Bitcoins: bubble or boom
CAN SOUTH AFRICANS MAKE MONEY OUT OF A VIRTUAL CURRENCY?
NOBODY knows what Mike Niemand does at 4am, but you can bet he faces a bank of screens, trading bitcoins on international exchanges that never sleep.
Niemand is an internet developer who has been on the web since 1994, 16 hours a day, running powerful graphics processors day and night.
“At home, my wife and I fire up different machines and we might converse via Skype, 10m apart. That’s how intrusive the internet is. When you spend so much time on it, you know everything that’s going on.”
That is why Niemand was quick to spot bitcoin when it snuck on to the worldwide web five years ago. A faceless group of Californian programmers (cryptically named Satoshi Nakomoto) intended slowly to feed units of the “virtual currency” into the market to reach 21 million bitcoins by 2141.
Bitcoins exist and have value only because the cipher punks who buy and sell them believe they exist and have value. There are no physical bitcoins. Cartesian philosophers would love the concept.
The open-source bitcoin software protocol depends on anonymous peer-to-peer trades,
The beauty is you’re not paying 3% or 4% in transaction fees to Visa or Mastercard
all of which are recorded on a central public record called the block chain.
Every transaction has to be verified by other members of the block chain, for which service these “miners” are rewarded with new coins. In this way, the supply of bitcoins is tightly regulated.
Mining is difficult, because the confirmation process requires the block-chain members to solve an exponentially more complex equation (based on the SHA-256 algorithm) each time.
Ace Weston, who posts on the marketwatch.com site, said the rigmarole was for security purposes: “So that some entity can’t show up with their supercomputer and start mining fake transactions into the block chain.”
In the beginning, when Niemand first pricked up his ears, the equation was relatively easy.
“I’d seen bitcoin out there, not paid too much attention, then mined a few coins, 10 or 11, then forgot about them. I was mining one every three minutes. Then they were worth 5c, 10c. It was just fun. A lot of guys got in, mined early, at 1c a coin.”
For two years, the price did nothing. Niemand watched until the price dollied around the $10 mark, made his first big buys on the open market at about $20 or $30 a bitcoin and then splashed out when the price was between $60 and $75.
Still, nothing much happened. In April 2013, bitcoins shot up to $266 and crashed almost the next day to $20 or $30. In November 2013, they jumped over a period of two weeks to more than $1 000 each — “which was when everybody really started to sit up and take notice”.
Although the price has since corrected to today’s $446 level, (about R4 850) fortunes have been made by early adopters such as Niemand.
These days, he prefers to trade existing bitcoins rather than mine new ones. To keep a lid on the rate of supply, the mining process has become impossible for anyone without colossal computing capacity.
“Early on it wasn’t difficult. Now these guys in pools have huge server farms — dumb machines, not computers anymore, just chips that do bitcoin algorithms, no good for anything else. You can buy those rigs, row after row of graphics cards, but even they are becoming useless because you need so much processing power.
“With my machine at home, which has a top-of-the-range R9280 graphics card that costs about R11 000, I’d have to mine for about four months nonstop . . . before I’d start making coins. And it’s chowing money, not just electricity, just to pay the card off. Mining is worth it for an experiment or to have fun, but it’s easier just to trade.” (See sidebar)
And so we see Niemand at 4am in Sandton, faced with the oneminute ticker on bitstamp.net, scalping his targeted return of 3% to 5% a month. With a trading account in bitcoins worth R500 000, it is not peanuts.
With that amount of churn, Niemand’s transaction costs have come down to about 0.24% a trade. As with any securities exchange, bitcoin fees are tied to volume.
Niemand is an avowed libertarian, a nonconformist. He likes the idea of a change in the existing financial order. He distrusts conventional fiat currencies, issued by diktat at the whim of central bank governors. He believes in bitcoin’s selfregulating peer group. There is no central authority in charge of bitcoin — no Gill Marcus or Janet Yellen.
To Niemand, bitcoin is freedom. You can keep your bitcoin stash in a “digital wallet” — just a string of alphanumeric characters — that you can transport wherever you wish. Across borders, if you like. A secret coded address is all you need to cash in your bitcoins, or pay for services, anywhere in the world.
“It makes sense to move away from classic currency,” said Niemand. “It’s a digital age. The internet needs its own money. The beauty is you’re not paying 3% or 4% in transaction fees to Visa or MasterCard, which can kill merchants.”
Around the world, each bitcoin trading hub sets its own buy and sell prices. This has opened up lucrative channels for arbitrage — rand-hedging is just one of the opportunities. Niemand cautioned that “it can get quite hairy”. Bitcoin, whether in dollars or rands, is a volatile instrument.
“The beauty of these large exchanges is you trade online on their tool, put a limit order, whatever you want, and you see your bid or ask going straight into the book. You can cancel it any time you like; you’re watching it by the second. You can see the orders getting knocked off in real time.”
Of course there are risks. The public meltdown of Mt Gox, a Tokyo-based bitcoin exchange and one of the largest trading hubs, terrified many a would-be investor. In February, Mt Gox filed for bankruptcy after it “lost” an estimated 850 000 of its customers’ bitcoins.
Niemand saw it coming, because he was having trouble getting money in and out. He withdrew all his cryptocurrency from Mt Gox in October.
Any proper exchange will settle trades immediately, but Mt Gox did not. It allowed spreads of up to $20 a bitcoin to open against the prices quoted on rival platforms.
“The problem was it got too big too quickly. All of a sudden, they were trading millions of dollars’ worth of bitcoins a minute. And they got into trouble,” said Niemand.
After Mt Gox, the US Internal Revenue Service announced it would treat bitcoins as property, subject to capital gains tax. Tellingly, there are no major bitcoin exchanges in the US.
By contrast, Japanese authorities are laissez faire : “Bitcoin is not a currency. It is an alternative to currencies, like gold,” a spokesman for the Financial Services Agency told Reuters. “We are only responsible for currencies and therefore bitcoin is not subject to our regulatory oversight.”
South Africa’s Financial Services Board, Revenue Service and the JSE have not said a work about bitcoins.
Many online retailers now accept the currency. Bitpay.com in the US has an e-commerce platform for some 15 000 merchants. More than 4 300 brick-
All of a sudden Mt Gox was trading millions of dollars’ worth of bitcoins a minute
and-mortar stores accept bitcoins, including 29 here. They can be found on coinmap.org.
Several bitcoin ATMs exist around the world. Niemand investigated importing one to set up in Sandton, but it would have cost R220 000 (plus shipping), excluding stock.
The big opportunity for bitcoin is in remittances: tapping the vast population of migrants and exiles who rely on expensive money-transfer agencies to send cash home. All they need now is a cellphone connection to transfer bitcoins from one digital wallet to another — which can then be redeemed in the currency of their choice.