Most investors would consider themselves lucky to experience double digit growth in a year.
However for those who have taken the plunge and invested (or gambled) in cryptocurrencies, they have seen the growth of their investments hit the triple or even quadruple digits.
While it keeps fluctuating, the value of bitcoin has risen by around 800% over the past year. At the time of recording this interview, the increase was at just under 700%.
Meanwhile the value of ether has jumped a whopping 12-fold.
So who are the initial up-takers buying these currencies and reaping the rewards - for now at least?
Scott Milat - an adman and aspiring entrepreneur intrigued by blockchain technology - is one of them.
Speaking to interest.co.nz in a Double Shot Interview, Milat shares his philosophical views on cryptocurrencies and provides some practical advice about how to go about investing.
Speculation on the future potential value of the technology
To begin with, Milat cautions against thinking about cryptocurrencies in the same way you would dollars and cents.
“These aren’t traditional currencies. This is not a traditional financial asset. This is something completely different. The technology that enables cryptocurrencies - blockchain technology - it’s a very powerful new development,” he says.
“If you were an early investor in Uber, within four years you made 2000 times the return on your investment. These new technologies can unlock massive value, and I think what we’re seeing at the moment is speculation on that potential future value.”
That potential future value is what prompted Milat to research bitcoin for a year before investing in it.
He says the concept around decentralised autonomous organisations, or the ability to have a governance structure on the blockchain, is what really caught his attention.
“Rather than having a board of directors… you essentially have an agreement in place, written out in a computer programme, and everyone works within that distributed autonomous organisation,” he explains.
“Essentially the code itself has all the reward structures in place.”
How do cryptocurrencies derive their value?
While one can see how the blockchain technology behind these smart contracts can drive efficiencies, the value of cryptocurrencies is a little harder to understand. Currencies derive their value from how much demand there is relative to supply. So how do these laws of demand and supply work when people are “mining” bitcoin?
Milat explains cryptocurrencies always have a maximum supply.
“So there’s only ever going to be 21 million bitcoins, and that number is fixed…
“The people who mine bitcoin are essentially providing the computing power that bitcoin needs to operate. Bitcoin rewards the people that are giving that computing power by paying out a small amount of bitcoin. That amount of bitcoin the software pays out over time, reduces.
“We’re currently at around 16.6 million bitcoin in circulation.”
Milat says the 21 million bitcoin mark is expected to be reached in 100 years’ time.
“It’s really hard to say what the situation will be once that happens.”
New Zealand regulator ‘agile’
As for what will happen to cryptocurrencies, as the likes of China bans exchange platforms and initial coin offers (ICO), Milat believes they’ll come round to the idea.
“China has pressed pause. There are reports coming out that they have now kind of tightened up the requirements for KYC [know your client] for a lot of exchanges. And it looks like they’ll probably allow a certain amount of exchanges to re-open,” Milat says.
He believes larger countries closing their doors to cryptocurrencies, have provided opportunities for smaller countries to open theirs’ and fill the gap in the market. After all, people in China can use platforms in the likes of Gibraltar to trade currencies.
What is the New Zealand government’s stance on the matter?
Releasing commentary on Wednesday, the Financial Markets Authority (FMA) says it’s keen to “facilitate responsible innovation, and ensure that the regulatory regime remains relevant and agile”.
Its view is that the specific characteristics and economic substance of an ICO determine if it’s a financial product – if it is regulated, and if so how.
ICOs and token events are a form of fundraising where you receive tokens that carry certain rights, such as providing access to a new product or service, or an interest in an underlying asset or project.
As for cryptocurrency services, like wallets, exchanges and broking, it says the providers of these must be on the Financial Services Providers Register, comply with fair dealings provisions in the Financial Markets Conduct Act and be a member of a disputes resolution scheme.
Anonymity not always a bad thing
Nonetheless, one of the key features of cryptocurrencies is that they are decentralised. While cryptocurrency enthusiasts will criticise government authorities for meddling with markets, the reality is cryptocurrency trading is fraught with crime.
Put to Milat, he says he doesn’t want to support criminal activities.
And while the anonymity provided by some cryptocurrencies enables them to be misused, this feature is also what can make them attractive to legitimate users.
Milat says: “If financial institutions and the private sector are going to get on board with public blockchain technologies, they don’t want their transactions to be completely open and transparent.
“So with Monero and Zcash, which are the anonymous currencies at the moment (the main ones), the technology that they’re building will enable private firms to transact on a public blockchain, which is the equivalent of saying that these private companies will have the ability to use the internet for their business and be able to have those transactions private.
“So there’s actually a massive value-add in having privacy around the cryptocurrency.”
How to try to avoid the risks
Asked how he has tried to dodge the risks associated with cryptocurrencies, Milat says he purchases his digital currencies directly from people. In other words, he meets up with them, and makes the trade.
“That’s kind of just a benefit of being involved in the whole space,” he says.
The FMA suggests those keen to trade cryptocurrencies use exchanges based in New Zealand, as this will increase the chances of recovering any money lost.
“Most online exchanges are unregulated and operate exclusively online, with no connection to New Zealand. This means it is hard to find out who is offering, exchanging, buying or selling,” it says.
“It also makes it unlikely investors will recover their money if things go wrong.”
There are currently only a few small New Zealand exchanges around - none of which Milat has used before.
The FMA also suggests: “Know what you’re getting into, including how the currency is stored and transferred, and how to get your money back.
“Understand how to access a payment record. You may need to prove you’ve made a payment – to get a refund for example…
“Using cryptocurrencies may make investors a target for scammers.
“Consumers need to be aware that cryptocurrencies are volatile, their value can change quickly and they aren’t widely accepted in the same way as legal tender.
“The currency held in digital wallets is at risk of being stolen, just like a real wallet.”
Banks’ de-risking
The other difficulty trading cryptocurrencies is that banks aren’t keen on the idea.
They’ve been known to close the accounts of people involved in cryptocurrency trading due to the risk of this breaching their obligations under the Anti-Money Laundering and Countering the Financing of Terrorism Act.
Put to Milat, he says: “Yes, the banks will and have closed down people’s bank accounts. And that normally happens if you’re going to be transacting a lot back into New Zealand dollars, and your bank account goes up by a large sum overnight. That’s going to raise some questions.”
He likens the situation with banks to that of a trader he knows, who contacted the Inland Revenue to inquire about how to ensure his earnings are taxed appropriately, only to be told: ‘We have no idea how to treat these things'.
34 Comments
Extraordinary popular delusions and the madness of crowds? https://en.m.wikipedia.org/wiki/Tulip_mania
I think many people are seeing this only as a speculative currency. While there has certainly been speculative buying, Blockchain technology is useful for things such as investment in areas with low trust as it shows proof of a transaction and dividends can be coded in, applications to corporate governance where there can be more transparency without giving away sensitive information, contracts can be coded in to the coins, application to patents to show proof of work, reduction in approval processes and removal of middlemen in transactions. Betting on one cryptocurrency or another is pretty damn risky though.
Good points. You may be interested in this interview I did with Auckland University Commercial Law Head of Department, Alex Sims, as we talked quite a bit about smart contracts and the potential blockchain technology can unlock.
People should be made aware of the risks. No discussion of the 51% attack on the rules of the cryptocurrency. No discussion of block size limits limiting transactions. No discussion of the 12 kW.hr of power used for each transaction (some may not see that as sustainable). No discussion of the frisbee on the roof scenario when block difficulty is high and interest in mining rapidly diminishes.
I dont think bitcoin crosses the threshold of being seen as a currency., therefore it is purely a speculative play to invest in it.
1/ medium of exchange... only to a small extent ( used by people who want to be invisible. )
2/ Unit of acct.. yes.. but not really.. , Only in relation to actual currencies.. so, only just .
3/ store of value...No... Its' value is very volatile.
But on the upside Roelof is that as an asset it does not demand a yield. In the falling interest rate environment we are in, assets with a value unconnected to yield could be in a much better position when things turn pearshaped.
I have shared the opinion expressed by others here that Bitcoin is highly speculative. I still think that, but am thinking more carefully about my position. Would it hurt to have $1000 in bitcoin? Potential downside is $1000, potential upside looks to be worth the risk.
The issue I am finding is that there is no easy to understand source on investing in bitcoin. Sure I might figure it out, but how will my IQ of 100 builder neighbour work out how it is done. It seems for it to be easy means relying in a third party service, which introduces an extra layer of risk.
Jenee, if you and interest.co want to get the jump on other media then write an easy to understand guide to investing in bitcoin. Something that leaves out the industry jargon. Perhaps a step by step process, illustrated graphically also, that an average person could safely follow.
This is a thought provoking article on the topic. http://charleshughsmith.blogspot.co.nz/2017/09/bitcoin-sour-grapes-and-…
Good suggestion Scarfie. I am keen to do a crypto episode as a part of my Generation Rent Investment Guide series, but need to school-up a bit more first. The fact the FMA has now published commentary on cryptocurrencies is helpful. A New Zealand crypto exchange, Dasset, is also set to launch soon, which will be worth a look as the founders are prominent in the blockchain community in New Zealand.
There are now over 1000 cryptocurrencies, and growing fast. It seems the threshold for starting one isn't very high. While each one may satisfy the criterion of being a limited supply, there is no limit to the number of cryptocurrencies that can be created. It seems to me that those that survive will be the ones taken up by the banks and big business.
I understand it is unlikely to be Bitcoin given the limit to the rate of transactions it can handle.
I would be somewhat surprised if any of the existing currencies are adopted in any scale by the banks.
After all, why would they pick up someone else's cryptocurrency when it would make far more sense (from their point of view) to launch their own, owned in a joint arrangement across the major banks?
They would control the mining (initially at least) and the ICO. Whilst some people would balk at using a bank-controlled crypto currency and stick to Bitcoin (or Ethereum, or Dogecoin or something) most consumers and businesses would shrug their shoulders and use whatever was easiest and most portable, which would be whatever the banks decided to support (ie their own...).
At that point, the other crypto currencies lose value, and eventually disappear entirely (except, perhaps, dodgy corners of the internet).
Hi @mspace, I would be surprised to see large banks adopting public blockchain technology at any great rate too. As you have pointed out, it makes sense for them to leverage those innovations for private systems.
What are your thoughts on the argument that private blockchain systems like these are the equivalent to an intranet or closed networking system as opposed to open public blockchain technologies which are closer to the internet?
As in, if there were two tables of lego blocks. One table only allowed certain people to come along and build structures and had fairly strict guidelines around what they could build. The second table invited anyone to come along and build what they like. Certainly there would be lots of rubbish that no one would use, but somewhere among all of that you might see an entirely new wave of innovative business models begin to emerge and new applications open up just as we did with the internet?
I think it's important to differentiate between blockchain, and crypto currencies. Crypto currencies are a form of blockchain but by no means the only kind.
There are already a number of companies looking to use blockchain concepts for things unrelated to currency, such as logistics and accounting (as distinct from money).
I don't see blockchain overall becoming "closed" any more than, say, encryption has. To use your blockchain as lego analogy, you will still have the table that lets you build anything from a pile of loose bricks to a castle.
I do see crypto currencies becoming regulated, simply by virtue of being a financial instrument. Governments regulate other financial instruments (bonds, shares, insurance etc) so they've not going to let crypto currencies slide by free. At that point it becomes a mechanism for the incumbent financial institutions, mainly because of size.
At least, that's my view. If everyone's using Bitcoins instead of Euros in 3 years then we'll know I'm wrong...
I suspect that it’ll reach a tipping point where some significant entity such as the Fed will set a “standard” crypto currency which will bring one of the key elements which is lacking at the moment - trust. Right now the whole landscape feels like a bit of a gold rush but without anyone knowing what gold looks like.
Interestingly, Microsoft announced a blockchain framework targeting enterprise use recently:
https://techcrunch.com/2017/08/10/microsoft-wants-to-make-blockchain-ne…
There's a whitepaper on it that's interesting...describes the use at an enterprise level (distributed ledger, transactions etc.), and potential points of connection to third-party blockchain currencies. Worth a read, if a bit technical in places.
This is also a great interview with Microsoft's GM of blockchains about what they are doing in the space https://epicenter.tv/episode/201/
Banks aren't exactly experts in crypto currencies / block chain tech so they are far more likely to work collaboratively with companies that can offer the tech and work out the regulatory hurdles.
There are already a bunch of cryptos trying to hit this space. Ripple with there XRP coin for instance are already working with banks and regulators. Then there is Ethereum which is faster and requires less. Computational power than Bitcoin. It also acts as technology springboard for other block chain companies to offer smart contracts, trading, futers etc.
My guess is is that Bitcoin will go the way of yahoo has once Google came along. Won't disappear but slowly loose market share..
Lets be honest. It's not investing, it's speculation. Just like any other currency trading, you are simply playing a supply/demand curve. The "asset" provides no return, it has no intrinsic value beyond the demand.
Good luck to those playing the game, I hope you know when to cash out.
Willy's NVT ratio is one method of valuing cryptocurrencies/tokens that's worth looking at. https://www.forbes.com/sites/wwoo/2017/09/29/is-bitcoin-in-a-bubble-che…
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