Cashing in on bitcoins

Published in the Adelaide Advertiser, September 2017

Bitcoin, the world’s first crypto-currency, has delivered spectacular financial gains but faces rising pressure amid government crackdowns and fears the bubble may soon burst, as personal finance writer Anthony Keane reports.

Bitcoin, the digital currency that has delivered spectacular financial gains, faces rising pressure amid government crackdowns, a surge of copycats and fears that its bubble will soon burst.

The world’s first crypto-currency – which is created on computers and is not backed by any assets – has surged in value from $100 to more than $5000 since 2012, with its trajectory marked by wild price swings including a 20 per cent dip during September.

Its rapid rise has led to the creation of hundreds of other digital currencies, prompting calls for greater regulation, scam warnings and concerns that anyone trying to buy into this sector today risks losing their money.

Bitcoin supporters say its benefits include that it is a global digital currency independent of any government, can be transferred anywhere immediately, does not require middlemen such as banks, and has extremely low transaction fees.

All transactions are kept on a public log but people’s personal information is hidden.

Governments in Australia and Japan are introducing laws to regulate digital currencies, while China announced a ban on Bitcoin exchanges this month. Other countries are taking Separate action. But still the price surge continues.

Yesterday bitcoin was trading around $US4200 ($5400) – a handy gain for people who bought one in 2010, a year after it was formed, when it traded for just six cents.

Investment specialists liken bitcoin to the dotcom boom and subsequent collapse, but say the technology behind it – known as block chain or shared public ledger – holds great promise.

AMP Capital chief economist and head of investment strategy Shane Oliver said regulators were taking a closer look at crypto-currencies as new ones appeared every month.

“It’s like the Wild West in America, when every bank in America was printing its own currency,” he said.

“There’s a degree of that going on here but it’s not banks – its people in cyberspace creating their own currency.”

Baillieu Holst chief economist Darryl Gobbett said bitcoin’s price rose “because of its scarcity value”. “The number of Bitcoins that can ever be produced is fixed (at 21 million, according to its rules) but other cryptocurrencies are being created,” he said.

“The types of things that people might buy Bitcoin for – making transactions that they don’t want governments to see – could be done by an increasing amount of other cryptocurrencies.

Central banks are looking to create a digital form of cash. Once that gets going it could well be that the role that Bitcoin is playing by being independent of banks and governments may be bypassed.”

The Australian Securities and Investments Commission warned this week about the dangers of initial coin offerings, where digital currencies raised money for block chain related projects.

“ICOs are highly speculative investments, are mostly unregulated and the chance of losing your investment is high,” ASIC Commissioner John Price said.

“Consumers should understand the risks involved, including the potential for these products to be scams.”

Wealth Within chief analyst Dale Gillham said the rise of digital currencies was “just another bubble, and for the most part those investing in it are not old enough to remember the tech boom and bust of the late ’90s”.

“People have this natural gambling mentality. They are trying to find the next big win,” he said.

Mr Gillham said cryptocurrencies were in a period of “rampant speculation”, which suggested the bubble was about to pop.

“The big end of town is staying away from it. If there was a lot of money to be made, the professionals would already be there,” he said.

“One of the things that worries me is it’s completely unregulated. We need to regulate it for our own safety.

“If you want to gamble, bet $1000 on it and see what happens, but be prepared to lose it.

“There are over 900 cryptocurrencies and there are definitely fake ones. “Stay with the big ones, however even they should be treated as pure gambling”

Bitcoin Questions Answered

What is a Bitcoin?

A bitcoin is not a physical coin. It’s an electronic currency created by mathematical computations, and is kept on a public ledger in the cloud, along with a record of all bitcoin transactions. You may have seen images of shiny bitcoins, but these are mainly souvenirs made for enthusiasts.

How are they created?

Bitcoins were invented by the mysterious Satoshi Nakamoto, who some believe is alias for Australian computer scientist Craig Wright who identified himself last year. New coins are given to “miners”, people who use powerful computers to solve complex mathematical problems for the network. So far 16.6 million bitcoins have been created and its rules limit total production to 21 million.

What are they worth?

The price of a bitcoin fluctuates daily and is currently around $US4200 ($5400), up from 6c in 2010 and $US100 in 2012.

How do you get them?

Online exchanges make buying bitcoin easy. Create an account and a secure bitcoin wallet, then pay your money, plus a service fee, usually by internet banking, credit card or PayPal.

What do you use them for?

In theory, bitcoins can be used to buy anything from a merchant willing to accept them. In practice the best gains have been made by speculators cashing in on the rapid rise in value.

Who owns Bitcoins?

While all bitcoin transactions are recorded on a public log, the names of buyers and sellers are kept private, which has made the digital currency popular among people acting illegally.