Tuesday 25 July 2017

Is Bitcoin safe as houses or floating in a bubble?

Bitcoin is back and it's booming. The virtual currency's value has risen threefold so far this year and by 2,700pc since 2013, leading to fears of an internet-fuelled bubble. But advocates and financial experts say there's more to the cryptocurrency than just speculative froth, writes our technology editor

Bitcoin is booming
Bitcoin is booming
Adrian Weckler

Adrian Weckler

You're selling your Dublin three-bed semi-detached house. Your asking price is €400,000. Would you accept 200 bitcoins instead? Reuben Godfrey says he would.

The Dublin-based director of the Blockchain Association of Ireland is bullish about the current state of the world's most popular crypto-currency, which has tripled in value so far this year.

"I believe the eventual value of Bitcoin will be 50 or 100 times what it is now," he says. "There are only ever going to be 21m Bitcoins in existence. At the moment, it represents a negligible value of international global wealth. But in future it could be many, many billions."

In case you missed it, Bitcoin is booming. Its value has soared almost 300pc so far in 2017 and by 400pc in the last 12 months.

Over a longer period, the rise is even more dramatic. If you had bought €1,000 worth of Bitcoin this time four years ago, you would now be sitting on €27,000.

What is behind the extraordinary sudden rise in value of the eight-year-old cryptocurrency? And will it last?

Experts say that a combination of user trust, utility and regulatory acceptance are the main components behind Bitcoin's sustained rise.

"It has gained roots and looks like it may be here to stay," says David Dalton, head of Deloitte's financial services business in Ireland.

"You can almost see this as an emerging asset class, something that's become a vestable asset."

What has happened is that the number of people and organisations willing to assign value to Bitcoin is increasing and deepening.

Just as significantly, the underpinning technology behind Bitcoin - blockchain - is now being considered for much more mainstream financial services.

"Blockchain technology is progressing rapidly," says Dalton. "There's a huge amount of interest by financial services companies like banks and insurance companies."

Dalton heads up a Deloitte 'lab' in Dublin with 25 people working on financial pilot projects, some of which include blockchain technology.

"We built a trading finance prototype with five banks in Hong Kong to help blockchain improve their processes," he says.

"Industries outside financial services have started to get on board too, especially in areas of supply chain."

Cynics might say that underworld activities have played no small part in the continued usage of Bitcoin. Last month's Wannacry ransomware outbreak, which crippled hospitals and other organisations in Britain and around the world, was partially sustained by the ability to receive ransom payments in untraceable Bitcoin. The virtual currency has undeniably become an important crutch for cybercriminals.

However, cryptocurrency experts say that this narrative is overblown.

"To say that Bitcoin is a criminal currency is preposterous," says Reuben Godfrey.

"It's a negligible amount involved. If you look at the Wannacry episode, I think it was in the region of $100,000 that was paid over, a tiny, negligible sum in international crime. Criminals use all sorts of currencies, so to link it all with Bitcoin is ridiculous."

One of the biggest challenges that 'virtual' currencies such as Bitcoin have is credibility. Sceptics point out that there is no sovereign backing the standard, no central bank, no vault of gold. This, they argue, presents a long-term trust issue for those thinking of jumping into Bitcoin or other cryptocurrencies.

Bitcoin advocates acknowledge the point but say that there are already enough people who accept cryptocurrencies to make it viable. "If you can get 500 people who will transact with you and who are committed to it, you have something," says Godfrey. "With the euro, the only reason we accept it is that we all believe in it. The central bank prints paper money and we accept that others will accept it. What Bitcoin and blockchain herald is the beginning of huge societal change. Bitcoin is the safest way to transact value that's ever existed. We really are just at the beginning."

For those looking for steady investments, Bitcoin's volatility is an issue.

This week, it's trading at over €2,000 per coin, almost three times its price at the start of the year. But Bitcoin has been known to rise and fall in greater volumes than ordinary 'fiat' currencies when triggered by external events.

It is also vulnerable to non-regulatory interventions that other currencies don't suffer from. For example, in early 2014, the price of Bitcoin was trading at almost €1,000 on the back of a wave of enthusiasm and positive sentiment. But then the cryptocurrency's biggest trading exchange, Mt Gox, collapsed when it emerged that a huge amount of Bitcoin had gone missing. A subsequent investigation found that some 650,000 coins - roughly €1.3bn at today's exchange price - were likely to have been stolen. The price withered and stayed below its January 2014 level until the beginning of this year.

Despite all of the utility and enthusiasm many people just couldn't trust the integrity of Bitcoin exchanges or transactions.

However, it now looks as if some of these fears are being allayed. Investors and traders are seeing new purposes for Bitcoin, virtual currencies and especially the blockchain technologies that underpin such transactions.

One recent development is the phenomenon of 'initial coin exchanges' (ICOs), a Bitcoin version of an IPO. In essence, a startup can raise finance in the form of Bitcoin. In many cases, this is for another type of virtual currency, blockchain process or related technology. It may sound circular (and it is quite unregulated) but money is being invested and made.

According to the US-based specialist cryptocurrency research firm Smith and Crown, at least €100m has been raised in 2017 through this method. One example of an ICOs this week is Gene-CoinChain, a proposition to store genomic data using blockchain processes. Another is Starta Capital VC, a Moscow-based accelerator fund.

"A lot of startups are doing ICOs as a way to raise capital," says Dalton. "It has the ability to disrupt the venture capital community because companies can raise funds through their coin offerings and not have to revert to traditional venture finance."

However, given that ICOs are largely unregulated, it remains a question of buyer beware. There are already documented instances of scammers trying to pose as ICO merchants, including one that passed itself off as being associated with the famous Rothschild family. (The family had to publicly disown the project.)

More straightforward attempts to bring virtual currency transactions into the mainstream are currently underway. The famous Winklevoss twins, who sued Mark Zuckerberg for allegedly stealing their idea for a social network, have invested the last five years in Bitcoin projects. Two months ago, a plan they had to gain regulatory approval for a virtual currency exchange was rebuffed by the US Securities Exchange Commission. However, the twins say that they remain committed to the future of Bitcoin and will try again to set up a regulated exchange.

"We look at 2016 as the year of the prototype for blockchain technologies and 2017 as the year of the pilot," says Dalton. "Probably the biggest use case right now is for cross-border payments much more quickly and a lower cost than today."

Bitcoin was the driver for what has become one of the biggest crossover financial blockchain companies in the world. Operating out of Dublin and Boston, Circle Financial has used the technology behind the cryptocurrency to build systems for transferring established currencies more cheaply than existing transfer systems are capable of.

The company wants to bypass much of the existing middleman technology and bureaucracy associated with transfers in favour of new secure standards that are much more accessible. Company co-founder Sean Neville likens the evolution of digital money transfers to accessing content online through Google or social media.

"The notion that people are connected globally through a value exchange in the same way that they're connected through Twitter or text-messaging already is something that I think is close to becoming mainstream," he says. "We may still be a little early, but ultimately this is going to happen. We're very close to a public version of a protocol for value exchange. And that will be the thing that other developers, financial developers, banks, software companies or even people in university dorms will all plug into this to create value."

Neville acknowledges that Bitcoin has had a tough press at times. "It's fair to say that there is some toxicity in the mainstream around the bitcoin brand," he says. "I think that if you were to ask people who weren't that familiar with bitcoin, they might associate it with something that's not too positive such as ransomware, the dark web or other activities that regulatory regimes would obviously frown on.

"When we set out to create the company, we thought of bitcoin as something that would be in the background. But we didn't have the regulatory approval we needed to move euros and sterling and so forth. So we had to decide whether or not we stayed in stealth mode until we acquired all of those licences or whether we launched with bitcoin a little bit more front and centre than originally intended.

"We chose this path so that we could test our operation readiness and learn more about the product and so on. As we acquired the necessary licences, we pulled bitcoin further and further into the background like we had always intended."

Is the future of bitcoin as an enabling technology that points the way for other services?

Despite companies such as Stripe letting ordinary firms accept online payments in Bitcoin, there are virtually no mainstream merchants that accept the virtual currency for day-to-day goods and services.

However, observers believe that this may change in time.

"It is absolutely gaining some roots," says Deloitte's Dalton. "Last week I was in New York at a major blockchain event that was attended by 3,000 people. It's going to be some time before we see widespread adoption. But there's no shortage of real interest now."

Godfrey agrees. "If even 20pc of global wealth goes into Bitcoin in future," he says. "If you were to construct a currency today, it would be digital."

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