Within a matter of hours, the notoriously volatile currency slid to below $9,300, before recovering to surpass the $10,700 mark. Numerous financial experts are advising people to avoid getting involved with bitcoin, believing that the boom can only end badly.
However, if you’re really curious and either want to dip your toe in the water or simply find out more, here’s how you can buy bitcoin.
The easiest way to get involved is by signing up to a bitcoin wallet service. You can also “mine” bitcoin using a supercomputer – an unrealistic option for most people – or set up and control your own wallet, but using a third-party service is far simpler.
You can sign up to these as you would sign up to any website. Enter your name and email address and set a password to get started.
After that, it’s time to connect your bank account, debit card or credit card.
Use two-factor authentication to secure your account, but don’t use your phone number or SMS for this. According to security researchers, criminals only need to know your name and number in order to steal from your bitcoin wallet.
Instead, use Google Authenticator or a security key, such as the YubiKey.
Once you’ve done this, you can start investing in bitcoin. Whichever service you decide to use, you’ll be able to access a graph showing how bitcoin’s value has changed over time. It’s likely to look extremely jagged.
With the value of bitcoin so high at the time of writing, it may come as a relief to hear that it is perfectly possible – and not at all unusual – to purchase small fractions of bitcoin.
Once you’ve established how much traditional money you’re willing to invest, complete your exchange through the wallet service, following their instructions.
However, we can only reiterate how risky the move could be. Not only is bitcoin extremely volatile, but investors in it and other cryptocurrencies are frequently targeted by criminals.
Earlier this month, for instance, the value of bitcoin dropped by 5.4 per cent after $31m worth of cryptocurrency Tether was stolen. Coinbase users have been targeted successfully too.
The best thing you can do to protect yourself is to always proceed with extreme caution.
Scammers constantly use phishing attacks to try to trick people into visiting malicious websites that look official, but aren’t.
They commonly send out fake but legitimate-looking emails, which you need to be wary of. To stay safe, you simply shouldn’t engage with them.
Don’t follow any links in the messages or enter any private details they ask you for. Instead, you should always make sure you’re on the right website or app.
People are also being duped by malicious websites promising quick profits and trading tips. Again, use common sense to protect yourself, and don’t take any unnecessary risks.
Bitcoin transactions are irreversible, so if any of the currency leaves your account, you won’t be able to get a refund.
Bookmark your wallet service’s website if necessary.
Some services, such as Coinbase, allow to you set price alerts that tell you when the value of bitcoin has dipped below or climbed above certain values.
When you decide it’s time to sell up, you can complete the transaction through the wallet service.
In 2017 alone, the price of a Bitcoin exploded from under $1,000 in January to more than $10,000 in early December, earning the top cryptocurrency a market capitalization of more than $167 billion. The surprise success of Bitcoin has opened the floodgates to a torrent of new cryptocurrencies competing for investor dollars.
Bitcoin is an invisible digital currency (with no physical backing) that can be sent from one internet user to another. It runs on blockchain technology. The blockchain works by recording financial transactions on a shared digital ledger that’s encrypted on a peer-to-peer network. Instead of relying on a large financial institution or centralized servers to process payments, the blockchain runs on thousands of computers or “nodes” worldwide. Advanced cryptography keeps financial information secure and largely anonymous, so data breaches are impossible.
The blockchain is being heralded as a world-changing technology that will permanently disrupt the highly centralized (and fee-based) financial system. Investors, eager to get in on the ground floor of this potentially revolutionary technology, are throwing money not only at Bitcoin, but at the more than 1,000 crypto-competitors known collectively as “altcoins” (Bitcoin alternatives). Skeptics are comparing this to the dot-com bubble.
Bitcoin was first released in 2009 by anonymous coders under the pseudonym Satoshi Nakamoto. Critics initially dismissed Bitcoin as a futurist pipe dream — or worse, a boon to black market criminals — but now Bitcoin’s underlying technology is being hailed as the future of finance.
Andrew Miller is an assistant professor of electrical and computer engineering at the University of Illinois at Urbana-Champaign and associate director of the Initiative for Cryptocurrencies & Contracts. He thinks the bubble talk is irrelevant. What’s more important is that investor speculation is fostering rapid innovation, creating hundreds of “really exciting experiments” in the form of new cryptocurrencies, each with unique functionalities.
“Anyone investing in technology understands that there will be many failures,” says Miller. “It seems to be the case with cryptocurrencies that the speculation is funding what is hopefully a really important infrastructure development.”
Infrastructure? I thought we were talking about cryptocurrencies. Well, you can’t have cryptocurrencies without the blockchain, and the impact of the distributed blockchain infrastructure will likely be far bigger than any individual cryptocurrency. That’s why so many blockchain enthusiasts are going bonkers for a Bitcoin alternative called Ethereum.
Ethereum isn’t just a cryptocurrency. It’s a platform for building applications that run on the blockchain. Like Bitcoin, Ethereum has its own programming language, but it’s much more powerful and versatile than Bitcoin’s. And unlike Bitcoin, Ethereum isn’t out to replace conventional money, but simply to enable more secure transactions on the blockchain. Ethereum has its own cryptocurrency called ether, but it’s only useful within the Ethereum platform. You’ll never use ether, for example, to buy Xbox games like you can do with Bitcoin.
Vipul Goyal teaches a graduate course on blockchain and cryptocurrencies at Carnegie Mellon University (CMU). He thinks that the surge in new cryptocurrencies will soon stabilize, leaving only a few dozen in circulation. He also thinks that Bitcoin’s position at the top may not be permanent.
“My personal prediction is that Ethereum will end up becoming the biggest cryptocurrency,” Goyal says.
The reason is that Ethereum’s programming language and platform make it easy for startups and developers to create decentralized apps (Dapps) that empower individuals and businesses in new ways. One of the biggest, says Goyal, is the idea of “smart contracts.” Instead of paying lawyers to write and enforce a contract, the deal can be programmed on the blockchain. Smart contracts enforce themselves, even imposing penalties for a breach.
Before coming to CMU, Goyal worked for Microsoft India, where he says the company was moving contracts for real-world properties like office buildings onto the blockchain to avoid costly legal disputes.
Ethereum also makes it easier to use what Miller at the University of Illinois calls “programmable money.” He uses the example of a college student’s bank account that’s programmed with certain parental controls. The student can withdraw up to $100 a week for expenses, but anything beyond that requires an authorization by the parents’ unique cryptography key. Miller thinks that programmable money is one of those ideas that will quickly spread into mainstream banking.
Besides Ethereum, some of the other altcoins gaining traction promise greater security and anonymity than Bitcoin. Miller says that the initial media buzz over Bitcoin’s unbreakable privacy was “only partially true,” and that the original version of blockchain still leaves users vulnerable to hackers.
Next-generation cryptocurrencies like Zcash (for which Miller is an adviser), Monero and Dash deploy much more advanced cryptography that completely hides the identity of users and the value of transactions.
There are still plenty of obstacles that may delay or potentially derail the widespread adoption of cryptocurrencies. Transaction speed is a big one. With Bitcoin, transactions need to be verified by half of all active nodes on the network, which Goyal says takes 30 minutes on average. Ethereum can only handle 13 transactions per second, which is 250 times too slow to serve a user base of 10 million.
“Unless there’s a real technological breakthrough, I don’t think we’ll get to the point where we’ll pay for groceries using crypto,” says Goyal.
Another potential monkey wrench is government regulation. One of the benefits of cryptocurrencies is that they operate outside of highly regulated financial systems and government control. But some companies are getting ready to offer bitcoin futures contracts, which will encourage mainstream investors to get involved, as well as spur federal regulation, via the Commodity Futures Trading Commission.
Ripple’s price surge has moderated this week, but all signs are pointing to a sharp acceleration in demand as hedge funds and institutional traders pivot toward cryptocurrency. And as we all know, the XRP token has favorable characteristics that could resonate within institutional circles.
XRP/USD Price Levels
The XRP/USD was in consolidation mode Friday after a volatile week. Between Tuesday and Thursday, prices fell more than 20% to reach their lowest levels in two weeks.
Price action was relatively calm overnight, with XRP/USD hovering around 0.2363 for a total market cap of $9.7 billion. That’s enough for fourth place on the global leader board. Twenty-four hour transaction volumes topped $266 million, with South Korean exchanges driving nearly half of total turnover.
XRP broke out earlier this month as cryptocurrencies added tens of billions to their collective market cap. Prices briefly traded above 0.2800 earlier this week before correcting sharply lower. That was the second time in as many weeks that prices broke through that threshold.
Despite a recent string of heavy declines, Ripple prices remain in a general uptrend above the key support threshold near 0.2250. However, the case for Ripple’s breakout extends far beyond the immediate technical indicators.
Earlier this week, TechCrunch founder Michael Arrington announced the creation of a $100 million cryptocurrency hedge fund that will also hold stake in token sales. He recently tole Fortune that the fund would invest primarily in cryptocurrencies (no matter how exotic) as well as initial coin offerings (ICOs).
The new entity is called Arrington XRP Capital due to the requirement that all limited partners make investments in Ripple cryptocurrency. The hedge fund will also use the XRP token to pay distributions, fees and salaries.
According to Arrington’s blog, the hedge fund has commitments for over $50 million so far. He adds that Ripple was the natural choice to underpin the fund due to its “super-fast and secure settlement infrastructure.” This essentially means that “non-U.S. investors in our fund will have an easier time investing in us and making redemptions easier.”
Arrington’s initiative is more important than most care to realize. Although there is no shortage of institutional interest in cryptocurrency, the XRP hedge fund will be the first to be denominated in cryptocurrency rather than fiat money. We’ve seen with bitcoin what institutional demand can do for a digital asset.
There’s plenty of reason to believe that Ripple is already on Wall Street’s watch list. As a bank-friendly digital asset, Ripple is frequently talked about at international conferences and within central bank circles. It is one of the few (perhaps only?) cryptocurrencies to have successfully added major banks to its client list.
Ripple is often viewed as a ‘centralized’ cryptocurrency because it operates as a shared liquidity pool where any person or entity can deposit and withdraw funds. Of course, many of its proponents do not see it that way, and instead argue that the platform does not limit anyone from participating. Naturally, the permanent ledger encoded on the Ripple network makes the entire process transparent and without the need for a central administrator.
Currently, the consensus on Ripple’s blockchain is controlled mostly by Ripple validators. This is expected to change in the future as validators assume a minority stake in the network. That being said, the XRP token is not controlled by any person or entity.
Though difficult to predict, the investment climate is expected to sway continuously in Ripple’s favor. All it takes is for a major U.S. exchange, like Coinbase, to add the cryptocurrency for prices to gain serious traction.
Bitcoin and bubble have become virtually synonymous in the minds of many skeptics during this year’s breathtaking rally. While the digital currency has defied doomsday prophesies, there’s a number of ways this party could end badly for the swelling ranks of bulls.
But be warned: many of the potential causes of death have surfaced during the past few years, and have proven unable to bludgeon bitcoin into oblivion thus far.
Knifed by a Fork
The multiple offshoots of bitcoin could cause the world’s largest digital currency by market value to cede its crown.
Divides among developers as to how to proceed with upgrades to bitcoin’s network have led to “forks,” in which different versions of the currency are spun off from the original. Excessive fragmentation could prove a bug for bitcoin, just as it did for the US financial system during the free banking era. When it comes to cryptocurrencies, hedge fund manager Mike Novogratz warned, “not everything can win” — though that’s not enough to stop him from launching a $500m fund to invest in the asset class.
Ether, the second-largest digital currency, has posted massive gains since the bitcoin forks began. But even that advance pales in comparison to the surges in bitcoin and bitcoin cash over the same span.
Strangled by Regulators
Given bitcoin’s checkered history as the means to purchase illicit materials, a vehicle for capital flight, and a victim of theft, it’s no surprise that regulators around the world have cast a watchful eye over the asset class. As such, the specter of a complete crackdown on cryptocurrencies remains an ever-present tail risk. The SEC has been keeping an eye on crypto and has given guidance saying some tokens may be securities, making them subject to their oversight.
UBS Group chief investment officer Mark Haefele said the wealth manager wouldn’t dedicate funds to bitcoin because “all it would take would be one terrorist incident in the US funded by bitcoin for the US regulator to much more seriously step in and take action.”
Federal Reserve Chair nominee Jerome Powell said bitcoin isn’t big enough to matter right now, but alluded to the possibility that it could impede the central bank’s transmission mechanism “in the long, long run.”
That raises the prospect of bitcoin becoming a casualty of its own success should cryptocurrencies gain sufficient mainstream adoption and pose a threat to the government’s ability to collect taxes or the efficacy of monetary policy. Even so, the recent history on restrictions is not encouraging for bitcoin bears: the digital currency was able to shake off what was tantamount to an attempted ban by Chinese authorities in September.
Hacked to Pieces
Ever since the 2011 breach of the Mt. Gox exchange, bitcoin owners have had to face the possibility that this intangible asset may fall into the hands of hackers. The Tokyo-based exchange filed for bankruptcy February 2014, alleging there was a high possibility that what was then nearly half a billion in bitcoin had been stolen.
The 2011 breach and 2014 collapse of Mt. Gox were accompanied by steep declines in bitcoin, as was the $65 million theft of the digital currency from Hong Kong exchange Bitfinex in 2016.
But a $31m hack of alternative currency tether earlier this month was only a speed bump for bitcoin. After falling more than 5 percent, the cryptocurrency recovered to post a fresh record high the same session.
A Short Demise
CME Group, CBOE Global Markets, and Nasdaq are planning to offer bitcoin derivatives — a move which seems poised to introduce more two-way traffic to the asset class.
At present, most options investors have for shorting cryptocurrencies are fairly expensive and risky. With futures from reputable, established exchanges in play, more investors may be incentivised to enter into positions that put downwards pressure on prices.
The introduction of bitcoin futures could also ultimately prove detrimental to its valuation should clearing organizations come under stress amid the digital currency’s wild swings.
Thomas Peterffy, chairman of Interactive Brokers Group, argued in an open letter that allowing bitcoin futures on platforms that clear other derivatives would raise the risk of price gyrations that could “destabilise the clearing organisation itself.”
Any institutional credibility recently gained by bitcoin could evaporate should such the cryptocurrency’s fluctuations serve to disrupt and undermine the operations of financial markets.
Pass Away on Profit-Taking
The failure of major cryptocurrency exchanges such as Coinbase to handle traffic on the day bitcoin breached $11,000 throws into sharp focus the scalability problems that cryptocurrencies face as speculative vehicles.
“A bitcoin correction is now likely and human psychology suggests it will finish the day lower,” wrote Bloomberg macro strategist Mark Cudmore. “If this was a normal market, it would almost definitely retrace in the short-term because large barrier magnets had been taken out.”
Profit-taking opportunities when the cryptocurrency passes significant milestones could foster steep declines and waves of selling pressure due to poor liquidity.
Death by ¯\_(ツ)_/¯
It’s been a puzzle to explain why bitcoin’s gone parabolic. Why would we expect the way down to be any different?
The practical applications for cryptocurrencies to facilitate legal commerce appear hampered by relatively expensive transaction fees and the high energy costs associated with mining at this juncture. On this note, Nobel Prize-winning economist Joseph Stiglitz said that bitcoin “ought to be outlawed” because “it doesn’t serve any socially useful function.”
Former Fed Chairman Alan Greenspan has said that “you have to really stretch your imagination to infer what the intrinsic value of bitcoin is,” calling the cryptocurrency a “bubble.”
Perhaps it could end like the dot-com bubble — with investors who have no clue how to value high-flying assets fleeing for the exit en masse.
Bitcoin’s giant move upward is far from done, according to tech investor and stock picker James Altucher.
According to Altucher, society has made major changes to its currency a few times in history: Gold replaced barter as a transactional currency; paper money replaced gold as a store of value; and bitcoin and other cryptocurrencies are going to replace paper money as a transactional currency.
Each type of currency solved problems of the prior generation of currency, he said in an interview with CNBC. Bitcoin solves the problem of infinite money printing, forgery, double-spending and anonymity, he said. Altucher owns bitcoin, ethereum, litecoin, zcash and filecoin.
Pointing to a demand-supply imbalance, Altucher predicts that bitcoin will top $1,000,000 per coin.
“There’s $200 billion in cryptocurrencies out there and over $200 trillion in demand for money — that’s the amount of paper currency andgold bullion in the world,” he said.
Altucher, founder and publisher of Choose Yourself Financial, a subscription-based financial publication cautions that 98 percent of cryptocurrencies are scams. But bitcoin and a few other cryptocurrencies are here to stay, he believes.
“This is the greatest tectonic shift in money and wealth that we will see in our lifetimes,” he said.
Here are his 10 predictions for cryptocurrencies:
At least one country’s currency is likely to fail soon — likely Argentina or Venezuela. This will lead to mass adoption of bitcoin among that populace. That will in turn lead to bitcoin rising by more than $50,000 when it happens.
Mainstream banks will accept bitcoin, and will start offering storage and software access. They will also create cryptocurrency derivatives — as the CME is about to start doing.
Despite the optimism, there will be a massive wipeout, and 95 percent of the alt-coins out there will go away — just like the dot-com bust. The surviving coins will go up a ton. This will happen within next four-six months.
The U.S. government will secretly start accumulating one of the smaller cryptocurrencies to make it easier for gray-area transactions with other countries. This has already started happening but will really start to ramp up in 2018.
China will invest heavily in another cryptocurrency, but probably not bitcoin. China will want to have a cryptocurrency that is competitive with bitcoin, but under its centralized control. This will, in general, provide legitimacy to all cryptocurrencies.
One big problem with cryptocurrencies now is their volatility. At least one — basecoin — will likely dramatically reduce that in 2018.
More companies will pay freelancers with crypto, which will lead to calls for tax reform. There will need to be greater regressive sales taxes, which will ultimately require government cuts and eventually less power for national governments. This is a long-term prediction.
In the same way the internet changed the monopolistic phone industry, crypto will change the monopolization of government-backed money.
A new government organization will be created to analyze regulation on cryptocurrencies. This will, ironically, lead to a huge upswing in bitcoin and coins that provide actual utility.
Thousands of crypto companies will be created and go public, but only a few will be massive successes.
Bigger blocks, shorter block times: those are the biggest takeaways from the mid-term roadmaps released this week by Bitcoin Cash developers.
Bigger Blocks & Shorter Intervals
Recently, representatives from a variety of Bitcoin Cash software development teams met in London to discuss their vision for the future of the cryptocurrency now that it has successfully established itself as a market heavyweight. This week, several of those teams have released roadmaps detailing their mid-term development priorities.
Chief among these priorities is a continued commitment to on-chain scaling. This is not surprising, given that Bitcoin Cash forked away from Bitcoin after it activated SegWit, a protocol upgrade that paved the way for off-chain scaling through the lightning network and other second-layer technologies.
But while on-chain scaling is a shared vision, teams do not necessarily approach it from the same angle. Bitcoin ABC, for instance, intends to work toward further increasing its software client’s default block size from its present 8MB limit as a step toward ultimately integrating an adaptive block size limit.
The Bitcoin Unlimited client, on the other hand, already provides nodes and miners with the ability to configure the block size limit up to 32MB. Consequently, this team’s developers intend to explore the ramifications of decreasing the inter-block time to from its current target of 10 minutes to a new target range of one to two-and-a-half minutes. If this idea is implemented, mining rewards will be rebalanced to account for the increased number of blocks.
Both teams also plan to experiment with the Graphene protocol, a scaling solution originally created by a group of developers that included Gavin Andresen.
Colored Coins & a New Address Format
Though front-and-center, scaling was not the only topic to appear in these new roadmaps. Both Unlimited and ABC also intend to begin restoring software op-codes that were disabled shortly after Bitcoin’s launch in 2009. The restoration of these opcodes will reopen the door to future developments such as Colored Coins — Bitcoin’s version of ERC20 tokens — and binary contracts.
Finally, both Unlimited and ABC plan to work toward implementing a new Bitcoin Cash address format that will make it difficult for users to accidentally send BCH to BTC addresses, and vice versa. This has been a significant problem since Bitcoin Cash’s launch, and millions of dollars worth of coins have likely been lost due to user error and the similar address structure.
With scaling the center of attention in the public blockchain sector, an older but lesser known attempt to overcome the restrictions inherent in ethereum is getting a refresh.
Revealed in an exclusive interview with CoinDesk, a new TrueBit protocol is being released this December, one that removes the ethereum “gas limit,” which today puts an upper-bound on the number of computations the network can achieve, bringing the second largest blockchain by market capitalization closer to its oft-touted goal of becoming a “world computer.”
While TrueBit is one of many in-progress scaling solutions being engineered for the ethereum platform – working alongside mechanisms such as sharding, state channels and Raiden – it distinguishes itself by focusing on the computational power of the network at large, instead of just transaction speed.
Geared specifically towards heavy computations, such as those video broadcasting and machine learning would require, TrueBit could resolve the fact that ethereum is still about as fast as a “smartphone from 1999,” as ethereum creator Vitalik Buterin joked last year.
“In short, the new scheme would be a vast simplification of the current TrueBit protocol,” said Zack Lawrence, the co-founder of 1protocol, who developed the technology.
And these gains all came about after speculation that someone could exploit the protocol, after an amendment to its white paper was released last month.
Jason Teutsch, a mathematician and co-founder of TrueBit, framed the speculation, and the process for patching the vulnerability, with a silver lining:
“When so many people have eyes on the papers, over time, you get more and more confident that it’s correct, but it’s always an ongoing process for these things that are living systems… Now, we go another layer down the protocol rabbit hole, it’s this iterative process of getting deeper and deeper into this.”
Hit the jackpot?
And going deeper led the devs to the incentive mechanism used in the protocol.
TrueBit aims to remove the gas limit on ethereum by moving computations off-chain – outsourcing them to an external marketplace that rewards participants for solving and verifying the computations. Within the marketplace “task givers” pay “verifiers” to solve computations in exchange for rewards, while “validators” check that the computations are correct.
To make sure everyone runs effectively, Truebit relies on an incentive scheme dubbed the “forced errors jackpot,” which ensures validators are actively checking for correctness by requiring verifiers to occasionally submit incorrect information. If a validator finds these forced errors, they’re rewarded with a substantial payout: the “jackpot.”
But according to Lawrence, that process can be a lot less complicated.
Within the new protocol, instead of limiting the participants’ tasks, everyone can participate openly.
Those that verify correct computations still get paid, but if another participant finds an error, they can submit what they believe the computation should be and enter that into the verification game. All the potential answers are then pooled together until a consensus is reached.
Because that verification pool is costly to participants, the protocol incentivizes them to work together honestly so disputes do not occur, since the reaching consensus within that verification pool would be costly for everyone.
Not only does this iteration eliminate the security flaws pointed out when the amendment was released, but it’s also easier to implement and could increase the number of computations participants are willing to perform since it eliminates the once-every-so-often jackpot, Lawrence told CoinDesk.
Still, the new protocol may not be the last step in evolving TrueBit to achieve optimum efficiency.
Teutsch explained that both versions of the protocol will still hit against eventual limits when it comes to massive computations. If, for example, verification takes too long or gets too expensive, those who notice errors might be inclined to keep quiet, and just let them go.
“Remember that the verification game is really slow compared to native computation, so my concern expressed here is more than just theoretical,” he said.
Plus, because TrueBit is a protocol built on game theory (rather than relying on more familiar security auditing processes), Teutsch said, its “security is an observational science,” in which devs try to put themselves in every position an attacker might be in.
Because of this, Teutsch said the developers may decide to run both the original protocol (now internally nicknamed TrueBit Classic) and the new protocol in parallel for better security.
But nodding to the fact that digital security is an immensely challenging prospect that takes continual work, Teutsch told us:
“Full confidence happens once you have all the money in the world behind it, and it’s sat there for a few years.”
This week has been a rollercoaster ride for Bitcoin – and could signal an equally unpredictable future.
What happened this week?
The eight-year-old cryptocurrency has pulled in droves of investors in recent months. But this week it hit record-breaking highs, soaring over $10,000 (£7,493) in value. At the start of 2017 a Bitcoin was worth just $1,000.
And yet within 24 hours of hitting the benchmark it had climbed past $11,000 before losing nearly 20% of its value, to just barely $9,000.
This rollercoaster ride, and resulting headlines, prompted the Bank of England to warn “investors should do their homework” on Bitcoin: some say the currency is peaking and based on nothing but a speculative bubble, while others feel it could have further to rise.
“This week is no different,” says David Yermack, professor of finance and business transformation at New York University. “Bitcoin has always been very volatile. Anybody who invests should have a large amount of risk tolerance.”
Remind me, what exactly is it?
Ten years ago, the idea of a futuristic, invisible currency – one that’s not linked to any government and that lives on the internet – might have been dismissed as a possible line from The Matrix or Blade Runner.
But that’s what it is: a digital alternative to notes or coins. It’s still not an official currency as it’s not issued by any government. It can be used as payment online and can be transferred digitally, avoiding the bureaucratic quicksand of banking hours, transaction fees, and waiting periods. The total nominal value of every bitcoin in existence – the first type of digital currency of its kind – is now over $167 billion.
What comes next?
Some say breaching the $10,000 mark signals a new chapter for Bitcoin.
“We’re in the second inning of a nine-inning baseball game,” says Ronnie Moas, founder and director of research at Standpoint Research, who specializes in investment, stock, and cryptocurrency recommendations. “What do you think is going to happen when this goes mainstream?” He thinks it could end up being as lucrative as Amazon or Google stock, and for him it is worth risking a decent sum in Bitcoin, rather getting caught on the sidelines. “In the direction we are headed, there are going to be 200 million people trying to get their hands on a few million Bitcoin.”
Moas believes the $10,000 mark is “basically a stamp of approval,” almost like a celebrity endorsement. “When it was at $1,000, it had no credibility – now people are saying ‘this looks interesting’.”
Not everyone is so bullish. “It’s a bubble that’s going to give a lot of people a lot of exciting times as it rides up and then goes down,” Nobel Prize-winning economist Joseph Stiglitz told Bloomberg.
Bitcoin’s relevance to the average person on the street, however, is still a little intangible. Although there are a handful of exceptions, you can’t use Bitcoin in most shops because its legal status varies by country. In many places, the cryptocurrency’s semi-anonymous nature stokes fears of money laundering or an increased sale of illegal goods.
While some think Bitcoin is the future of money, others think that the party will inevitably screech to an halt once governments get serious about trying to regulate it.
Right now? “It’s a total mess,” says Tadge Dryja, research scientist at MIT’s Digital Currency Initiative, when describing the decentralised nature of Bitcoin – meaning, there is no central body like a government or bank that oversees its distribution or use.
Dryja and his team are working on systems that will make Bitcoin safer and easier for Bitcoin holders to use in the future. But as it stands he describes the digital currency as “dangerous.”
“I guess the best analogy is that of gold: governments can regulate the institutions that deal with it but not the metal itself. They can’t decide if it’s going to weigh less or be purple instead of yellow. They will have to regulate what is regulate-able.” That’s why some think eventual regulation will burst the bubble.
Kenneth Rogoff is a professor of public policy and economics at Harvard University and former chief economist at the International Monetary Fund. He thinks that there could be a broad international crackdown, and that even in countries like Japan or Australia which have gone to great lengths to legalise bitcoin, it won’t be further legitimised because governments cannot allow people to make big transactions in ways that can’t be traced.
At the moment, he says governments are sitting back and letting Bitcoin foster technological innovation. But while Rogoff predicts that Bitcoin will struggle as more competitors emerge (Bitcoin may be “the MySpace of cryptocurrencies,” he says), the regulation issue is what will prove the ultimate challenge.
“It’s just nonsense to think that we’ll reach a situation where everything is done in cryptocurrency and that no one pays taxes,” Rogoff says. He says in the currency game, “the government makes the rules and they can keep changing them until you can’t win.
“The fundamental thing is that governments will pull the rug out at some point,” he says. “It will take some international coordination. I don’t think [Bitcoin] will be worthless – there may be some rogue states that support it.”
But for now? The past week’s volatility could signal the “beginning of a really wild ride,” for Moas.
Whether it soars or crashes though, one thing’s for certain, Dryja says: “There will be plenty of jobs for lawyers going forward.”
‘Is my capital or/and returns safe, can I liquidate my holdings during a crisis, and will I make any money?’ These are questions you always ask yourself before you invest in a financial product, like a mutual fund or stocks. And chances are, you will only invest if the answer to all these questions is ‘yes’.
However, when it comes to cryptocurrencies like bitcoins – which are all the rage right now – the answer to these questions is an emphatic no, at least as far as India is concerned. The only exception being its massive returns. Which could be the prime reason why it has found a fan following in India despite there being so much uncertainty surrounding it.
Bitcoin prices have surged from not that much on 28th of April, 2013 to $11k on 30th of November, 2017 -a whopping increase of over 8,400 percent! With such returns, it is no wonder the cryptocurrency has emerged as a new attraction among investors.
1) Growth is speculative
When you buy stocks of a company, you know that the growth of your investment is directly proportional to the company’s growth, its earnings, turnover, expansion, and other internal and external factors. Similarly, behind every investment product there’s a mechanism as to how your money grows. However, in bitcoins, price is determined solely on the basis of demand and supply, and speculation is what is driving its prices right now.
Karan Bharadwaj, chief technology officer of Singapore-based fintech firm, XinFin says, “Bitcoin was invented to be a peer-to-peer digital cash system with a limited supply of 21 million bitcoins. Its price is driven because it is limited supply and decentralised. There is huge speculation around it, and that is what is driving the prices. Several things drive bitcoin prices. Often when the demand for bitcoin goes up in politically/economically volatile regions, there is a general increase in bitcoin prices.”
2) Remittance issues: you can’t buy anything with it
By and large, at least in India, the acceptance of bitcoins is low and people are purely buying it out of speculation and not with the intention of using it as a tool to transact. Deepak Kinger, vice president, banking and financial services, Virtusa Corporation, a fintech firm says, “Like we have Visa, MasterCard and RuPay networks, for bitcoins to become mainstream something like that needs to happen. The Reserve Bank of India (RBI) has clearly said that they are not regulating this industry and have warned people against investing in it.”
Kinger adds that at the moment there are only a handful of cryptocurrency exchanges in India and there’s a huge risk involved since this space is not regulate.
Corroboratiang these views, Bharadwaj says, “Historical data has shown that bitcoin can become 1/4th or double in price within span of days or even hours. Remittances cannot be realistically implemented on bitcoin because of its price volatility and delay in transaction confirmations. Even at the protocol level, it takes an entire hour before most participants consider a bitcoin transaction as valid. Volatility can seriously affect remittance ‘losses’ if built on bitcoin.”
“Besides there are no tangible assets under compliant environment that can be traded in India with bitcoins,” Bharadwaj adds. What this means is that you cannot buy anything using bitcoins, you have to convert it to currency.
3) If the exchange goes down, your money is gone
The capital market and products like mutual funds are regulated by the Securities and Exchange Board of India, the Insurance Regulatory and Development Authority of India watches over the insurance industry, and RBI regulates the banking system, but there is no such watchdog for bitcoins.
So, if by any chance you make investments in a fraudulent bitcoin exchange, there’s no one you can approach, not even the government can help you in getting your money back.
You buy and sell cryptocurrency solely on the face value of the exchange. Some of the popular exchanges include Zebpay, Unocoin, and Coinsecure. But if there’s a fraud, your money is gone, and in the absence of a regulator there’s no way to address it.
Kinger adds that further, there’s no mechanism to validate the authenticity of bitcoins. Also, there have been instances where investors have faced challenges while trying to sell their bitcoin holdings. So, even if you have holdings worth crores in bitcoins, if you can’t remit or liquidate it easily, what good does that do?
4) If RBI bans cryptocurrencies, what options do investors have?
Right now, there is ambiguity regarding cryptocurrencies’ legal status – it is neither legal nor illegal in India. Bitcoin exchanges, like Zebpay, have been stressing on the fact that they aren’t illegal. However, if RBI says that these virtual currencies are illegal and bans such transactions, these exchanges will have to shut down.
“If there’s the ban in India, all these exchanges will have to shut down, and in the absence of a regulator, it is likely that you’ll lose your money,” says Kinger.
However, according to Bharadwaj if RBI decides to ban cryptocurrencies, all will not be lost. “When an investor buys cyrptocurrencies from an exchange, they create accounts on that exchange where the cryptocurrency is held. Hence, in some cases the private keys for their accounts on the blockchain are also held by the exchange. If the entire exchange goes down, the private keys of the investors are compromised and they lose their holdings. However, if you transfer your holdings from the exchange wallet to a dedicated wallet or client-side wallets or hardware wallet, the private key of your account will remain discreet and the risk of losing the money is minimised. If you have stored your holdings in these wallets and RBI bans the cryptocurrencies, you can conveniently convert it into any fiat currency other than the rupee.”
5) Bitcoin and ponzi schemes
Investors interested in bitcoins might fall prey to bitcoin cloud mining services or investment schemes promising fixed or assured returns. Remember, there is no such thing as fixed returns in bitcoins due to the extreme volatility in its prices.
Historically, bitcoins started with the concept of mining. While it is quite clear that mining is an essential part of the bitcoin ecosystem, how it works is complex. “Bitcoin operates in a totally trust-less and anonymous environment which may be misused by bad elements. Potential investors should be fully aware of its risks. They should also hold their bitcoins in reliable online wallets or cold storage wallets. They should never share their private keys or click on any links that could potentially be associated with phishing attacks,” says Bharadwaj.
Quoting an instance of bitcoin fraud, Bharadwaj says, “A popular exchange called Mt.Gox got hacked a few years ago and lost millions of dollars worth of bitcoin to fraudsters. Another bitcoin startup, BitInstant, which was launched in 2011, went defunct in 2013 due to its links with the dark web, and subsequently its co-founder and CEO Charlie Shrem was arrested for the fraud. Investors should only use exchange wallets as temporary storage, while keeping long-term holdings should be kept in dedicated wallets.”
Bitcoin seems to be everywhere these days. Finding a place to spend it is another matter entirely.That flies in the face of popular perception that businesses are trumpeting the acceptance of the digital currency as a form of payment. Looking for a mate? OkCupid stopped accepting cryptopayments a year ago. Booking a flight? Expedia.com and Virgin Atlantic both dabbled in bitcoin but now don’t accept it for airfare. A Holiday Inn in Brooklyn no longer books beds for bitcoins.Nor can you raise a pint at north London pub Pembury Tavern, which received some press a few years ago for entering the digital currency economy, but has since, like others, quietly exited.And chowing down with bitcoin is getting complicated. The website airbitz.com lists just three restaurants in Manhattan where diners can pay with bitcoin. Two have closed. A third, Melt Bakery, which sells only ice cream sandwiches, accepts bitcoin, but the last time it did was July 2. And while the website of Piccola Venezia, an upscale Italian restaurant in Astoria, Queens, says “bitcoin accepted here,” I wouldn’t make the trek. The person who answered the phone there said bitcoins were not welcome. “It’s a big mistake.”It does looks as if pizza lovers can get Domino’s delivered in Brooklyn with bitcoin through a website called Pizzaforcoins.com, but it will cost them. A large pie with one topping (and the website forces you to get at least one topping — I went with extra cheese) was 0.0036 bitcoin when I checked on Thursday, which translated to $34.12 before tip. It normally costs $8.70.None of this is likely to rattle investors who are rushing into bitcoin. Its use as a medium of exchange has become entirely beside the point. Most of what has been propelling the cryptocurrency’s remarkable rise recently has been, like in any bubble, the fact that the price has been climbing rapidly. The rise justifies the rise. And many bitcoin investors now view bitcoin more akin to gold than say dollars or any other traditional currency.
But at least part of what underpinned bitcoin’s more than 900 percent jump this year, at least initially, was the idea that bitcoin’s acceptance, and use, was spreading more widely. A key aspect of bitcoin is that it is a cheap way to complete transactions without the middleman. Earlier this year, bitcoin investor and author Chris Burniske gave a presentation about the network value-to-transaction ratio, which compares the value of all bitcoins to transactions being done in the currency. Some have dubbed the ratio “bitcoin’s P/E” and used it to argue against a bubble.The idea, though, that bitcoin is being rapidly adopted, or even just gradually, is a myth. In 2013, a number of retailers and companies, large and small, started accepting bitcoin. Four years later, shoppers can’t use it at any large physical retailer. What’s more, not only have Walmart and The Gap not adopted bitcoin, many of the places that said they would no longer do.A long list of merchants that take bitcoin has circulated the Internet for the past few years, published most recently on 99bitcoins.com. But the list is mostly bogus. Many of the businesses on the list no longer take bitcoin or never did. There is a bitcoin payment button for online electronics retailer Newegg.com, but when I tried to use it for a Nintendo Switch, it didn’t work. Even Bloomberg is on the list, but my colleagues in billing say you can’t pay your terminal fee in bitcoin. Nor can you get a subscription to BusinessWeek or any of Bloomberg’s other publications or services. On Thursday, Mike Bloomberg threw some cold water on the idea that bitcoins would be used widely anytime soon. You can, in a roundabout way, use bitcoin to buy groceries at Whole Foods, but only after buying a gift card from eGifter, which is really no different from having to convert bitcoins back into cash before using them. And a number of web reviews of eGifter suggest the process is not painless or quick. An eGifter spokersperson said customers can use bitcoin, but the transaction is “slightly more complicated” than using cash.
The value of bitcoin transactions has spiked recently but is up just more than 400 percent compared with the first 11 months of last year Even so, a number of sites that track bitcoin, like Blockchain.info, show that use is up. On average, the daily value of bitcoin transactions has risen just more than 400 percent this year compared with the first 11 months of last year, according to Blockchain.info. But given the fact the number of places accepting it is falling, that seems hard to believe. The number is supposed to track just the volume of bitcoins used to buy actual goods or services. Even bitcoin believer Burniske thinks the figure has likely been inflated by all the people who have rushed into bitcoin as an investment. Worse, the cost to complete those transactions is rising even faster, with fees charged up nearly 2,200 percent this year, although it’s still minuscule on an absolute level, a fee of just 0.05 percent of the average transaction this year.
The cost of using bitcoins is still low but up substantially this year. Again, none of this will likely pierce the frenzy around bitcoin. Who in their right mind would spend the stuff now anyway, even if they could?