Sunday 23 November 2014

'Irish bitcoin' highlights the issues facing crypto-currencies

Crypto-currency has hundreds of imitators, but is it still worth a punt after already reaching its peak

Deirdra O'Regan

Published 08/06/2014 | 02:30

All That Glistens: Bitcoin’s physical presence is as encrypted hard drives or pages of code
All That Glistens: Bitcoin’s physical presence is as encrypted hard drives or pages of code

IN a nondescript building in Dublin city centre, rows of safety deposit boxes house all sorts of treasures, from the sentimental to the extremely valuable.

The security measures in Merrion Vaults seem straight out of a spy thriller; physical, pin and biometric verification are standard. The contents of the boxes are equally mysterious. "We store anything on behalf of our clients – provided it's within the law," says spokesman Nigel Doolin.

One of the newest additions alongside art work and gold bullion is Bitcoin. The physical manifestation of the crypto-currency consists of encrypted hard-drives and pages of largely unintelligible code. Merrion Vaults started offering the storage facility earlier this month in partnership with BitVendo, Ireland's first Bitcoin ATM operator. It's just one example of how interest in Bitcoin, and crypto-currencies more widely, is growing in Ireland.

Secretive, largely unregulated and highly volatile – crypto-currencies divide and mystify many investors. The buzz around Bitcoin in late 2013 brought crypto-currencies out of the shadows and into the mainstream media. Near the end of last year, the value of Bitcoin peaked around €850 making many early adopters millionaires – if only briefly. The Bitcoin bubble burst and the price fell sharply, losing half its value in a matter of days. Tales of big gains and big losses circulated online as copycat crypto-currencies started popping up and gaining prominence.

There are now around 300 crypto-currencies in existence but Bitcoin is by far the biggest, trading around €411 this week, according to digital currency analyst Coindesk.

It was around the height of the Bitcoin frenzy last December that Antonie Geerts decided to take a closer look at crypto-currencies. By day, Geerts is head of analytics and search for a digital consultancy firm but in his spare time he is the founder of Ireland's first crypto-currency, Gaelcoin.

Geerts, originally from Holland but living in Dublin, began developing Gaelcoin in an attempt to better understand the concept. He based his currency off the original Bitcoin model.

"To fully understand how Bitcoin works I felt I had to break it down and rebuild it," says Geerts.

The crypto-currency concept is both complicated and quite simple.

Each intangible digital 'coin' is a piece of encrypted data. The coins are stored in online 'wallets', either on a computer or an online exchange server. They are not issued or regulated by any central authority and value is determined by market supply and demand. Coins are generated through 'mining', which essentially means computers solve mathematical problems to release new currency. The currency can be transferred from wallet to wallet directly – in theory eliminating the need for a third-party intermediary.

Geerts describes Gaelcoin as his "pet project" and says he is not interested in notoriety or money. In fact, he says he will give away 50 Gaelcoins to the first 100,000 Irish people who apply. "I want to spread awareness and educate people on the way crypto-currencies work" he says.

Stephen Kinsella is a senior lecturer in economics at the University of Limerick. Young and tech savvy – he has over 11,000 Twitter followers – he could seem like the type to get on board the crypto-currency bandwagon. But this is most definitely not the case. Kinsella believes Bitcoin mania is built on a number of falsehoods.

"Bitcoin is not really a currency, it's a commodity. It has no value other than what people are willing to pay for it. Essentially crypto-currencies are ponzi schemes. Your investment is going to plummet if there aren't enough fools behind you to buy the product."

Kinsella's perspective is supported by the Central Bank which has joined regulators around the globe in warning of the risks of virtual currencies that aren't covered by any regulatory protections.

But crypto-currency enthusiasts are undeterred. Alan Donohoe is a founding member of the Irish Bitcoin Foundation and managing director of electronic repair shop GSMsolutions which houses a Bitcoin atm. He has significant interests in Bitcoin and is confident in a crypto-currency future. Although it is impossible to get accurate data on trading and ownership within Ireland, Donohoe maintains interest and participation is steadily increasing.

"Around 1,300 people subscribe to our foundation's newsletter and most of them would hold Bitcoin," he says.

Donohoe adds that while many investors only hold small amounts of Bitcoin, he is aware of larger investors. "I know of one person who has around 20,000 Bitcoins," he says. That puts the value of their current investment at over €8m.

Donohoe says currencies such as Bitcoin threaten the power of regulators and banks and so it is natural that they will try to dismiss them. Despite market volatility and connections to illicit activity he is sure the currency is here to stay – "this is going to be the year of Bitcoin," he says.

Kinsella disagrees. "There has and always will be a demand for speculative types of products, but as an intangible commodity Bitcoin will always be a bubble.

"As a financial experiment it's interesting, and there are no doubt a high number of super smart people investing time and money in it. But ultimately their intelligence could be put to far better use elsewhere."

What would Kinsella say to those firmly hitched to the Bitcoin bandwagon? "I hope you all get rich – but it isn't going to happen. Everything I've learnt as an economist backs that up."

And to the uninitiated or casually curious investor? "Don't believe the hype – those with vested interests need the hype."

Geerts too is cautious and isn't endorsing crypto-currencies as a whole – just yet. "Some of these currencies are too easy to 'mine'. This leaves them open to inflation, forgery and theft," he says. But despite the flaws, Geerts is convinced that crypto-currencies will some day change the fundamental structure of the global financial system. "The current system is dated. Crypto-currencies allow money to be transferred instantly, without the need for a third party payment provider. So it functions more like real cash than our current banking methods."

Geerts also believes the issue of regulation will resolve itself. "The technology is constantly improving to the point where some day crypto-currencies will be completely secure and the technology will regulate the market," he says.

Until the day that technology means 'wallets' and online platforms are impenetrable by hackers, the cautious crypto-currency investors will probably look to more traditional methods to store their 'coins'. Both BitVendo and the Merrion Vaults say they have been surprised by the level of interest since they launched their storage service earlier this month. Doolin says Merrion Vaults is so convinced by the merits of Bitcoin that they are considering excepting payment in the currency at some point in the future.

Those curious to learn more about crypto-currencies can take Antonie Geerts up on his offer of free Gaelcoin.

Investors who want to go ahead and buy one today can – for around €.00001. Still, while most crypto-currencies flounder in obscurity on online exchanges, Bitcoin's market cap is currently nearing €4.5bn. Proof that it's no monopoly money.

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