Bitcoin - the only certainty is uncertainty
Everybody has noticed Bitcoin. At this very moment many people are talking about it over lunch with their colleagues or around the braai with friends (probably one of the more dangerous places to get financial advice).
After a period of hype in late 2013 cryptocurrencies in general have once again become a big talking point and are receiving deserving attention as a completely different way to transact by cutting out the usual financial institutions and banking systems. This allows for transactions to be completed within minutes rather than days through a system called a blockchain. Someone from another African country and working in South Africa could use a system such as this to send money back home from their cellphone without the need of a local bank account to facilitate these transactions.
The market cap of cryptocurrencies as a whole has grown exponentially in the last year by gaining over 600% as seen in the chart by coinmarketcap below:
Bitcoin isn’t the only horse in this race with a couple other currencies such as Ethereum, Ripple and Litecoin which are by no means completely dwarfed by Bitcoin anymore.
Although not likely a popular comparison these cryptocurrencies have many similar qualities to gold. They are seen as a store of value, and can be seen as a sort of hedge against traditional currencies if the traditional monetary systems had to implode. They also have an element of scarcity for example there will only ever be 21 million Bitcoins in circulation.
My opinion is that before listening to your neighbour with the big 4x4 and following his advice because you don’t want to be the only Joe missing out on all the action, I think it is wise to try to fully understand where you are putting your money. This approach should be followed with all meaningful financial decisions and will help you to understand what factors have an impact on your money, and therefore you will be in a better position to make educated decisions about what to do next. Fear of missing out is definitely not something that should be driving any financial decisions.
In the case of cryptocurrencies it is wise to understand how it can be used as means to transact and the process behind it. What has been causing this sudden interest/demand for it and is this likely to continue? Is it something you want to use as an “investment” vehicle and if yes how much should you be contributing towards this? These are answers you should come to yourself so that you make the best decision possible for yourself.
In the last month I have been trying to increase my knowledge on the subject (sometimes it can get a little complicated because of the very new terminology). I opened an account with Ice3x and Luno and deposited a small amount of money to play around with. I bought some Bitcoin, Litecoin and Ethereum in different weightings. Luno only offers Bitcoin but Ice3x have a few other crypto currencies available.
It has been a few weeks now and this has been some of the most volatile price movements I have ever seen. I decided rather than to keep it on the platform to transfer it over to a cloud based wallet called bitgo. The transaction was almost instant using a simple deposit address but ended up costing me roughly R50 in fees (I clearly forgot to read the fine print, Luno uses something called “dynamic fees” which determines a fee based on the Bitcoin network traffic, and it ended up costing me around R50 in fees for the transaction).
So what will I do going forward? It is hard to ignore the price movements we have seen in this market for the last year, but I am by no means convinced that these movements will continue. One of my biggest concerns is that if these currencies do not grow as a means of payment and a way to transact the current valuations could wildly unjustified and we could many years of negative returns or if this market is in a demand bubble which burst I wouldn’t be surprised in the slightest. It is however impossible to know what will happen in the future (queue that person who in their mind are convinced that they do) but I must say I am intrigued. I will continue to put very small amounts of money into this market every now and then, the kind of money that if it had to go to zero over night I would still be able to sleep very peacefully. I will also continue to buy multiple currencies like somewhat as a basket.
The safety of my cryptocurrencies would start to worry me if it had to start forming a bigger contribution to my portfolio, there is no consumer protection or courses of action if someone had to hack my Bitcoin keys for example (the code linked to my Bitcoin). There seems to be a lot of criminal activity using this currency as their base for transactions, for example the “WannaCry” ransomeware attacks where hackers encrypted your computers data and demanded ransom payments in Bitcoin, and other dark web sites exchanging drugs or guns for payment in Bitcoin like what was done at Silk Road.
Regulation is also something that could be a game changer and as uptake becomes more prominent we may see further problematic transactions taking place using digital currencies (for purposes such as money laundering). This means governments may feel the need to gain more control over the system. More control may not even be possible but regulation and outright bans are a very real risk for all users. See this link regarding the legality of Bitcoin throughout the world.
One thing that I have noticed is the militant allegiance to Bitcoin. When doing some research I noticed that any negative comment towards cryptocurrencies (mainly all on Bitcoin) was met with harsh criticism and personal attacks on the individual making those comments. Now Youtube and social media comment sections have never been a great source for unbiased info but I think this shows some indication that many individuals have a bit too much riding on the success of this market, and being so emotionally driven with your finances is never a good space to be in.
So if you are interested go do your research and a strong word of caution about overexposing yourself to this market or there may be many sleepless nights ahead of you (but easy for me to say right, I didn’t make 600% returns in a year).