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INVEST IT 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. 64
So, for the risk-averse among you, investing directly in Bitcoin may not be for you. However, there’s an ever-increasing quantity of Bitcoin businesses that may offer safer, more traditional opportunities. One of the biggest players at the moment is BitPay - a payment services provider that recently attracted $30 million from investors, including huge names like Richard Branson and PayPal founder, Peter Thiel. BitPay’s main draw is that it allows merchants to accept payments in traditional currency, but to use the Bitcoin network to transfer the payment, massively reducing fees. Bitcoin startups are popping up at an incredible speed on crowdfunding sites. Investing early in a great new Bitcoin business venture is therefore the best way forward for the savvy, but cautious tech investor. I don’t have to warn you, I’m sure, that on balance it’s still a very risky move. Nevertheless, Bitcoin offers some of the most exciting opportunities at the moment, and every wild west needs a few cowboys. ABOUT THE AUTHOR: Darren is a disruptor. Having changed the email marketing industry back in 2004 with a cost effective, anti-spam solution, he is now challenging the previously dull old world of accountancy. Cited as the fastest growing accountancy firm in the UK by Accountancy Age magazine, Crunch.co.uk is the UK’s first totally integrated online accountancy service providing each customer with a team of accountants at the end of the phone. High profile online entrepreneurs - Ex-Chairman of Skype Michael van Swaaij and co-Founder of Bebo Paul Birch - are investors in the company. Prior to founding Crunch, Darren built a top UK digital marketing agency from scratch with only £100k investment. Pure now employs over 120 people and has over 3,000 clients. Darren took the company to the point of a multi-million dollar sale in 2008. 65
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