WE have been told for the past year that cryptocurrencies were ushering in a revolution of the financial markets and with money as we have always known it. Apparently, as with all revolutions, there are winners and losers, as well as collateral damage of innocents.
The foremost of these currencies—Bitcoin—reached a trading day high of $19,788 as priced on the largest trading exchange Bitfinex on December 17, 2017. Since then the trading price has been around $13,000 to $15,000 per Bitcoin.
A few days ago the price crashed below $10,000, falling over 35 percent in one day. Others of the cryptocurrencies were down as much as 50 percent.
The attraction of investing in these “cryptos” has been promoted as being digital as opposed to physical, a decentralized currency free from national currency-exchange disadvantages, and that the transactions would be done peer-to-peer without government regulation and interference.
Lurking behind the concept and trading of Bitcoin and the others was the attraction that profits would be tax-free and money could be secretly moved across borders. However, for all these features and “benefits,” there is never a free lunch.
The digital world through the Internet has been an incredible technology breakthrough and an equally amazing social advance. But it has also come with a price. We have seen major incidents of both identity and financial theft that has affected ordinary people. The blockchain technology behind the cryptos was alleged to be safe and impenetrable. But hundreds of millions of dollars have been stolen in the last few years from trusting and unsuspecting investors.
The decentralization that was a major feature has also been proven to be false. While there are countless web sites to transact the buying and selling of Bitcoin, it has come to be concentrated to a few exchanges and is not peer-to-peer but through a “middleman.” The transaction costs have become very high, and the spread between the buying and selling price would make a normal money changer both envious and blush with embarrassment. One such exchange in the Philippines has been quoting a 20-percent difference between the buy and sell price.
It is true that these digital currencies are virtually free from government interference and regulation. As a result, there is no control on who does what and little recourse if things go bad. One recent coin offering resulted in $400 million of investor losses when the creators failed to deliver on their promises.
This past week a major crypto-cash exchange, BitConnect, simply shut down. The Internet is filled with gruesome stories of people losing life savings and more when the price went to nothing and they could not sell on the way down. And there is not any government agency that is going to step in.
The Bangko Sentral ng Pilipinas has been warning that there is high risk in the cryptocurrency market, but many people have ignored those warnings to their regret. While there undoubtedly is a future for digital currencies, that future will not come easily. For the time being, it is “buyer beware.” The government will not protect you. And, as with all speculative investments, never put in more than you can afford to lose.