The meteoric rise in the price of Bitcoin means it can no longer be ignored as a possible investment option. But only the very brave would put their money into this cryptocurrency, also known as a digital currency, right now.
The price has risen in part due to uncertainty over the future of mainstream investments, and in part due to the growing acceptance of cryptocurrencies as an increasing number of people, and institutions, start to take them seriously.
Central banks, big companies and financial institutions are all looking at establishing digital currencies and new digital currency start-ups and Initial Coin Offerings (ICOs) are becoming prevalent.
But with a Bitcoin costing between $2400 and $2 600 since 1 July, and gaining 150% in value in the first six months of this year with widespread warnings of a Bitcoin bubble, it takes a very brave investor or day trader to buy it at this price.
The move to digital currency, however, is a reality and getting into a relatively new (it has been going since 2009) and growing investment trend might be appealing to investors.
A New York Post blogger who took a snapshot of Bitcoin trading found the currency is mostly being taken up by people in the US, followed by China, but noted that the “most surprising” participating country was South Africa, which accounted for 2.5% of sales.
Given our economic situation, it is easy to see why we are looking for alternative investments.
But Bitcoin is not for those looking to spread risk. It is a risky investment and a fertile playground for traders who thrive on volatility.
The currency is also very difficult to understand, but investors don’t necessarily need to know how Bitcoins are mined or how the technology behind cryptocurrencies works.
They do, however, need to understand how to safely keep their Bitcoins (in digital wallets, with keys) and need to understand the trading environment.
In the Bitcoin environment, there are capacity (blockchain size) issues, which are affecting transaction costs and the ability to scale, and the Bitcoin community is currently at a bit of an impasse on how to go forward.
This may or may not be solved on 1 August, when a Bitcoin Improvement Proposal (BIP148) will try to force Bitcoin miners to undergo a user-activated soft fork – where some previously valid blocks/transactions in the blockchain are made invalid, and the rest are kept valid.
Depending on how people react, this could result in the currency losing value, and current Bitcoin owners are being advised to keep their Bitcoins offline until it passes.
In the past few weeks the Bitcoin price crashed well below $2 000 and subsequently soared as signs emerged that the impasse would be broken.
Digital currency Ethereum experienced similar volatility. The risk inherent in these currencies was made clear in mid-July when trading platform CoinDash raised $12m in an initial coin offering, only to find that $7m was hacked and stolen.
finweek asked two experts for their views:
Is it worth investing in Bitcoin now, given the recent price movement?
Shane Maguire, director at 45ive Media and contributor to bitcoinhub.co.za, says it isn’t a good time to invest “given the hype around Initial Coin Offerings, given the price surge and all the start-ups”.
He believes the price is not sustainable, and he expects a possible 60% to 70% price reduction when the bubble bursts.
Werner van Rooyen, head of marketing and growth at Luno*, a Bitcoin exchange, says the total market cap of Bitcoin was around $15.5bn at the beginning of the year and is now at around $40bn.
It is, however, off its June high of $47bn. So it is not at an all-time high and some investors are taking advantage of the recent dip.
It’s impossible to predict what the price will do, he says. He suggests, firstly, that investors should not invest more than they can afford to lose, and, secondly, ignore short-term fluctuations and invest a fixed rand-amount on set intervals.
“We’re seeing an increase of institutional investors and hedge funds who invest a small percentage of their total net worth in digital currencies like Bitcoin.”
Is it a problematic investment because it is so difficult to estimate value and because there is so much price volatility?
Yes, says Maguire, as the value behind the coin is “nothing you can hold or touch, but there is value in it in the sense that the network proves value”.
There are some technical ways to measure value, including things like total electricity of the Bitcoin network and mining profitability.
Van Rooyen says the price “is simply determined by supply and demand, like everything else”.
“The volatility attracts investors with a certain risk appetite since many traders can profit from the price movements,” he explains, adding that while fluctuations may seem high, overall volatility has been decreasing.
Where should investors go to buy Bitcoin?
According to bitcoinzar.co.za, there are two licensed exchanges, Ice Cubed and Luno. You can trade with other users on localbitcoins.com and can even get Bitcoins at a BTM, a Bitcoin ATM. The first one in South Africa has been installed in Kyalami.
If you sell things online, you can also earn Bitcoins by giving buyers the option to pay in the digital currency, as a number of local online sites already do.
Van Rooyen warns that buyers should do research into the companies (or individuals) where they buy or store their Bitcoins. “Bitcoin is attractive to fraudsters for the same reason that it’s attractive to investors: it’s a digital currency that can easily be sent anywhere in the world.”
What are the fees and transaction or hidden costs?
Van Rooyen says there is no fee to make a deposit from your South African bank account to Luno, but you will incur a small fee whenever you convert between rand and Bitcoin and also whenever you send or receive Bitcoins.
“This fee is paid to Bitcoin miners and depends on how busy the Bitcoin network is,” he explains.
There is an R8.50 fee when you withdraw your money into your bank account. Because transaction costs vary according to congestion on the network, fees are currently quite high due to the scaling issues, Maguire says.
Among other cryptocurrencies, are there any worth investing in now?
There are a growing number of interesting options with good tech propositions, says Maguire. While Ethereum has been growing exponentially, he said a lot of the price rise reflects speculation.
Other interesting currencies include Civic – a start-up by South African and Bitcoin Foundation chairman Vinny Lingham, which recently raised $33m in an ICO.
Steem, a social network running on its own blockchain, enables you to earn cryptocurrency by blogging, posting and curating content.
“Another cryptocurrency to look out for is Stratis – a platform working on solutions to make blockchain technology easily available for enterprise,” Maguire says.
Van Rooyen adds that he is interested in Ethereum, “not as a currency, but as a smart contract network”.
Bitcoins are catching on as an actual currency – do you consider them an investment, a currency or both? Bitcoin is a means of payment and storage of wealth (an alternative asset class), says Van Rooyen.
“It has characteristics of money, but also of a limited resource. The best description so far is to liken it to a digital version of gold: something that is scarce, something that has value and can be exchanged into local currency in most places around the world.”
Maguire adds: “I see it as a technology layer. Currency is one application for that technology but there are many other applications being developed right now, like transfer of property, for example, which can be done 10 times cheaper than current systems.”
WHAT IS BITCOIN?Currencies like Bitcoin, Ethereum, Ripple and Litecoin are generated by encryption techniques and held electronically, usually in wallets, which have keys.
They are “mined” by people solving maths problems with computers.
You can buy Bitcoins from a Bitcoin exchange, directly from another person, or from a BTM. You do not need to buy a whole Bitcoin.
Bitcoin is not controlled by any company or individual.
It is an online payment system and transactions between wallets are not linked to your bank account or to where you live as it is an international currency.
*finweek holding company Naspers is an investor in Luno.