In 2011, a close friend of ours, Mitchell Bourne (CEO of Comply Flow), started mining Bitcoin with Sergiu Mesesan who he had met in a coffee shop. Together, they set up a mining rig in their kitchen and waited for the money to roll in. The rig was a clunky, noisy mess of hardware that stood at waist height and mined around 12 Bitcoin a day (at one point, the pair had mined around 1,700 coins). The profit was modest, but barely offset the electricity or “the annoyance of having an industrial machine running at 100 degrees next to the toaster”.
Despite their unsatisfying dabble in mining, Mitchell (second from the left) and Sergiu (far left) went on to organise the world’s first European Bitcoin Conference. On the way to the conference, Mitch inadvertently erased 60 Bitcoins from the hard drive of his laptop. The conference was a moderate success, but Bitcoin seemed to be going nowhere so Mitch wasn’t too worried about the cryptocurrency he’d erased from his hard drive (around $200,000 AUD by current valuations).
(Sergiu Mesesan, Mitchell Bourne, Raul Condea & Max Keiser post conference)
Fast forward and few years and Bitcoin was trading at around $750, Saxo Bank analyst Kay Van-Petersen made an ‘outrageous claim’ – that Bitcoin would hit $2,000 in 2017. The same analyst says he doesn’t see any reason why Bitcoin can’t hit $100,000 in the next 10 years. And this time, Van-Peterson’s claim is being taken a little more seriously – take a look at past few week’s headlines, and you’ll see a media storm: ‘Bitcoin may hit $4,000 by the end of the year’, ‘Bitcoin is taking off’, ‘Bitcoin produces 1000% return’, and ‘Bitcoin price could reach $10,000 in a few months’.
But is Van-Petersen right? Let’s start with the basics.
What is Bitcoin?
Bitcoin is a cryptocurrency – a decentralised digital currency that enables instant payments without the need for a central authority, such as a bank. Bitcoin appeared in 2009 and has been credited as the world’s first cryptocurrency. As of today, it is certainly the largest.
Key to understanding the Bitcoin as an investment is understanding the way it operates, and its limited nature. Bitcoin operates through mining, where miners are people with computers. When somebody wants to make a Bitcoin transaction, that transaction is broadcast to the Bitcoin network, where it is added to a ‘block’. A block is a collection of a few hundred pending transactions, bound into a mathematical puzzle by a miner. Other miners then solve that mathematical puzzle, which adds the block to the ‘blockchain’, a digital ledger in which Bitcoin transactions are publicly recorded. For solving these mathematical puzzles, miners are rewarded in Bitcoin, which incentivises them to continue mining and verifying transactions without the need of a central authority.
So is Bitcoin a good investment?
Why Bitcoin Is A Good Investment
Bitcoin has a limited supply. There are only 21 million Bitcoin available – of which a little more than half have been mined. This means that, as Bitcoin become more and more scarce, their value should increase – as long as demand remains the same or increases also.
Every time 210,000 Bitcoin are mined, the reward for solving a block is halved. This event is called ‘the halving’. This has happened twice – in 2012, and in July 2016, and is expected to happen every 4 years or so. When Bitcoins become harder to mine, as they do during the halving, those already in circulation become more valuable – it’s no surprise that in the year since the last halving event, Bitcoin’s price has skyrocketed.
(The price of 1 bitcoin in USD, and volatility calculated on yearly basis – Courtesy: Wikipedia)
Japan recently deemed Bitcoin a legal form of payment, driving the currency’s value to further heights, and making Japan the largest country in the Bitcoin industry. It’s rumoured that Russia is the next country considering recognising Bitcoin – investors predict Bitcoin rates will spike if this happens.
Mrs Watanabe is the metaphorical name given to the housewives of Japan, who seek to invest their family savings. Mrs Watanabe has been labelled an important player in the currency market in the last decade, as Japanese interest rates provide such low returns that she is forced to widen her investments. Recent reports suggest that Mrs Watanabe is turning to Bitcoin in force, alongside South Korean retirees and thousands of other Asian investors seeking new options in a time of low returns.
Why It Isn’t
Quite simply, the reasons not to invest in Bitcoin can be grouped under the broad heading of uncertainty. Major hedge funds refuse to invest in Bitcoin and consider it a gamble. Nobody, it seems, truly understands the nature of Bitcoin and how it will evolve – remember, this is the world’s first cryptocurrency.
Bitcoin is an entirely digital currency, and for that reason it can be hacked. Tim Lea, author of Down The Rabbit Hole, estimates that around a third of Bitcoin exchanges are hacked – further hackings could spook investors and cause the currency’s value to fall dramatically.
Legality issues and bans
Bitcoin is seen as anonymous and was used as the primary currency on the black market website The Silk Road. It’s not unlikely that governments may choose to ban or regulate Bitcoin transactions in the future, though the Indian Government has denied recent reports that they are seeking to ban the currency.
Do not confuse investing in Bitcoin as investing in cryptocurrency – Bitcoin may be the first of the cryptocurrencies, and it may currently be the largest, but it is not the only one. Other digital currencies may learn from Bitcoin, write better code, and take over the cryptocurrency market. Current competitors include Ethereum, a cryptocurrency that has also skyrocketed in value in the last year and now sits at a value of around $250. The future may be in cryptocurrencies, but it may not be in Bitcoin – only time will tell.
The Bottom Line
After organising the first ever European Bitcoin Conference, Mitchell sold his Bitcoins in 2012 when the currency’s value rose to around $5 a coin. Today, a single Bitcoin is worth over $3,500. If he’d held onto them, Mitch’s share of his mining operation would have made him a multi-millionaire, comfortably. If he’d kept up the rig for another year, his fortune would be astronomical – well over $10 million.
There are plenty of reasons that Bitcoin may prove a shrewd investment, and there’s evidence to support Kay Van-Peterson’s claim that Bitcoin may one day hit $100K . But, when it comes to investment, Bitcoin brings unprecedented uncertainty. This is the world’s first cryptocurrency, a digital experiment, a phenomenon that is quite simply impossible to predict. Governments, hackers, housewives – all have a part to play in the future of Bitcoin.
This year, Mitch found his old, smashed up Samsung and replaced some hardware. His phone still has 2.48 Bitcoin left from the mining days – that’s nearly $10,000 AUD.
But Mitch isn’t selling. He’s on now on Kay Van-Peterson’s side.
(This Bitcoins recovered from this phone were worth over $8.2K at the time of writing).