“It’s like a cult, I wouldn’t touch it”
EVERYWHERE you go on the Gold Coast, there seems to be someone talking about how much they've made investing in cryptocurrencies - and for every supporter there's a doubter.
What is cryptocurrency?
CRYPTOCURRENCIES like bitcoin, ethereum, ripple and litecoin, are digital assets which
seek to eliminate the need for banks, governments and other regulatory bodies when buying or selling online, allowing people to trade with each other directly.
Instead of a central bank, these peer-to-peer systems use a decentralised network of computers to create a `distributed ledger' which verifies encrypted transactions and confirms them. The process of decryption and validation is called mining. The system is anonymous and unregulated - factors which attracted many investors in the first place.
What's up with it lately?
ALTHOUGH it's been around for almost a decade, bitcoin gained stunning traction in 2017, peaking last month at almost $US20,000, with some investors celebrating increases in value of 1000 per cent.
This week however, they're licking their wounds after the price plunged to half that, skidding below $US10,000 amid fears regulators - particularly in Japan, China and Korea - could launch a crackdown. Other coins have joined the plunge.
"There is a lot of panic in the market. People are selling to try and get the hell out of there," Charles Hayter, founder of Cryptocompare, which owns cryptocurrencies, told AAP.
Analysts at Citi on Wednesday said bitcoin could halve again in value amid the current rout, adding that a possible fall to between the $US5,605 and $US5,673 area "looks very likely to be very speedy".
Robert Bianchi is an Associate Professor at Griffith University's Business School and has research expertise in asset allocation, investment style analysis and alternative investments.
He's watched bitcoin and its newer counterparts develop over the past decade.
To look at what's happened, he says it's necessary to split it into two issues.
The first is the asset itself - a relatively new form of technology which, once refined, may well have wide and important applications in the future.
The second is the vocal and volatile market surrounding the mere idea of the digital assets which, in many cases, don't serve the purpose for which they're intended - and never will.
Dotcom Bubble 2.0?
IT was 1999. J-Lo and Brittney were firmly topping the charts and the world as we knew it was about to be destroyed by the Millenium Bug.
Meanwhile, in the United States, and to a lesser degree in Australia, people were getting very excited by the swift evolution of the internet, which was making itself known as the revolution of a generation.
Speculative investors poured into the stockmarket, buying up anything with .com in its name. Amazon shares sold at 150 times the company's earnings; some stocks rose by 2600 per cent or in a matter of weeks; and companies went public and sold millions of shares without ever making a dollar.
It couldn't last and it didn't, and the crash was wideranging. Tech companies folded by the hundred but so did advertising and communications businesses - people lost their savings, jobs and more.
Some see the explosion of cryptocurrencies as this history repeating and ironically amplified by the mechanics of the internet which so excited the speculators of the new millennium.
Others see it as an inevitable technological and economic shift - a necessary advancement which will improve the world and make them rich along the way.
"People are saying you can't compare this to (previous investment bubbles like) the tulip market, or the housing market in the US. They say because it's a tech investment, it doesn't compare," Prof Bianchi said.
"The classic line on Wall St is that when people say `this time it's different', you should run away."
"The smart people stock up and then it rises again"
PROF Bianchi said many crypto players had never invested in anything before and few can point to any investment metrics to justify their belief they would not lose their money.
"It's definitely a mania, it's a speculative bubble - I wouldn't touch it with a barge pole," he said.
"If you're going to put money into it, you must accept that it will fail and, on that basis, decide what you will put into it."
Ben Kara doesn't fit the green investor description above - he's a finance graduate and former financial adviser, and is now a property agent on the northern Gold Coast.
He's invested "heavily" in cryptocurrencies and agrees with Prof Bianchi - on some points at least.
"Never put in more than what you're willing to lose," he said.
"It is a high-risk investment - high risk, high rewards and potentially a big loss.
"People could put $1000 in now and have $100,000 by the end of the year but not really know how.
"Unsuspecting people get pulled into it as a get-rich-quick scheme, with no idea what the tech is that they're buying."
While he's reluctant to reveal how much he's invested, says he's doubled his cash since he began trading in October, despite this week's crash.
He said he was initially buying and holding coins, mostly ethereum, but had recently gone into day trading and swinging to take advantage of the volatility.
"If you'd spoken to me (on Monday), I would have told you I was at 320 per cent in three months," he said.
"But I'm at 200-250 per cent after the fall."
Mr Kara is registered in 10 different exchanges, but currently favours Bittrex for its lower fees.
He said he had no concerns about accessing his money easily if he wanted to cash out.
"My biggest problem would be the ATO as it's not clear how its considered taxwise - it's still a very grey area."
The ATO's public advice is ambiguous - it says capital gains tax do not apply on cryptocurrency profits, as long as "you are not carrying on a business of bitcoin investment". The advice changes, however, "if your transactions amount to a profitmaking undertaking or plan".
Mr Kara said if he'd had enough of a particular coin, he could cash out of that in five or 10 minutes, but a conversion to cash in his bank account would take a day or two.
He said he chose which coins to invest in based on the underlying companies, their team, purpose and marketing.
"Even today, on the worst day crypto has had in a while, I'm still well and truly in the green, but some people are losing their minds because they've lost 50 per cent.
"The news comes out, people sell, the market goes into free fall - but the smart people stock up and then it rises again."
What is money anyway?
Prof Bianchi said there were two tests of whether something was actually a currency at all - and that cryptos failed both because they don't hold their value and are not yet a widely-accepted form of everyday payment.
"The fact they fluctuate so much every hour indicates that it's not a very good store of value - these currencies are going up and down like a yoyo, so it fails the first test," he said.
"To buy a coffee on the Gold Coast right now with bitcoin, you'd be looking at $3, plus a transaction fee of $25 - so it is not a good medium of exchange for everyday items.
"If you wanted to buy a house, perhaps you'd be willing to pay the $25 fee, but generally people every day are buying hamburgers, apples, milk - so as a medium of exchange it's hopeless.
"Bitcoin has had 10 years to address these issues and it's failed in both areas so I would argue that it's not a currency at all.
"I'd call it a speculative asset that goes up and down in value - it's worth what it's worth because people are willing to pay that price for it.
"I think it is a bubble - I wouldn't touch it with a barge pole.
"We're really starting to see people losing their life savings.
Prof Bianchi said the very unregulated environment desired by crypto investors had proven their undoing when exchanges collapse or systems are breached.
"When you trade on the ASX, those rules and standards allow us to trust the ASX so when you buy shares, you know you're going to get your money.
"With crypto exchanges, some are based in Dubai or the Cayman Islands so when one closes down there's no regulation, so you've done your dough.
"That's the price you pay for a lack of authority, a lack of regulation an a lack of standards.
"If that's the game you want to play, fine, but be prepared to lose every single cent you put into it.
"This is the wild west in terms of speculative activity - if you're not prepared to walk into the casino and put $15,000 on red or black, but you're willing to put it into crypto, you've got to ask yourself `what am I doing here?'."
Local law firm on board
AT least one Gold Coast business believes it is a gamble worth taking, announcing this week that it would accept cryptocurrencies as payment for its services.
In a media statement, Salerno Law partner Matteo Salerno said crypto currencies were "all part of the online world now".
"I liken Crypto-currencies to Uber, or Air BNB, which are concepts based on a system of business credibility and integrity - a natural way of accountability as opposed to government regulation," he said.
"It seems like society is now accepting these systems and they are becoming more and more common as an efficient way of regulation."
The Varsity Lakes business has styled itself as a crypto currency and fintech law firm in anticipation of the widespread application and uptake of cryptocurrency.
Mr Salerno said despite the perceived risk, "solid" crypto currencies like bitcoin were more secure than country-controlled currencies because control was decentralised and not subject to political fluctuations.
His client Carlo Devito is already on board.
"Crypto is natural progression, not really any different to paper money replacing gold," he said.
What's it really worth?
"FROM an investment perspective, how do you value something? By the amount of cashflow it provides you," Prof Bianchi said.
"When an asset doesn't have cashflow - like gold or corn - the value is decided by the cost of production.
"These coins use somewhere between $US20-$50 worth of electricity to produce, that's their value - so why is it worth $9000? It's because that's what people are willing to pay for it."
"It's natural to want to get rich quick"
In some cases, the beliefs have morphed into a quasi-religion, with online forums flooded with heated debate and defence from those who believe and those who don't.
"It taps into the human emotion of becoming wealthy - everyone wants to become wealthy and everyone wants to become wealthy in the shortest time possible.
"If you find something that does that, you will be naturally attracted to that.
"That's why people are talking about it, it's why people are getting involved - it's a lot quicker and easier than a share portfolio.
"People don't like hearing anything negative about it and that's because they're emotional about it."
Prof Bianchi said some devotees of cryptocurrencies treated it "like a cult or religion" and became hostile and attacked those who disagreed. He expected backlash for speaking publicly about it, but hoped his advice could help people become better informed.
"They need to make comments in a professional way."
So what to do?
According to Prof Bianchi, whatever you're investing in, the truism "don't put all your eggs in one basket" remains.
"Some people are saying they've diversified their portfolio because they've invested in different cryptos - that is not portfolio diversification and it is not a good idea," he said.
"There are a lot of amateurs in this marketplace and some of them have made good money.
"They might think it's fantastic and that it will go on forever but, at some stage, the laws of financial gravity will take effect, you will see the prices drop and people will lose their life savings.
"All bubbles end with a bust - we don't know if it will be tonight or in 10 years.
"Even if you think I'm wrong, only put in what you're prepared to lose."