Bitcoin seeking to cash in on the future of finance

2021 could prove to be the year that the increasingly popular cryptocurrency becomes a genuine, long-term asset class, writes Adrian Weckler

THANKS to US billionaire Elon Musk-led Tesla’s €1.5bn punt, the price of Bitcoin has shot up from €25,000 to almost €40,000. What’s going on? Has the world lost its mind to an online libertarian pyramid scheme? Or is it starting to accept Bitcoin as a genuine, long-term asset class? And for casual investors, is it too late to jump in? If not, where do you start? How do you protect yourself ? James Nagle runs one of Ireland’s main crypto ‘exchanges’, where punters can log on to buy or sell Bitcoin and other digital assets using a credit card or bank transfer at a cost of between 2.5pc and 6pc.

There’s no shortage of interest, says the Bitcove co-founder. “We have 40,000 people signed up,” he says. But 40,000 is just a fraction of the real number of Irish people trading cryptocurrencies, he claims.

“When you then take into account people trading on Coinbase, Revolut and other platforms, it’s a much bigger number.”

Bigger than the 180,000 figure estimated by another Irish exchange, BitIreland?

“It would more likely be double that number,” says Nagle.

What has become clear in recent months is that it’s not just techies, Redditors and anarchists who are trading. Ireland’s biggest stockbrokers say there has been a spike in interest in Bitcoin from normally-conservative small Irish investors.

“There’s a huge increase in the number of clients asking about cryptocurrencies,” says David Bergin of Ireland’s second-largest securities brokerage, Goodbody.

“Interest rates are low, inflation is a worry and people have been saving for 12 months during the pandemic with fewer places to put their money. They’re now seeing hedge funds and Tesla invest big sums in Bitcoin. Its credibility is being reassessed.”

For some investors, recent returns from crypto assets are hard to ignore. Anyone who bought €1,000 of Bitcoin this time last year now has a commodity valued at €4,110. Even those who bought at the last peak, in December 2017, have more than doubled their money.

What’s more, some financial institutions see long-term price targets of €200,000 and beyond.

“A target of $300,000 to $500,000 is credible and reasonable,” says Seamus Donoghue, vice-president of sales at Metaco, which advises large banks such as Standard Chartered and Gazprombank.

“Indeed, it could well go beyond that. As an asset class, crypto currency is still very small with Bitcoin at about $800bn. Compare that to gold, which is itself a relatively small asset class and is currently at between $10tn and $12tn. But Bitcoin is an instantly transportable asset, unlike gold. If you put that into a price target, it’s something like $300,000 to $500,000.”

Donoghue isn’t some libertarian fanboy. He has spent 20 years building and managing trading operations with banks such as JP Morgan, Deutsche Bank, Barclays and Bank of America Merrill Lynch.

His conviction that crypto is emerging as a long-term tradeable asset is backed up by phone apps such as Revolut, which now allow regular punters to buy and sell it with little more difficulty than any mainstream betting app.

So has crypto finally shed its image of a toy currency beloved by anarchists, tech evangelists and criminals?

Not quite yet, critics say.

“There may be a false sense of credibility from financial apps like Revolut mainstreaming,” says Conor Flynn, founder of Isas, one of Ireland’s top security consulting firms for financial services companies. It makes it more accessible for ordinary people to get it, but it doesn’t add anything from a guarantee because ultimately there’s noone to underwrite it. I think you might see more people getting stung.”

Fraud and theft remain substantial problems around cryptocurrency trades.

Last week, Europol announced the arrest of 10 hackers suspected of stealing almost €100m in cryptocurrency in a “sim-swapping” attack that allowed suspects to gain access to their victims’ phones.

“The attacks orchestrated by this criminal gang targeted thousands of victims throughout 2020, including famous internet influencers, sport stars, musicians and their families,” the agency said in a statement.

Separately, a North Korean hacker gang was accused this month of stealing over €200m of cryptocurrency from the cryptocurrency exchange KuCoin.

“The key concerns regarding Bitcoin lie more in the security of the actual coins themselves rather than in the blockchain technology that undermines many digital currencies,” says Brian Honan, founder of BH Consulting, a large Irish IT security firm.

“There have been several cases where cryptocurrency exchanges have been hacked resulting in people’s money being stolen or indeed some exchanges have mysteriously gone offline with the owners of those exchanges and the money in them disappearing.”

Honan says that ‘phishing’ — where hackers gain access to a device and its contents through email, texts or social messages — is also a threat.

In addition to security threats, the do-ityourself process of storing Bitcoin and other cryptocurrencies can lead to awkward situations. Lose your computer’s password and you could literally lose millions.

Last month, US programmer Stefan Thomas offered up an extreme example. In an interview with The New York Times, he said he was given 7,002 Bitcoin in 2011 as payment for a job. The Bitcoin password was put on to an ‘Ironkey’ secure USB dongle, which locks itself after a number of unsuccessful password attempts to make it more secure. He lost the password. That 7,002 Bitcoin is now worth €256m. The Ironkey USB key only allows 10 attempts at unlocking it: Thomas has two tries left.

Lost or stranded Bitcoin is a real problem. The data firm Chainalysis estimates that 20pc of all existing 18.5m Bitcoins are missing or left in inaccessible hard drives. That’s €136bn at today’s exchange rate.

Last year, an Irish drug dealer, Clifton Collins, had €53m in Bitcoin seized by the Criminal Assets Bureau. But the crypto currency stash — now worth over €200m — could not be released as the codes to gain access to the Bitcoin were found to have gone missing.

The Collins case illustrated another issue indelibly attached to cryptocurrencies, by their nature — crime and tax evasion.

To some of its users, a main draw of Bitcoin is its lack of visibility to audit trails or any State-controlled apparatus. That includes bodies such as the Revenue Commissioners.

Asked by the Sunday Independent, a spokesman for the Revenue was unable to say whether there was any cryptocurrency declared by Irish traders or investors last year. The Revenue has published guidance on tax liabilities connected to trading and profiting from cryptocurrencies, including Vat and capital gains tax implications. But it does not yet appear to take measurement of crypto activity seriously, or count its effect on national finances.

This apparent apathy may embolden small traders who think it’s a tax-free way to make a quick profit.

However, institutional brokers are quick to point out that there is a demonstrable paper trail when using regulated bodies to trade.

“With us, it’s like buying a normal stock,” says Goodbody’s David Bergin. “You’re issued a note.”

Smaller bodies, like crypto exchanges, are also conscious of the lingering contraband smell around crypto. Bitcove says it has implemented a series of measures to give both its customers and authorities confidence that it meets the standards expected of a mainstream financial trading body, especially with updated EU anti money laundering rules on the way in Ireland.

“We have anti-money-laundering processes built in,” says James Nagle. “For example, with our ATMs, if you trade over €1,000, you need to produce identification. Online, any purchase is subject to KYC [Know Your Customer] verification checks. If we see suspicious activity, we alert the Central Bank.”

Nagle says this appears to be enough to satisfy an increasingly professional, corporate client base.

“The type of customer we’re seeing has changed,” he says. “We’ve been going since 2014. Back then, our customers were more likely to be people with an appetite for risk. But in the last year, we’ve seen a new wave of investors, ones who used to be risk averse. We’re seeing Irish companies purchasing large amounts of crypto who never would before. Some are using us to trade orders of up to half-a-million euro.”

Where corporate buyers go, regulators and taxation authorities tend to follow, says Lory Kehoe, a former Deloitte partner who is now director of digital asset sales at the giant US bank, BNY Mellon.

“Will transparency and regulation follow? Yes, because they absolutely have to,” he says. “There’s no way that any bank is going to sign up to providing services of that nature that are likely to land them in hot water with regulators. Hedge funds are now investing hundreds of millions of their funds in cryptocurrencies and regulation is starting to become clearer in the US.”

Kehoe’s enthusiasm is borne not just from his citations of hedge fund activity but also his front row seat of some local setbacks.

Before joining BNY Mellon, Kehoe was the managing director of the specialist firm Consensys, set up by Ethereum co-founder Joe Lubin to advise blue chip companies on blockchain processes and crypto integration strategies. It opened an office in Dublin with aspirations of employing 100 people, but topped out at 40 people before winding it back down again to a handful of people.

That episode has not dimmed Kehoe’s core belief in a permanent future for crypto assets as mainstream financial commodities. He says he has been buying crypto for years as part of a retirement plan.

“I buy the same amount each week,” he says. “That way, whether the market is up or down, I’m continuing to increase my portfolio. I’d like to leave at least one Bitcoin to

my son.”