Business

The cryptocurrency enigma

Yanique Leiba-Ebanks

Sunday, December 31, 2017

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You would not be living on this planet if you haven't heard about bitcoin. This is a digital currency used online as a method of payment which has been making headlines for quite a while now.

While bitcoin may be the best known cryptocurrency, there are believed to be in excess of 1,300 other cryptocurrencies available online. Of course, they are not as widely known or recognised as bitcoin. But for the average investor, it contains an element of mystery.

It was Mahatma Gandhi who said, “The world has enough for everyone's need, but not enough for everyone's greed.”

The bitcoin trading has been off the scale, going from 1 US cent in 2009 to US$14,761.03 ( as at December 29th, 2017). The prices have undergone massive fluctuations, resulting in very large swings.

Of course, this has caused investor trepidation, as headlines such as “Bitcoin price falls by more than 3,000” are very common. But many investors are eager to find out how they can make money from trading it. This is the most typical question posed to me by people wondering how to profit from this digital asset.

However, it is very important to understand what you are investing in. No doubt money can be made, but don't forget that money is also being lost.

Therefore, do not get distracted by the headlines. Do your research, as I could not possibly get through everything about bitcoin in one article.

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Bitcoin is tied to addresses. The owners of bitcoin addresses are not identified, but all transactions on the blockchain are public. This is why there are fears that it is most convenient for money laundering and other illegal activities.

Bitcoin utilises a decentralised network, which completely eliminates the use of banks or clearing houses.

Bitcoin is also much cheaper for merchants, as companies accepting bitcoin often pay fees from zero to less than two per cent, instead of the two to three per cent typically imposed by credit card companies.

There are many cases where banks have blocked transactions and even shut down bank accounts of people using bitcoin. The reaction has been extreme in some cases.

Clearly, it would not be an advantage for people to bypass banks and deprive them of their fees. This has led to some countries banning the use of bitcoin.

Most recently, South Korea moved to ban new trading cryptocurrency accounts.

In addition, straight from the headlines, in December we read that “The UK and other EU governments are planning a crackdown on bitcoin amid growing concerns that the digital currency is being used for money laundering and tax evasion.”

Latin America is quietly using their own digital currencies to effect payments. In 2015, adoption of the digital currency broke records in Latin America.

One payment processor reported a 510 per cent gain in merchant transactions in mid-2015, with more growth taking place toward the end of 2015.

Countries like Brazil and Mexico, and even more popularly Argentina, have been increasing the adoption of digital currencies.

The benefits would be more marked in countries like Venezuela, where inflation is ridiculous and people are seeking better stores of value for their money.

The use of digital currencies is particularly helpful for countries that wish to or need to bypass the US banking system.

There are many critics of these digital currencies, most notably Warren Buffet, Jaime Dimon and other influential figures who feel that it is a bubble. If you google bitcoin, you will find many references to it being a possible bubble.

However, it is very important to distinguish fact from fiction.

While the trading and the inflated prices certainly appear bubble-like, the actual movement towards using cryptocurrencies, while still in the nascent stages, is inevitable.

Never mind that so many countries are banning its use, cryptocurrencies (not necessarily bitcoin) are most likely a glimpse of the future where we will wonder what it was like before digital currencies came to be!

Happy New Year to one and all!

Yanique Leiba-Ebanks, CFA, FRM is the AVP, Pensions & Portfolio Investments at Sterling Asset Management. Sterling provides financial advice and instruments in US dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm

Feedback: If you wish to have Sterling address your investment questions in upcoming articles, e-mail us at: info@sterlingasset.net.jm

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