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Facebook, and that its value could climb as high as
$40,000 (~£23,000).
They’ve backed up this incredibly bullish
prediction with their own cash, apparently owning
108,000 coins, equivalent at today’s prices to
around £3.8m. They’ve also filed for an exchange
traded fund (ETF), the Winklevoss Bitcoin Trust
which, if approved, will trade on NASDAQ OMX
under the symbol ‘COIN’.
Multi-millionaire, Harvard-educated business
tycoons aside, what investment opportunities does
Bitcoin hold for us entrepreneurs, business owners
and financial types down here on Planet Earth?
One of the primary features that differentiates
Bitcoin from traditional currency is that it’s designed
to be deflationary. There are only a finite number
of Bitcoins that will ever be made and, as more are
created, it gradually becomes harder and harder
to do. It’s designed to mimic the way that precious
materials are mined - as the prize becomes more
scarce, one must invest more in the search,
inherently pushing up the value.
Something programed to increase in value over
time - sounds like a good investment, right? Well, it’s
not as simple as that. The last Bitcoin will be created
in the year 2140, meaning that although there is
deflationary pressure, you’ll not necessarily be
guaranteed gains, even in the long term.
This is mainly due to Bitcoin’s decentralised
nature. Unlike traditional currencies, whose value
can be controlled by central banks increasing the
money supply, Bitcoin is controlled by nobody. This
leaves its price entirely up to the whims of the free
market - a libertarian’s dream come true.
That’s why Bitcoin’s price fluctuates so much, and
what makes it such a high-risk investment. The fact
is that there’s nothing stopping Bitcoin from losing
all its value overnight. As long as people sell their
Bitcoins for traditional currency, the price will keep
dropping. Likewise, however, there’s technically
nothing but selling pressure stopping the price from
exploding.
So, it’s a risk, but can be very thrilling and
rewarding. But how does one get hold of bitcoin,
and where can one start trading?
There are several ways to buy Bitcoin. The
most common one is to sign up to an exchange.
Bitstamp, BTC-e, Bitfinex and Bter are some of
the most popular. Some exchanges require a long
authentication process to verify your identity and
may ask for you to scan and send them official
documents.
Getting money on to these exchanges can be a
pain, as you’ll either have to sign up to a payment
network like OKPay (again, requiring a long
authentication process) or deposit by international
wire transfer, which is a lengthy and costly process.
Exchanges will often offer a number of different
pairings, both against other traditional currencies,
and other digital currencies. Because the Bitcoin
code is open source, many have copied the idea,
tweaking it slightly to make their own coins. These
‘altcoins’ are of varying degrees of worth, from
Litecoin, worth 0.014 Bitcoin, to Primecoin, which is
worth 0.0005.
Some of the biggest wins are to be made
investing Bitcoin in Altcoins. The trick is to do your
research, find out what the unique features of each
coin are, and whether it offers any unique uses. For
example, Darkcoin recently rose sharply in value,
because it offers a unique degree of anonymity
- a trait highly valued by the cryptocurrency
community.
As all investors know, with great opportunity
comes great risk. When the price of Bitcoin goes
up against the dollar, Altcoins often go up against
Bitcoin, resulting in a ‘double rally’. This is obviously
good news; however, when the price of Bitcoin
drops, so will the Altcoins, resulting in a ‘double
crash’.
Another issue to be wary of is that these Altcoins
are even more volatile than Bitcoin, because
they’re tiny markets and therefore easily influenced
by ‘pump and dump’ schemes. Certain wealthy
individuals have been known to trick people into
investing by pretending to schedule a time when
they would buy a certain coin. This artificially raises
the prices and, when the time comes, there is a
spike in value, followed by a huge crash when the
pumpers sell their coins. It’s best to avoid these
situations entirely.
Manipulation like this is, of course, illegal in
regulated markets. But Bitcoin is like the wild west
of finance at the moment, and almost anything
goes. Every exchange and any site that accepts
bitcoin is therefore vulnerable to hacks.
The most notable example is the fall of Mt. Gox,
which was the world’s first and formerly biggest
Bitcoin exchange. The site allegedly faced 150,000
hacks every second and eventually drove the
company into the ground. The nail in the coffin was
when the owners discovered that 744,000 of their
customers’ Bitcoins had been stolen by hackers.
The company filed for bankruptcy in February and
cited debts of around £38m.
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