Crypto-currency: risky as hell but worth a punt

    30 September 2017

    ‘I’m up 430 per cent,’ said my friend Mash, boasting about his investments in Bitcoin. I should have known then that crypto-currencies were about to crash.

    Sure enough, in the first week of September, the value of digital coins took a large dive. Bitcoin, always the crypto leader, fell by 17 per cent; Ethereum, the second most valuable crypto-currency, dropped by 20 per cent. Analysts have long been predicting a correction in this market, which has rocketed in 2017. Warren Buffett called it all a ‘mirage’ a few years ago. On other hand, John McAfee, the software entrepreneur and political activist, promised to ‘eat his own dick on national television’ if one Bitcoin was not worth $500,000 within three years. You never know.

    What’s certain is that the amateur online investor is at a disadvantage. Most people who invest in Bitcoin have little or no understanding of what they are buying. We can blather all we like about chains of code, ledger systems and mining, and that’s fun, but nobody is quite willing to admit that digital stores of value remain a mystery to all but the geekiest.

    Thousands of currencies with all sorts of funny names have sprouted up since Bitcoin emerged, and many are highly dubious. The 41st most valuable crypto-currency, for instance, is Bitcoin Dark (shady name, shady coin), but if you go to, you see a red warning sign on the home page saying ‘developers moved to Komodo Coin … Komodo is the future!’ Komodo is the 22nd most valuable currency, it turns out, with a market cap of $371,253,359.

    Another is called Useless Coin, started as a joke about the sheer vapidity of digital money, but it still has a market cap of about $64,000.

    Then again, all money is mystery, au fond, and you can go mad thinking too hard about it. And despite the recent tumble, there is a very good argument to carry on investing in crypto-currencies. It starts with the fact that a £100 Bitcoin investment made seven years ago could have made you a multi-millionaire.

    The latest dip has provided a good excuse to get into the market late— indeed, prices are already creeping back up as I write. In 2011, when Bitcoin first achieved parity with the dollar, its bubble appeared to have burst: the price fell by 68 per cent. It fell again in 2012 and 2013 but just kept coming back stronger.

    There will be further dips as crypto-currencies increasingly bump into the reality of ‘fiat’ or state-backed money. The reason for the latest plummet is that China, the source of much optimism about digital currencies, just banned Initial Coin Offerings. I’m still not sure I entirely understand this, but ICOs are a bit like IPOs; businesses can use them to raise capital. Investors use Bitcoin or other digi-dosh to buy ‘crypto tokens’ – essentially shares, which can then be redeemed. It sounds scammy, yet ICOs have raised close to $2 billion worldwide just this year. Chinese companies reportedly raised $383 million through these vehicles, which led to much wild speculation about how blockchain currencies would eventually replace the dollar as the global reserve currency.

    Austrian-school economists have long speculated that the internet would come up with a way of usurping the central banks they despise: and Bitcoin’s surge this year seemed to be proving them right. But then China is a state-run economy, remember, and the top brass in Beijing don’t for now appear eager to upend the way the world works, hence the ban. In a statement, China’s central bank said that ICOs have ‘seriously disrupted the economic and financial order’.

    But analysts are not convinced China’s reluctance will keep ICOs in check for long, and there is more than enough money washing around the crypto-markets to make them a very risky but potentially still very lucrative investment. The more fundamental driver of the price of Bitcoin is the lack of trust in government-backed money since the financial crash; quantative easing by central banks may have just about propped up the world economy but it has dangerously undermined faith in leading currencies, and more and more investors are drawn — perhaps subconsciously — towards the new digital currency markets, even if they are risky as hell.

    It’s easy to be ripped off by crypto-currency. ICO investments vanish all the time in the blink of a screen, and many a speculator has tried to reap his rewards only to find that his or her investment has disappeared.

    You might not trust Mark Carney or the Federal Reserve, but you have legal recourse if your pounds and dollars vanish. The crypto sphere relies on the trust of its kooky community, and it’s a haven for cyber-cowboys. Widows and orphans should steer clear then, but there’s a lot of money to be made in this digital Wild West.