fluctuates between 15% and 20% a day. “While it’s this unstable it will never really been seen as a proper currency,” he says.
If you do want to venture into the strange new world of cryptocurrency you’ll need to buy bitcoin from an exchange, such as Luno or Coinbase.
Exchanges such as these have corresponding apps you can download to your smartphone – and buying the currency is as simple as transferring money with your device.
Luno in particular has an easy-to-understand Learning Portal that teaches you the ins-and-outs of bitcoin trading.
WILL THE BUBBLE BURST?
The value of bitcoin is managed by perceptions, Griessel says, because the cryptocurrency is seen as limited or exclusive.
If bitcoin continues to grow at this rate over the next five years – or maybe even just at half this rate – it can become more valuable than the American economy, he adds.
But it’s “mathematically impossible” for the value to continue to rise at this rate, he warns.
“I think, at best, things will begin to stabilise and cryptocurrencies will be accepted more widely as a next payment form.”
American billionaire and investment genius Warren Buffett already said in 2014 that the bitcoin bubble would burst: the underlying technology is interesting, he remarked, but bitcoin had no intrinsic value. “It’s basically a mirage,” he said.
“There are cycles with this sort of thing,” Griessel says. “And when people stop asking questions and everyone is just buying, assuming that growth will simply continue, you’re usually at the end of a cycle.”
It also bothers him that cryptocurrency doesn’t really create value (like a company whose products are manufactured from raw materials) and pay out dividends (like investment in shares). “It’s not impossible that regulation will be the end of bitcoin’s fairytale story.”
‘At best, things will begin to stabilise and cryptocurrencies will be accepted more widely as a next payment form’
EXTRA SOURCES: REUTERS.COM, FORBES.COM, FORTUNE.COM, INVESTOPEDIA.COM, BITCOIN.ORG