Business Technology

Saturday 16 December 2017

Bitcoins – be careful before you invest your hard-earned money

The digital currency, Bitcoin.
The digital currency, Bitcoin.
Louise McBride

Louise McBride

The once mysterious virtual currency, the bitcoin, is popping up on Irish high streets more and more these days.

The first Irish bitcoin ATM opened in Dublin earlier this month – in GSM Solutions, an electronics repair firm based on Abbey Street. You can now pay for a pint in bitcoins in Ireland, book a room in a B&B, pay for a photographer and order a pizza – albeit through a tiny number of businesses. Those businesses include the Baggot Inn in Dublin and the Ring Farmhouse B&B in Offaly.

If you're considering using bitcoins, remember they are not a legal currency and they are not regulated by the Central Bank. Most high street businesses still won't accept them – not only because of the volatility of the virtual currency but also because it can take some time to clear transactions. Some people have lost hundreds of thousands of euro after investing in the virtual currency.

"The best way to describe bitcoins is people who are selling bits of the sky to each other," says Stephen Kinsella, economics lecturer at University of Limerick. "Bitcoins don't have any of the features which you would associate with a normal monetary system. You couldn't have anyone getting their pension in bitcoins for example – bitcoins are too volatile and too easily hacked."

* Hubs and wallets

Most bitcoins are bought at online exchanges using a conventional currency – and then moved to a personal bitcoin account or 'digital wallet'. Using this wallet, consumers can sell bitcoins online to anyone willing to pay for them – or convert the bitcoins back into a conventional currency such as the euro or dollar.

Like all wallets, digital wallets can fall into the wrong hands. According to the banking regulator, European Banking Authority (EBA), "Digital wallets are not impervious to hackers. Cases have been reported of consumers losing virtual currency in excess of €721,000, with little prospect of having it returned."

Furthermore, you need a private key or password to access your digital wallet. If you lose this key or password, you could have to kiss goodbye to any money you have in that wallet as there are no central agencies that record passwords or issue replacement ones.

If you are buying bitcoins through an online exchange, these hubs tend to be unregulated. Some of these online exchanges have gone bust or shut down suddenly – sometimes after being targeted by hackers. The EBA says it is "aware of consumers permanently losing significant amounts of money held on these platforms".

It warns, "If an exchange platform loses any money or fails, there is no specific legal protection that covers you for losses arising from any funds you may have held on the platform, even when the exchange is registered with a national authority."

* Your rights

When using bitcoins to make a purchase, you have no right to a refund – you are not protected by the refund rights you are normally entitled to under EU law.

Similarly, there is no investment protection for those who invest in the virtual currency. For example, bitcoins are not covered by the Deposit Guarantee Scheme, which ensures that anyone with savings up to €100,000 will be reimbursed, should the financial institution holding the savings go bust.

The German central bank recently warned about the dangers of bitcoins, citing their "highly speculative" and "volatile" nature.

This volatility has prompted many to risk investing in bitcoins in the hope that their value rises sharply, and they can make money by selling it immediately. However, investors also stand to lose, should the value of their bitcoins go down.

* Cheap and easy

Advocates of the bitcoin argue that it is a cheaper, easier and more secure way to make purchases. Unlike credit and debit cards, you usually don't have to pay any fees or charges when you use bitcoins to pay for something – and your transactions can't be traced as they don't involve a bank.

"Bitcoin is first and foremost a technology – an open-source protocol that allows us to send value over the internet faster, cheaper and more securely," says a spokesman for the Bitcoin Foundation, an international organisation which promotes the use of bitcoins.

"Its social and economic benefits include improving global financial inclusion, strengthening financial privacy for law-abiding consumers, and providing a stable money supply in countries where monetary stability may threaten prosperity and even peace."

The anonymity of bitcoin transactions, however, has made them appealing to criminals – who see the virtual currency as a way to evade tax or launder money. "This misuse could affect you, as law enforcement agencies may decide to close exchange platforms and prevent you from accessing or using any funds that the platforms may be holding for you," warns the EBA.

The Revenue Commissioners is also actively monitoring the use of bitcoins in a bid to catch tax cheats.

* Caveat emptor

If you are considering using bitcoins, be sure you understand exactly how they work and are fully aware of the risks of investing in them. Don't invest money that you cannot afford to lose. If using a digital wallet, guard it as safely as you would a conventional wallet. Be particularly wary of the threat of hackers.

Above all, don't get sucked in by the hype.

"Bitcoins are just a speculative asset," says Kinsella. "They will blow up in some people's faces. Some people will lose a fortune and some will make a lot of money. That's how bubbles work."

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