House for sale: £80,000 – or 18 bit­coin

As the craze rages on, James Con­ning­ton sub­jects the cryp­tocur­rency to a tech­ni­cal mea­sure of risk

The Sunday Telegraph - Money & Business - - Money - Sam Brod­beck

Bit­coin is fre­quently de­scribed as be­ing highly volatile – but how ex­actly does the dig­i­tal cur­rency mea­sure up against the main­stream as­sets of shares and bonds?

Volatil­ity is a mea­sure of how much an as­set’s price moves over a given pe­riod. It is a com­monly used mea­sure of risk. The larger the price move­ment, the greater the volatil­ity.

Higher volatil­ity isn’t al­ways shunned. Those who want high­growth, long-term in­vest­ments will typ­i­cally in­vest in more volatile sec­tors, such as emerg­ing mar­kets and smaller com­pa­nies – and short­term traders de­lib­er­ately seek out volatile as­sets in or­der to cap­ture gains over short pe­ri­ods.

Chris Beauchamp, chief mar­ket an­a­lyst at trading ser­vice IG, said: “For­eign cur­rency tends to win the crown as the most volatile as­set, but emerg­ing mar­kets are not far be­hind.

“Ma­ture mar­kets such as the S&P 500 have their volatile mo­ments – but given their re­cent sta­bil­ity, even a 1pc drop would be quite dra­matic.” And bit­coin?

The chart above com­pares the volatil­ity of bit­coin to that of Bri­tish shares (the FTSE 100 in­dex), emerg­ing mar­ket shares (the MSCI Emerg­ing Mar­kets in­dex), and US cor­po­rate bonds (Bloomberg in­dex) us­ing data pro­vided by in­vest­ment shop AJ Bell. It is based on “rolling 30-day volatil­ity”, a com­monly used mea­sure of price vari­a­tions. As ex­pected, the data shows that the FTSE 100 is more volatile than bonds, and emerg­ing mar­kets are more volatile still. How­ever, the volatil­ity of bit­coin eclipses them all by a sig­nif­i­cant mar­gin.

Its av­er­age volatil­ity score over the seven-year pe­riod cov­ered is 12 times greater than the av­er­age for the FTSE 100, and 42 times greater than that of the bond in­dex.

Over this pe­riod bit­coin has ex­pe­ri­enced an as­ton­ish­ing price rise. But it has also suf­fered mul­ti­ple crashes, which could have cost an in­vestor huge sums.

For ex­am­ple, over two weeks in Septem­ber this year, the price fell by nearly 40pc.

Over two weeks in De­cem­ber 2013, the price fell by more than 50pc, and by Jan­uary 2015 the price had fallen by around 90pc from its peak.

Mr Beauchamp ex­plained that “volatile as­sets carry psy­cho­log­i­cal risks as well as fi­nan­cial ones”, in that wild move­ments can trig­ger sell­ing out of fear.

“The more volatile the as­set, the more cir­cum­spect you should be about how much to in­vest. You don’t want to have to watch a ma­jor part of your port­fo­lio go through stom­achchurn­ing swings,” he said.

Bit­coin’s volatil­ity ap­pears to have many ori­gins.

It is highly sen­si­tive to reg­u­la­tor ac­tions and news about its rate of adop­tion as a cur­rency. The mar­ket also suf­fers from a lack of liq­uid­ity – a mis­match be­tween buy­ers and sell­ers – which can ex­ag­ger­ate price moves in ei­ther di­rec­tion. Neg­a­tive news about the se­cu­rity or sta­bil­ity of the com­pa­nies pro­vid­ing bit­coin “wal­lets” and trading ser­vices can also dent pub­lic con­fi­dence sig­nif­i­cantly, and thus af­fect the price of bit­coin. For in­stance, in 2014, the Toky­obased Mt Gox bit­coin ex­change, which han­dled the ma­jor­ity of trans­ac­tions world­wide at that point, col­lapsed, co­in­cid­ing with the dis­ap­pear­ance of $460m (£350m) worth of bit­coin from its sys­tem. This had ap­par­ently been stolen by hack­ers.

The col­lapse of Mt Gox was a ma­jor con­tribut­ing fac­tor in the 2014 bit­coin price col­lapse. Tech­ni­cal de­tails re­lat­ing to the soft­ware that runs bit­coin can also af­fect the price. Last week, a con­tro­ver­sial “fork” in Bit­coin, which would have cre­ated an off­shoot cryp­tocur­rency, was called off.

There were fears that it would have led to mar­ket con­fu­sion about which was the “true” bit­coin. There has been other pre­vi­ous “forks”. The price of bit­coin rose to a record high of nearly $8,000 fol­low­ing the news. How­ever, it has since fallen back to un­der $7,000.

The craze for “cryp­tocur­ren­cies” shows no sign of abat­ing as home sell­ers be­gin to of­fer dis­counts to those buy­ers who bid with bit­coin.

The value of dig­i­tal cur­ren­cies, such as bit­coin and ethereum, has rock­eted in re­cent years as more peo­ple ditch con­ven­tional money in favour of dig­i­tal al­ter­na­tives.

Some of these peo­ple are un­doubt­edly spec­u­la­tors – bet­ting on cur­ren­cies just as they would on stocks or com­modi­ties – but oth­ers are at­tracted by the chal­lenge that these new dig­i­tal pay­ment sys­tems present to the sta­tus quo rep­re­sented by cen­tral banks.

Sean Atkinson, 49, said his in­ter­est in bit­coin was less from an in­vest­ment point of view and more in terms of “how it can change so­ci­ety”. He has be­come so en­am­oured with bit­coin that he has de­cided to sell his house for £80,000 or £100 “plus bit­coins”.

When he listed his three-bed­room Grimsby house for sale (on a web­site he set up for £1) Mr Atkinson was ac­cept­ing 18 bit­coins. That meant that you could have bought the Ed­war­dian ter­race prop­erty for the equiv­a­lent of £77,000 if you used bit­coin, or £80,000 in old-fash­ioned cash. But, as its crit­ics point out, bit­coin is highly volatile.

Since he put his house on the mar­ket, the ef­fec­tive price of bit­coin has shot up – to­day you’d pay more than the cash price, at nearly £94,000.

What hap­pens if the price of bit­coin jumps, or falls, dra­mat­i­cally, af­ter a deal has been agreed? “Yes, that will be in­ter­est­ing,” said Mr Atkinson. “I will hon­our the agree­ment and we’ll agree at what point the sale takes place. If the [bit­coin] price drops through the floor, I’ll still hon­our it.”

Two po­ten­tial buy­ers have al­ready ex­pressed an in­ter­est. The film-maker and yoga teacher said he had no plans to buy a re­place­ment prop­erty – he’ll be mov­ing into his part­ner’s house – and would pre­fer to spend his haul as and when busi­nesses be­gin to ac­cept bit­coin for ev­ery­day items.

And he said he was aware of the risks of los­ing out if bit­coin did crash. “Yes, I’d feel aw­ful. Peo­ple would laugh at me, and my par­ents would say ‘I told you so’, but since I’ve had bit­coin I’ve watched the value sink then come back up a few times. If you look at the graphs, it’s a con­tin­ued curve up.”

Stamp duty is due on all prop­erty pur­chases of £125,000 or more (dif­fer­ent rules ap­ply on sec­ond homes). At around £80,000, Mr Atkinson is well un­der the thresh­old but the cur­rency could ap­pre­ci­ate so far that tax be­came payable.

In Septem­ber, it emerged that Michelle Mone, the bra ty­coon and peer, was sell­ing £192m of Dubai apart­ments in bit­coin with her boyfriend Doug Bar­row­man, a busi­ness­man and cryp­tocur­rency in­vestor.

Cash equiv­a­lent: Sean Atkinson is happy to take the risk of bit­coin crash­ing

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