The rise of Bitcoin and cryptocurrencies have made and lost fortunes, and the stories of success and failure are everywhere.
Just this week, the Australian Financial Review published an article “Aussie expat returns home with $267m after selling his crypto start-up” detailing Sydney entrepreneur Michael Dunworth’s dazzling success selling his company Wyre.
Welshman James Howells mistakenly threw away a hard drive containing Bitcoin private keys thinking it was worthless. It is currently valued at $345 million. He has hired data experts from Nasa to help him track it down and is still trying to persuade Newport council to let him search them local landfill site, even offering to share his fortune with the council.
Equally wrenching, San Francisco computer programmer Stefan Thomas has just two password attempts left if he is to unlock a Bitcoin wallet worth more than $300 million. If he fails and burns through his final two of 10 attempts, he will lose 7002 Bitcoin, currently worth an eye-watering $322 million Australian dollars.
So what’s really going on. And given that Australia is days a way from Bitcoin and Ethereum cryptocurrency ETFs are set to hit the Australian market this week, should you be investing – or staying away?
Former ASIC Chairman Greg Medcraft recently came out in support of blockchain technology. And the area has as many fans as it has detractors.
This week, the area took hits of up to 50% in trading in the US and elsewhere. Volatile hardly describes this stomach-churning roller coaster ride. So what’s really going on?
Here’s what you need to know:
There are over 15,000 digital currencies, Bitcoin is by far and away the largest, representing around 42% of the total market. It is the largest, has the strongest network effect but what exactly is it?
Bitcoin is an open monetary network. A ledger of payments that is secured by a network of specially encripted super-secure computer servers.
Every 10 minutes a “block” is created – transactions are included and confirmed by the network. What it creates is the first open accounting ledger in history – an open free market that trades 24/7 and values transactions in all global currencies.
In other words, with the right software everyone can see it being traded.
Bitcoin allows for the transfer of value from one person to another without a third party intermediary – in other words, banks and financial institutions that make money in fees by such transfers.
It’s a “permissionless accounting ledger” that can’t be corrupted. So anyone can trade in it.
It’s audited every 10 minutes, isn’t controlled by a central party and there is a fixed quantity of units in the system. So if it were adopted to replace currency, government’s can’t simply print large amounts to bolster their financial system.
Like any investment there are risks, especially in the short term.
There’s particular volatility at this current time, rising interest rates tend to negatively affect high growth stocks and risk assets like cryptocurrencies. Being relatively early in its monetisation process, Bitcoin is still highly volatile and although it averages an annual compound growth rate north of 100% over the last decade or so, it is susceptible to short term sharp pullbacks.
Anyone buying in Bitcoin should be prepared to hold it over at least 4 years and ideally longer.
Leading ETF trading platform Betashares says: “Whilst it is impossible to predict the outcomes of government regulation, or market returns over the short or long term, crypto and blockchain technology are here to stay.
“Crypto is changing the way business is done, disrupting industries, and is expected to continue to garner retail and institutional investment.
“Whilst it is still too early to know which specific cryptocurrencies will ‘win’ over time, the companies providing the ‘picks and shovels’ and laying down the infrastructure for the crypto economy to thrive have the potential to be the ultimate winners.”
Here’s what the ASIC MoneySmart site says about trading in Crypto:
Crypto is not regulated
Many crypto-assets and other digital assets are commonly not considered to be financial products. Because of this, the platforms where you buy and sell crypto may not be regulated by ASIC. This means you may not be protected if the platform fails or is hacked.
When a cryptocurrency fails, investors will most likely lose all the money they put in. In most countries, cryptocurrencies are not recognised as legal tender. You’re only protected to the extent that they fit within existing laws.
The value depends largely on popular opinion
Investing in crypto-assets is highly speculative. The market value can fluctuate a lot over short periods of time, and is affected by things like media hype and investor opinion.
The price of crypto may depend on:
- its popularity at a given time (influenced by factors like the number of people using it)
- how easy it is to trade or use it
- the perceived value of the currency
- its underlying blockchain technology
Your money could be stolen
Be aware that a hacker can potentially steal the contents of your digital wallet.
Your digital wallet has a public key and a private key (like a password or PIN). However, crypto-asset systems allow users to remain relatively anonymous and there is no central data bank. If a hacker steals your crypto-asset, you have little hope of getting it back.
Using a wallet that’s held offline, called a ‘hardware wallet’ or ‘cold storage’, may provide additional protection.
Crypto-assets can be technically complex and difficult to understand.
Unlike traditional financial products, there is usually no product disclosure statement or prospectus that explains in plain English, and in one place, how the crypto-asset operates.
A crypto-asset’s code may not always be available for users to review. In cases where it is available, it may be written in uncommon or obscure computing languages.
The processes for interacting directly with crypto-asset networks is also unfamiliar to many people. They may require special-purpose software and an understanding of how transaction fees operate. Unfamiliar users run the risk of:
- sending a transaction to an incorrect address
- over-paying on transaction fees called ‘gas’ (sometimes by thousands of dollars)
- not paying enough for a transaction fee (and so losing the fee and transaction)
Crypto scams are increasing
There are two main types of crypto scams.
- Fake opportunities to buy crypto
- Using your own crypto to invest or pay for something
Scammers try to trick people into investing in fake opportunities to buy crypto. Watch out for these tactics:
- false promises of very high returns
- fake endorsement from celebrities or government agencies
- people who contact you through social media or text messages
- using dating apps to establish a romantic connection and gain trust
- multiple or constantly changing bank accounts used for transfers