House for sale: £80,000 – or 18 bitcoin
As the craze rages on, James Connington subjects the cryptocurrency to a technical measure of risk
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