Whichever newspaper you open, the talk everywhere is of cryptocurrency. Much of the media focus has been on the most famous digital currency, bitcoin, particularly the fact that its price has risen exponentially, today exceeding 10,000 US dollars. We have all read that we can buy a cup of coffee with it in the USA or book a holiday on Expedia. What is this currency trend and should you be getting involved somehow?
You could be forgiven for asking what exactly cryptocurrency is. It has crept up on us so fast that many people are just catching up with it. Essentially, it is a digital currency designed to be secure, and in some cases, it is even designed to be anonymous. It relies on blockchain technology and actually has its roots in the cryptography that many of us associate with the codes and secure communication developed in World War II. To understand this blockchain technology , you have to visualise a ledger that everyone can see. This ledger essentially lists all the transactions that are happening in the cryptocurrency system. But it is not a physical, paper ledger. Instead it is run through computer code on thousands of networked computers around the world. Together, these computers are confirming who owns what amount of a cryptocurrency, for example Bitcoin.
The code is designed to release new currency, ie Bitcoins, on a schedule. To get them, a cryptographic puzzle must be solved. ‘Mining’ of the currency takes place by computers trying repeatedly to solve the puzzle until they succeed. The computer that ‘wins’ then publishes its solution to all the other computers on the network and receives the coin. Anyone can become a ‘miner’ by downloading the software.
There is no question that cryptocurrency is becoming increasingly common and that there is a market for it. We are even seeing Initial Coin Offerings (ICOs, the digital take on an IPO).
What is the average person to make of all this? Should we all be rushing to get in on the act? Or is this all some bizarre pyramid scheme? Will the emperor turn out to have no clothes? The advantages of cryptocurrencies is that they are secure payments. You can’t fake a transaction or reverse it. Fees are generally low. They are decentralised and essentially available to everyone, with none of the hoops to jump through that a traditional bank would demand to allow an account to be opened. As we have just seen today, markets tend to take off, meaning the value of just a small investment could increase overnight.
But isn’t this all a bit volatile? Should we be nervous of a bubble that could burst? The soaring price of bitcoin is certainly jangling some nerves. The currency has grown by a staggering 850% since January this year, breaking through the $10,000 barrier. IG Group, the world’s largest online trading platform told the Financial Times that it is suspending trading on some of its bitcoin derivatives yesterday as they felt the huge demand left them facing a high security risk. Plus500, another online marketplace, have raised the fees they charge in dollars to hold an open position in bitcoin. There is definitely a nervousness around the volume and risks of trading cryptocurrency. Another concern is that it isn’t physically based anywhere and so is not subject to reassuring regulation.
What does it mean if the bubble does in fact burst? David Shrier, academic and CEO of Distilled Analytics, told CNBC that he does accept there is feverish speculation going on with cryptocurrencies but that he believes this in itself is not a bad thing: “There is enough utility and utilisation of bitcoin that it will retain some kind of value, even if the price settles down a bit. Amazon didn’t go to $0 when the dotcom bubble burst, but other frothy stocks with no reality behind them did. Similarly, bitcoin won’t go to zero, but I do believe a number of these other cryptocurrencies will fail,” said Mr Shrier.
It will be fascinating to watch. There are many who believe that bitcoin has a lot further to rise. The man who successfully predicted that bitcoin could hit the $10,000 mark, fund manager Michael Novogratz, has over 20 percent of his net worth in cryptocurrencies and he told CNBC that he sees the possibility of it reaching $40,000 by the end of next year. That seems hard to resist.