🤑🤑🤑Money Money Money.

This week is all about the world’s latest gold rush - called crypto-currencies. They remain largely opaque to most of the world despite the money pouring into them. 

The one that most have heard about is bitcoin as that is by far the most popular and visible offline. There are many others and this year especially has seen unprecedented change and it is only August!

As ever, do share if you enjoy and click the thumbs up or down at the bottom to let me know what you thought. Replies are always welcome also.

Cheers,

Riaz

The value of a single bitcoin almost trebled last year and has already trebled again this year. It may not have been as smooth a ride as that implies but if you managed to stick it out you’ve done very well. Of course such performance does not go unnoticed and as a result a lot of people are speculating. 

The hype, whilst not the only thing, is certainly driving the currency upwards.

It doesn’t even have to be bitcoin itself, just last week a boiler room was shut down for selling a crypto-currency to investors that did not even exist.

This creates an interesting challenge for bitcoin to succeed. To do so, it needs to be used as a currency and not an investment vehicle (it isn’t one). Owning bitcoin is not the same as holding shares in crypto-currencies.

And so, when bubbles like this one are created, the only certainty  is that many fingers will be burnt at some point.

When economies hit rough patches, investors run to safe havens to protect their money. Typically this might mean companies that hold up well in uncertain times like utilities, gold or even investing in currencies like the Swiss franc.

Last week, with the war of words going on between USA and North Korea, share prices’ feathers were ruffled and both gold and the Swiss franc strengthened in value.

Likewise bitcoin.

The difficulty last week is that bitcoin growth has been so significant for this past month that it is not easy to identify how much of its growth is due to investors moving money into bitcoin.

For a while last year, when there wasn’t so much hype surrounding bitcoin, it did indeed move very closely in step with gold.

Back in March, a single bitcoin became more expensive than an ounce of gold. It is now more than 3x the value of an ounce. The markets will eventually figure out the right value of course.. maybe gold is under-priced? :)

With such astonishing rises, you would think everything must be hunky dory in the house of bitcoin. I suppose with so much money at stake we shouldn’t be surprised that the answer is actually no.

Bitcoin is not controlled by a single entity but it is all overseen by several key stakeholders. One is the core group, who maintain the code of the system. Another are called miners, which ensure transactions happen on the system and finally there are the exchanges who hold your digital wallet and move money in and out of the system.

All three need to agree to keep everything ticking along nicely and of course they haven’t been agreeing for years but time finally caught up forcing them into some sort of action.

Basically bitcoin became so popular that the mechanisms that keep it going were becoming too slow. Think of a restaurant that didn’t staff up when it became a hip venue requiring you to wait for hours to get a table.

The solutions to “staffing up” though never got broad agreement and after a moment when it looked like a messy agreement which appeased by far the majority was going to be implemented, a small subset of the core group jumped ship creating a whole new type of Bitcoin called Bitcoin cash.

You would think that was a recipe for disaster, who on earth would hold money in something so badly managed?

Well this is the way building open source software is designed - the group that disagreed have spun out separately and if enough people agree with them then they will create their own new community alongside the old one. I’m just not sure I want this hassle with my money. One minute I have X bitcoin, now I have X bitcoin and Y bitcoin cash?

For bitcoin cash, it looks like the slow decline has already started. There is no good reason other than believing in its developers to hold it and its price continues to decline slowly. I wonder how many holders of bitcoin even know they are holding a store of an alternative currency as some exchanges do not even make it visible.

For bitcoin itself though, the timing turned out to be good. The growing hype and increasing uncertainty in the markets has allowed bitcoin to come through it all and removed a group that was holding the overall system back - for better or worse.

Barely rising above the waves of noise about bitcoin is the initial coin offering or ICO. This is a way of creating and selling your own crypto-currency. There have been nearly 50 new coin offerings in the past three weeks alone.

On the one hand the rising number shouldn’t come as a surprise. More than $2bn has been raised through an ICO model to date and with many people seeing the success of bitcoin and a few others, it seems people are willing to take a huge risk.

Filecoin, having raised $52m from high profile venture capitalists Sequoia Capital, Andreessen Horowitz and Union Square Ventures went on to raise $200m in an hour, though due to issues with the website had to be paused.

Both the Financial Conduct Authority (FCA) in the UK and the Securities and Exchange Commission (SEC) in the USA are looking at ICOs as they are not currently regulated. The SEC has said that it would look closely at any ICO that looks like it falls foul of current regulations. 

Tim Draper, another high profile venture capitalist and who has backed bitcoin and other ICOs believes the digital tokens created during the ICO process are commodities and so fall outside the regulations.

For now, it looks like entrepreneurs holding ICOs believe Tim is right as only a few have closed down their ICO.

I think that if ICOs are to really work they need to be at least lightly regulated even though this will reduce the popularity of ICOs. That is likely a good thing as it gives confidence to a wider group of investors.

Investing in an ICO is akin to investing in a startup at the idea phase. The chances of you making any money is very very low.

In other news, I am launching an ICO.. 

Finally and obviously the opinions here should not be taken as investment advice.