Tag: Bitcoin

With a new futures market, Bitcoin is going mainstream

From The Conversation.

The Chicago Mercantile Exchange will soon begin trading Bitcoin derivatives (futures contracts), signalling the cryptocurrency is now a mainstream asset class. Bitcoin has had limited use in the mainstream economy in part because the volatility of its price. The value of the currency might go up or down significantly between the time a deal is struck and delivery.

The introduction of Bitcoin futures contracts will allow investors to manage this risk, and make it safer to hold and trade in Bitcoin. This will make the cryptocurrency more accessible to individuals and businesses, and encourage developers to build more products and services on top of the technology.

Futures and other derivatives are contracts between two parties to fix the price of an underlying asset (currencies, shares, commodities etc.) over a period of time or for a future transaction. The buyer of these contracts commits to purchase the underlying asset at a set price and at a certain date, and the seller commits to sell.

There are two main uses for these contracts. First, to reduce price risk by freezing future prices. The second use is speculation. For instance, a speculator would commit to buy a commodity/share/currency at a certain time, hoping that the market price at the time of delivery is higher than the price set in the contract.

Airlines commonly buy long term oil future contracts to hedge against the potential increase in fuel price, or to take advantage of what they believe to be a low price.

Similarly, future contracts will enable traders to lock in the value of Bitcoin for a defined period of time. This effectively removes the risk associated with fluctuation in value. In addition, since these contracts will be traded on the Chicago Mercantile Exchange, the exchange effectively guarantees that both buyers and sellers will abide by the agreement.

In 2010, one Bitcoin was worth less than one hundredth of an Australian cent. As of Monday the 6th of November, the price is near A$10,000.

The market capitalisation of Bitcoin is now well over A$160 billion, which is larger than the GDP of most small countries. As the price of Bitcoin has grown, so too have transaction volumes, showing an increasing use of the cryptocurrency.

As a result, Bitcoin is starting to look like a credible investment in any respectable financial portfolio.

Although, this is not the first futures contract for cryptocurrency. Futures contracts already exist for both Ethereum and Monero.

But the Chicago Mercantile Exchange’s futures contract is significant as the CME group manages not only the Chicago Mercantile Exchange, but also the Chicago Board of Trade and New York Mercantile Exchange and Commodity Exchange. Combined, these exchanges represent the largest derivative market in the world.

The decision to issue futures contracts on Bitcoin rather than another derivative is also significant. So far Bitcoin derivatives have mainly been swap agreements. A swap is a commonly used financial tool where two parties agree to swap financial instruments, such as interest or currencies. The key point is that the two parties, the buyer and seller, make a deal directly with each other.

As a swap agreement is not done through an exchange, the risk of a party not delivering on the agreement can be quite high. If one party decides to opt out, the agreement has to be terminated. This leaves the other party exposed.

Futures contracts eliminate this “counterparty” risk, as the exchange clears the transaction and guarantees delivery. And unlike swaps, futures contracts are standardised (in term of size, how much is going to be traded, and maturity date etc.). This means futures contracts can be traded at any time until maturity, making them very liquid and accessible.

The lack of a futures market in Bitcoin was a significant barrier to it becoming a mainstream asset class. You can buy and sell forward contracts on the Fijian dollar, for instance, meaning that institutional funds anywhere in the world can hold Fijian dollars in their portfolio and manage the risks of that asset.

But they cannot yet do that with Bitcoin. Until now, there has been no way to offload the risks associated with fluctuating prices. An investor could always hold the cryptocurrency, but they would do so fully exposed to price volatility.

The introduction of Bitcoin futures contracts will allow traders to hedge against this volatility and eliminate the currency risk. This will make Bitcoin more attractive for both individuals and corporations.

As crypto-assets become a mainstream investment class, other products emerge around them (such as exchange traded funds). It will also have a similar effect to that of mainstreaming share ownership – enabling a much larger fraction of the population to diversify their asset portfolios and income streams.

This will unlock some of the value currently being built on cryptocurrencies and blockchain technology – new products and services – that are currently only accessible to a relatively small number of the early enthusiasts and those helping build the technology.

The increased flow of investment funds into Bitcoin will likely push prices up further, but it will also incentivise more work to build products and services on the technology. Bitcoin just went mainstream.

Authors: Jason Potts, Professor of Economics, RMIT University; Marie-Anne Cam, Senior Lecturer in Finance, RMIT University

Why the RBA would want to create a digital Australian dollar

From The Conversation.

The Reserve Bank of Australia could join the likes of Estonia and Lebanon in creating a cryptocurrency based on the Australian dollar, to reap the benefits of technology like the blockchain but with more stability than other well known currencies like Bitcoin.

The RBA has already been approached by interested startups to create this new digital currency, known as the “DAD” or Digital Australian Dollar.

In contrast with other cryptocurrencies a state-backed digital currency has the advantage of being backed by the government as in fiat currency, but at the same time has the technological advantages shared by other cryptocurrencies.

A digital Australian dollar could remove the role of middlemen and create a cheaper electronic currency system, while at the same time enabling the government to fully regulate the system.

It would also allow transactions to settle faster (several minutes to an hour) than the traditional banking system (several hours to several days), especially in a situation where an international payment is involved.

The difference between a digital Australian dollar and Bitcoin

We already use the Australian dollar in a digital form, for example paying via your smartphone. But banks are essential in this system, moving money on our behalf.

When using a cryptocurrency, you interact with a system like the blockchain, an online ledger that records transactions, directly. Bitcoin, Litecoin, and Ethereum are examples of cryptocurrency that use the blockchain in this way. These currencies are created by the community that use them and are accepted and trusted within the community.

However, since the community runs the system, the price of the cryptocurrency solely depends on the market mechanism. When the demand increases, the price increases, but when the demand decreases, the price also decreases. While it might create an opportunity for speculators to gain profit from trading, it also creates risk for the cryptocurrency holders.

In comparison to cryptocurrency, the Digital Australian Dollar might be well managed that the price volatility could be reduced significantly. The government holds the capability of increasing or decreasing the money supply in the system. This power can be used to stabilise the market supply of the new digital currency.

The blockchain technology also reduces the fee for every payment made. This is made possible by removing the role of banks or other intermediary parties charging fees for their services. However, a small transaction fee still needs to be introduced to protect the system from being flooded by adversaries with insignificant transactions.

The characteristics of cryptocurrency itself might limit its usage to daily transactions. As the pioneer of cryptocurrency, Bitcoin was created to become a payment system, but the users gain incentive by simply saving their cryptocurrency and not using them to purchase goods or services.

They believe the future price of the cryptocurrency is higher than the current price and thus does not make a good medium of exchange nor a store of value. There is no guarantee that the cryptocurrency will hold any value in the future. Since there is nothing to back up the value, users will lose their wealth when the community no longer acknowledges the value of cryptocurrency.

Cryptocurrency might also jeopardise the local government’s effort of implementing regulations to minimise illegal activities. Perpetrators create cryptocurrency transactions easily without being detected by the government’s financial monitoring system.

The privacy features of cryptocurrency also make it hard for law enforcement agencies to determine the actors behind illegal activities. Although most governments in the world have enforced the coin exchange services to identify their users, the operation of the cryptocurrency is beyond their reach.

There are other state-backed digital currencies

The idea of creating a national cryptocurrency is not new. Estonia has explored ways to create Estcoin, following an initiative on the blockchain-based residency registration called e-Residency. Lebanon’s central bank has also started to examine the possibility of creating one.

Despite the efforts of those central banks, several questions must first be addressed before launching the real product to the public. The user’s financial data could be exposed since the blockchain will make all transactions created in the system transparent.

Consumer protection is also a concern since all transactions made in the blockchain are permanent without the possibility of being reversed. Without firm solutions to those problems, the Digital Australian Dollar will not satisfy all requirements to be the next groundbreaking innovation for the country’s financial system.

Author: Dimaz Wijaya, PhD Student, Monash University

Is Bitcoin Money?

From Daily Reckoning

At various times in history, feathers have been money. Shells have been money. Dollars and euros are money. Gold and silver are certainly money. Bitcoin and other cryptocurrencies can also be money.

People say some forms of money, such as Bitcoin or U.S. dollars, are not backed by anything.

But that’s not true.

They are backed by one thing: confidence.

If you and I have confidence that something is money and we agree that it’s money, then it’s money. I can call something money, but if nobody else in the world wants it, then it’s not money. The same applies to gold, dollars and cryptocurrencies.

Governments have an edge here, because they make you pay taxes in their money. Put another way, governments essentially create an artificial use case for their own forms of paper money by threatening people with punishment if they do not pay taxes denominated in the government’s own fiat currency.

And the dollar has a monopoly as legal tender for the payment of U.S. taxes. According to John Maynard Keynes and many other economists, it is that ability of state power to coerce tax payments in a specified currency that gives a currency its intrinsic value. This theory of money boils down to saying we value dollars only because we must use them to pay our taxes — otherwise, we go to jail.

So-called cryptocurrencies such as Bitcoin have two main features in common. The first is that they are not issued or regulated by any central bank or single regulatory authority. They are created in accordance with certain computer algorithms and are issued and transferred through a distributed processing network using open source code.

Any particular computer server hosting a cryptocurrency ledger or register could be destroyed, but the existence of the currency would continue to reside on other servers all over the world and could quickly be replicated. It is impossible to destroy a cryptocurrency by attacking any single node or group of nodes.

The second feature in common is encryption, which gives rise to the “crypto” part of the name. It is possible to observe transactions taking place in the so-called block chain, which is a master register of all currency units and transactions.

But the identity of the transacting parties is hidden behind what is believed to be an unbreakable code. Only the transacting parties have the keys needed to decode the information in the block chain in such a way as to obtain use and possession of the currency.

Murdered Soviet Economist Exposes Next Crash

This does not mean that cryptocurrencies are fail-safe. But on the whole, the system works reasonably well and is growing rapidly for both legitimate and illegitimate transactions.

It’s worth pointing out that the U.S. dollar is also a digital cryptocurrency for all intents and purposes. It’s just that dollars are issued by a central bank, the Federal Reserve, while Bitcoin is issued privately. While we may keep a few paper dollars in our wallets from time to time, the vast majority of dollar-denominated transactions, whether in currency or securities form, are conducted digitally.

We pay bills online, pay for purchases via credit card and receive direct deposits to our bank accounts all digitally. These transactions are all encrypted using the same coding techniques as Bitcoin.

The difference is that ownership of our digital dollars is known to certain trusted counterparties such as our banks, brokers and credit card companies, whereas ownership of Bitcoin is known only to the user and is hidden behind the block chain code.

Bitcoin and other cryptocurrencies present certain challenges to the existing system. One problem is that the value of a bitcoin is not constant in terms of U.S. dollars. In fact, that value has been quite volatile, fluctuating between $100 and its present high above $3,400 over the past few years. It’s currently around $3,467.

It’s true that dollars fluctuate in value relative to other currencies such as the euro. But those changes are typically measured in fractions of pennies, not jumps of $100 per day.

One potential solution to the Bitcoin volatility problem I find interesting is to link Bitcoin to gold at a fixed rate. This would require consensus in the Bitcoin community and a sponsor willing to make a market in physical gold at the agreed value in Bitcoin. This kind of gold-backed Bitcoin might even give the dollar a run for its money as a reserve currency, especially if it supported by gold powers such as Russia and China.

Both are looking for ways out of the current system of dollar hegemony, which will only take on added urgency now that the U.S. has imposed harsh sanctions against Russia and is signaling a trade war against China.

Bitcoin’s ‘hard fork’ becomes a reality

From Fintech Business.

Bitcoin cash has entered the scene as bitcoin finally split into two this week following years of community infighting about the future of the bitcoin blockchain.

However, Melbourne-based Blockchain Centre chief executive Martin Davidson said bitcoin cash was just one among many other ‘alt coins’, or bitcoin alternatives, available.

“Bitcoin cash can be thought of as another alt coin just like Litecoin and hundreds of other crypto currencies which have been created by a group of developers who want bitcoin to have a larger block size, rather than follow the road map set out by the Bitcoin Core development team,” Mr Davidson said.

The new bitcoin cash blockchain contains all the information from the previous blockchain but has eight times more transactional capacity (8 megabyte) than the original (1 megabyte), making transaction speeds on the new virtual currency much faster.

The fork was triggered due to a split in the bitcoin community over how to handle the increasing volume of traffic on the 1 megabyte blocks as bitcoin grew more popular.

Though bitcoin cash is only a few days old, it’s possible it will have its own community of users, much like ethereum classic and ethereum, according to Mr Davidson.

“It’s quite possible bitcoin cash will have its own network infrastructure, application layer services and new user base who like the value bitcoin cash brings over the existing, longest standing and most valuable crypto currency, the original bitcoin,” he said.

Blockchain Australia board member Lucas Cullen says most of the bitcoin community is resistant to change, and will likely gravitate towards the coin with the better software.

“There have been many attempts to convince the community that their version [of bitcoin] is better, but most of the time it’s about a majority — and I think most of the bitcoin community are pretty stubborn and pretty resistant to change,” Mr Cullen said.

“We’re pretty risk adverse.”

Announced in a tweet by CoinDesk, the first bitcoin cash block was mined at 2:14am on 2 August (EST). Since then, 24 more blocks have been mined (at the date of writing).

The value of bitcoin dropped from US$2,854 to $2,729 on the day of the fork, and bitcoin cash already has a market value of US$7 billion, according to Mr Davidson.

“And its great news from a financial perspective for all bitcoin holders as everyone who held their own bitcoins before the chain split or fork, now have an equal amount of bitcoin cash coins also,” he said.

Bitcoin’s Bumpy Ride

Having reach a high against the US$ of more than $2,800, Bitcoin has now fallen substantially.

The virtual currency reacted to the news that India may be inclined to recognise Bitcoin as a currency, but then fell significantly.  There are reasons why bitcoin could thrive in a country like India.

This article from Business Insider explains:

At 1.32 billion, India’s population may have already taken over China’s – making it the most populous country in the world. According to a study by PricewaterhouseCoopers’, at least a whopping 233 million Indians still don’t have bank accounts.

Although due to demonetization (a government’s move that got rid of 86% currency notes in circulation) and under Prime Minister’s Jan-dhan Yojna (an initiative to open bank accounts for every Indian household), a lot of people have managed to get their bank accounts, but that number is far from 200 million mark.

Ironically, India has one of the largest remittance markets in the world with a total value of close to $70 billion. On every transaction, an average user pays up to 15% in bank charges and conversion fees.

Bitcoin provides a solution to India’s underlying problems. The digital currency can be used to move money inexpensively across borders within a matter of minutes without ever having a bank account. It’s important to note that lately bitcoin adoption is taking over its network capacity, leading to delay in transactions and very high fees (more on this later).

How does it work?

Every transaction on the bitcoin network is recorded on a public ledger called blockchain . Each blockchain has three parts; its identifying address (of approximately 34 characters), the history of who has bought and sold it (the ledger) and the private key header log – where a sophisticated digital signature is captured to confirm every transaction for that particular Bitcoin file.

All the trades that happen on the bitcoin network are publicly disclosed, with each participant’s digital signature attached to the Bitcoin blockchain as a confirmation. These trades can be found at blockchain.info .

What this means is that bitcoin transactions are not completely anonymous. People can see history of your bitcoin wallet, which is great for transparency and security. It also helps deter people from using bitcoins for illegal purposes.

With each new ledger update, some new bitcoins are minted. The number of bitcoins created in each update are halved every 4 years. This will go on till 2140 when this number will round down to zero. At that time no more bitcoins will be added into circulation and the total number of bitcoins will have reached a maximum of 21 million.

The block size controversy

The debate on whether or not to increase the block size has been going on for a few years now. It is clear that the bitcoin network is a bit clogged up at this point and something definitely needs to be done to scale the network in order reduce the transaction fees and time.

At present bitcoin network can achieve 7 transactions per second. To put this in context, Visa says its payment system processes 2,000 transactions per second on average and can handle up to 56,000 transactions per second if needed.

Every transaction on the blockchain is verified by miners who use computing power to solve increasingly complex mathematical equations, which comes in “blocks” and are mined about every 10 minutes. Since these blocks are capped at 1MB, they can record just seven transactions per second, at most.

The average time it takes for a bitcoin transaction to be verified is around 50 minutes, but some transactions can even take days. If you add a small fee to your transaction, it bumps that transaction up in the queue, meaning that those who didn’t pay such a fee may have to wait more.

This has led bitcoin supporters to split into two groups; Bitcoin core (aka the developers) and Bitcoin Unlimited (aka the miners). They both have different scaling proposals, BIP 148 and Segwit2x respectively.

On August 1, 2017 the fate of bitcoin will be decided. Bitcoin core is going to go ahead with its user-activated soft fork (UASF) that would seek to push SegWit (Segregated Witness) live without explicitly asking miners for their support in order to make the blocks more efficient without increasing their size.

Meanwhile, SegWit2x, plans to pair SegWit with a 2 MB block-size increase, boosting transaction capacity further by tweaking the bitcoin’s underlying rules.

If everything goes according to plan, users will be able to start running SegWit2x on 21st July. Similarly, BIP 148 will be triggered on 1st August. There are fears that this collision could possibly split bitcoin into two with entirely different networks.

In a nutshell, this is how it will go: if the users’ fork has below 50% of hashing power, then there will be two branches; a user’s fork and a miner’s fork. If at some point users’ fork gains more hashing power and has longer chain than the miners’ fork, this is where UASF as a soft fork comes into play. The miners’ fork is then completely wiped out – replacing all the blocks on the miners’ fork with users’ fork.

If majority of miners go with Bitcoin Unlimited and decide to mine blocks bigger than one megabyte, while some users stick to the current bitcoin protocol, the network and blockchain can split in two – resulting in two different types of bitcoin tokens: “BTC”, which follows the current protocol and “BTU”, which follows the new protocol.

Pro tip : Whichever way this goes, if you hold bitcoin, make sure you control your private keys and avoid any transactions shortly after the split.

India’s take on bitcoin

On November 8, prime minister of India announced demonetization of Rs. 500 and Rs. 1000 rupee notes (86% of country’s currency notes in circulation). This move was not only to curb black money problems in the country, but also to push people to go digital and use online wallets instead of cash.

After demonetization India saw a rise in bitcoin demand like never before. For the first time premium on Indian exchanges crossed $300, leading to many arbitrage opportunities.

Hundreds of articles started pouring in claiming that the bitcoin price rally was fueled by demonetization, but Sandeep Goenka, founder of Zebpay, India’s largest bitcoin exchange, had later argued that there was no such link. He said, “This is because India has a negligible share in the bitcoin industry. For the international bitcoin community, demonetisation was yawn , a non-event”.

According to him the price rally that India saw was because of global bitcoin price touching an all time high, but people in India mistakenly related that to demonetization.

What about the premiums though? Why did they skyrocket?

Sandeep said, “Yes, in India the prices were at a premium above international prices but this is common. It happens all the time when the US$ price increases due to low liquidity in Indian markets. The premium on prices had increased sharply even in mid-June, which was the previous major bitcoin price rally.”

The Indian government is in the midst of deciding whether or not to regulate bitcoin. In the past, there have been multiple warning from the government and central bank asking people to stay cautious of virtual currencies, emphasizing they are not regulated by the RBI (Reserve Bank of India).

With the explosive growth that bitcoin has seen since the beginning of 2017, government seems to be reconsidering their stance on bitcoin. Earlier this year, India’s Ministry of Finance (FinMin) established an interdisciplinary committee to study the legal framework surrounding virtual currencies.

Recently FinMin also sought public opinion on virtual currencies after stating that ‘the circulation of Virtual Currencies which are also known as Digital/CryptoCurrencies has been a cause of concern’.

Local reports from India hint at government is already in the process of preparing norms for the regulation of virtual currencies. All signs point toward the government legalizing and taxing bitcoin and other virtual currencies. A ban on cryptocurrencies like bitcoin is highly unlikely and would be counter-productive to government’s own “go cashless” agenda.

While on one hand government is looking to regulate bitcoin, on the other it is actively keeping a close eye on businesses dealing with bitcoin and cracking down on illegal bitcoin activities .

Conclusion

In India bitcoin is far from mainstream. The daily volumes of local bitcoin exchanges are negligible as compared to exchanges in China and the US.

That being said, after demonetization, interest in bitcoin has definitely gone up. More people want to know about bitcoin. Young generation in particular is getting attracted towards the cryptocurrency.

Bitcoin has the potential to thrive in developing countries, but not if transaction fees are higher than the living wages. The whole point of having bitcoin in the first place is to transfer money quickly from one address to another with bare minimum fees.

If bitcoin manages to scale, keeping its core principles intact, there is nothing that can stop it from prospering in the developing world and beyond.

 

Bitcoin faces another test as users battle over how its trading platform should be used

From Business Insider.

The price of Bitcoin remains on a rollercoaster as investors and developers continue to battle over its future.

The cryptocurrency crept above $US3,000 a little more than a week ago, before crashing to almost $US2,000. Since the start of this week it’s been on a steady climb back towards $US3,000. This chart shows the recent fluctuations:

But a report in the Wall Street Journal (WSJ) suggests that tensions still remain in Bitcoin community. While its price climbs, the eventual path that Bitcoin follows is still subject to a significant degree of uncertainty.

The rift centres around what Bitcoin is for and how it should be used. In one camp, users want Bitcoin to remain as a finite commodity similar to gold.

Opponents want the speed and size of Bitcoin transactions to be rapidly sped up. In effect, they want Bitcoin to function to a similar fashion to a highly liquid currency like the US dollar.

The cryptocurrency was established with a limited supply of 21 million Bitcoins, of which around 14 million have been mined. That shortage of supply could go some way to explaining the dramatic increase in prices this year.

The blockchain network that Bitcoin trades on provides a historical record of all Bitcoin transactions. All users can see the blockchain activity, but the system provides a high degree of protection for people’s individual identity.

The Wall Street Journal provided a brief summary of how the activity on the blockchain currently works. Bitcoin transactions are packaged into blocks by companies that specialise in processing the trades.

However, the size of those transactions is currently capped. That means a processing speed of approximately just seven transactions per second, compared to a large network like Visa which can process hundreds of thousands in the same time frame.

With Bitcoin’s popularity exploding, the reduced capacity has led to delays and higher transaction fees.

Not surprisingly, some market participants want to increase the volume of transactions. But they’re facing resistance from those who want to maintain the status quo.

That resistance stems partly from a desire to protect their investment, but they also want to maintain the original Bitcoin platform without the intrusion of big business.

Previous attempts at compromise have failed, and the possibility of a split in the currency is back on the table.

The dispute has led a growing number of users to sell out of Bitcoin and purchase Ethereum instead. Prices for Ethereum (the world’s second biggest cryptocurrency) have also skyrocketed this year.

Ethereum, which experienced a flash crash overnight, was worth $US190 at the end of May and now trades at around $US300, after starting the year at a price of $US8.15.

According to the WSJ, all parties are open to boosting transaction capacity for Bitcoin but there are strong disagreements about how to actually go about it.

Businesses would prefer to raise the transaction limit for all Bitcoins, whereas their opponents (led by developers) want to set up a secondary network with faster processing speeds.

The net effect is that the outlook for Bitcoin remains increasingly cloudy as the market continues to develop and mature.

Price hikes in Ether and Bitcoin aren’t the signs of a bubble

From The Conversation.

When there is a rapid growth in any of the crypto-currencies and assets such as Bitcoin, Ether, Zcash and others, many will call it out as a bubble. Indeed, on a relatively short time scale it clearly looks like a bubble.

The entire crypto-currency market capitalisation currently stands at around US$100 billion; it was US$60 billion one month ago. But Bitcoin was worth 1/100 of a US cent in June of 2009, 7 cents in June 2010, and US$7 in June of 2012.

Recently all eyes were on Ether. Over a 90 day period, Ether appreciated twice as quickly as Bitcoin did in late 2013, when Bitcoin crashed to around 35% of it’s highest value. Aside from the 2013 crash, Bitcoin has experienced smaller crashes many times since, but is now worth double its 2013 high.

In the longer term, these are fluctuations around a strong growth trend. Crashes will cause some to abandon the field. But signals of longer term growth in these crypto-currencies and assets point to a possible emergence of a new type of market, through the building of a new economic infrastructure.

Ether is the token of the Ethereumblockchain, a platform that runs “smart contracts” through a distributed online ledger that records transactions. It’s second only to the crypto-currency Bitcoin in price. Some believe it will one day overtake Bitcoin (a process dubbed “The Flippening”).

Price hikes not the sign of a bubble

Fundamental aspects of the technology that underpins crypto-currencies and assets are causing people to re-imagine, and then enact, new ways of creating and exchanging value online.

The key difference between Bitcoin and Ethereum is that you can use Bitcoin for payments, but you can use Ether to automate any number of processes using smart contracts.

While many use cases for Ethereum are still at the proof-of-concept stage, it is now attracting the attention of major banks, businesses and governments, all interested in the potential of the technology to provide greater efficiency and transparency in transactions. That normalisation has collapsed the implicit risk premium attached to this technology.

Venture capitalist Albert Wenger describes the current activity in crypto-currencies and assets as “fat protocol investing”. To explain what this is, take the example of the underlying internet and web protocols (TCPI/IP and HTTP), used to build and run websites. These are not able to store value – therefore they are “thin protocols” in Wenger’s terminology. So instead, people invest in companies that make software (applications) and hardware that rely on these protocols.

Companies such as Google and Facebook made a fortune by collecting and storing data generated by users through their online interactions. Meanwhile, users, and the developers who created internet and web protocol, received nothing in return. Blockchain is a “fat protocol” because it can be monetised, including incentives for developers but also for users. For example, the creator of JavaScript and co-founder of Mozilla Brendan Eich, recently released an Ethereum-based web browser through which users can be paid for the attention they give to advertisements.

What is making crypto-assets and currencies appear bubbly is the way in which many of these new platforms and applications have raised money through what are called initial coin offerings. An initial coin offering (a word play on ‘initial public offering’) is a mechanism by which developers sell the tokens associated with their platform to the public. Depending on the structure of the offering, buyers can usually then trade the tokens, creating secondary markets. As the founder of Ethereum, Vitalik Buterin, has noted, no-one has figured out the right model for these offerings.

This could be due to the immaturity of the Ethereum platform and ecosystem (which started development in 2013 and went live only in 2015). What we’re observing here is a new economic infrastructure being built and coming online. In tweets on Tuesday, Buterin distanced himself from initial coin offerings, stating he would no longer agree to be an advisor.

So while the current speculation in crypto-assets should make us pause, this is not speculative like tulips, or gold mining stocks. It is speculative like building a new city, in that infrastructure needs to be developed first before you get to see who moves there.

A further point to note is that investment bubbles are actually useful and important mechanisms for building new technologies because of the way they concentrate speculative resources on a new technology to facilitate exploration.

There is an enormous effort proceeding to building new crypto businesses and infrastructure on the Ethereum platform. If this platform does indeed begin to carry large parts of the global economy as predicted by Deloitte, a business consultancy, then it’s still massively undervalued.

These comments should not be construed as offering personal financial advice.

Authors: Jason Potts, Professor of Economics, RMIT University; Ellie Rennie, Principal Research Fellow, RMIT University

Bitcoin Reaches For The Stars

The digital currency Bitcoin has now breached the US$2,100 mark thanks to continuing strong demand from Japan and China. Japan accounted for nearly 55 percent of trade volumes recently, where Bitcoin is now recognised as legal currency.

But to highlight the volatility, after hitting a fresh record-high of US$2,230 in US trade, it tumbled over 10% to as low as US$2,001 before rebounding yet again. Now it is up again at US$2,143 having added over 5% in just the past couple of hours.

The longer term trend is clear.

Bitcoin had already lifted to USD$1,900 last week when reports of possible political scandal in the U.S. and Brazil drove traders to safe commodities so Gold futures rose more than 2 percent. But some are now suggesting that Bitcoin may soon be seen as a competitor for gold in a flight to safety.

In addition, Bitcoin traded on the Hong Kong-based Bitfinex will soon be easily converted to U.S. dollars and this has the potential to narrow spreads and lift volumes further.

Some are also suggesting that the US Securities & Exchange Commission (SEC) may reverse its earlier decision to block the creation of a Bitcoin Exchange Traded Fund (ETF) is also impacting the market.

Remarkable to think that this highly volatile digital currency may be seen in the same category as gold!

Bitcoin Now Legal Tender In Japan

From Yahoo Finance.

Bitcoin has traded up to $1,147 a coin after Japan announced on Friday that bitcoin would be accepted as a legal payment method beginning on April 1, 2017.

According to Coindesk, Japan legislature passed a law, following months of debate, that brought bitcoin exchanges under anti-money laundering/know-your-customer rules, while also categorizing bitcoin as a kind of prepaid payment instrument.

It’s a debate that began in the wake of the collapse of Mt Gox, the now-defunct bitcoin exchange that shuttered after months of growing complications and, in the end, revelations of insolvency and alleged fraud.

According to Japan’s Financial Services Agency, that law goes into effect on 1st April, putting in place capital requirements for exchanges as well as cybersecurity and operational stipulations. In addition, those exchanges will also be required to conduct employee training programs and submit to annual audits.

Yet there may be more work to come in this area.

For example, Nomura Research Institute’s Yasutake Okano indicated in a May 2016 report that other Japanese laws may need to change to account for the tech, including the Banking Act and Financial Instruments and Exchange Act.

Reports indicate that other groups in Japan are moving to plug some of those gaps as well.

According to a report from Nikkei, the Accounting Standards Board of Japan decided earlier this week to begin developing standards for digital currencies like bitcoin. Its work mirrors other efforts being undertaken elsewhere, including Australia, which began pushing for such standards late last year.

It’s the first bit of good news for bitcoin in quite some time. Recent chatter in the market has centered around developers threatening a “hard fork” that would split the currency in two.

Additionally, the US Securities and Exchange Commission rejected two bitcoin ETFs in March, saying that it did not find the proposals “to be consistent with Section 6(b)(5) of the Exchange Act, which requires, among other things, that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices and to protect investors and the public interest.”

Bitcoin has gained more than 19% so far in 2017. It has been the top-performing currency every year since 2010, except for 2014.