Cashing in on Bitcoin's currency revolution

It is a currency revolution that is taking the investment world by storm, and which simultaneously has caught financial regulatory authorities by surprise.

The revolution is in the form of Bitcoins, a tradeable virtual currency instrument that has totally changed the way many think of money and given the world an idea of the form currencies may take in the future. And, as an investor, if you were lucky enough to have bought one Bitcoin just six months ago, you would have achieved a mammoth 900% return based on the current market price.

Created to be free from the interference of politicians and bankers, the Bitcoin currency now has a growing number of devoted followers who are convinced of its longevity, and it is rapidly gaining traction in the investment world as well.

At the start of the year, few had heard of Bitcoin or given it any serious consideration. It was a niche product for the tech community to dabble in, with little interest from outsiders. But, after a series of hacking scandals, huge levels of price volatility, and growing numbers of venture capitalists clamouring to get aboard the digital currency train, Bitcoin has become more broadly recognised .

However, without proper regulation, some question whether it can survive within the wider community over time. A primary weakness for Bitcoin is its perceived lack of legitimacy. The digital currency has made some headway in this regard, with a growing number of online businesses now accepting Bitcoins as payment. But it comes at the same time as online money exchanges are coming under pressure from regulators in the US.

Payments processor OKPay announced overnight it is to suspend processing for all Bitcoin exchanges. Little information was given to customers, with just one short line posted on its website: “Dear customers, we are currently suspending Bitcoin processing.”

Nevertheless, for Australians interested in getting in on the Bitcoin action, IG Markets has added the digital currency to its range of binary products. This allows clients to potentially benefit from price movements in the Bitcoin market. Like other binary products, all clients need to do is agree or disagree with IG Market’s assumption on the future price of Bitcoin. This shows just how mainstream Bitcoin has become.

PayPal has also confirmed it may accept Bitcoins as payment in the future, which would certainly give the digital currency some more of the legitimacy it so clearly needs.

Whether or not Bitcoin survives in the long term, it has radically transformed how we think about money and has broadened our horizons as to how future currencies may look.

Developed as an alternative to fiat currencies in the wake of the 2008 financial crisis, Bitcoin has captured the zeitgeist of the post-GFC society. It appeals most to those who have simply lost faith in the traditional banking system.

Created by “Satoshi Nakamoto” in 2009, a person who thus far remains unidentified, there are now about 11 million Bitcoins in existence. The technology has been designed so that the number of Bitcoins that can ever be mined will top out at 21 million, sometime around 2140.

As the first widely used and accepted crypto currency, Bitcoin has divided opinion among investment experts over its lack of intrinsic value. It has been described by some as a scam and a speculative bubble that could implode at any time.

But no-one can deny its growing influence. Bitcoin start-ups are popping up everywhere, offering services such as storing Bitcoins in an online wallet or providing a conversion between Bitcoin and local currency.

Bitcoin is the shiny new toy for venture capitalists keen to stay on top of the hot trends, and with the Winklevoss twins, of Facebook fame, giving it the nod of approval, its journey into the mainstream is well on its way.

The price volatility of the digital currency is another reason it’s received such attention from the media. At the start of the year, one Bitcoin was worth $US13. By April it had rocketed above $US260, before swiftly crashing to $US100 on the same day. As can be seen from the graph below, it’s now trading at around $US130.

Click to enlarge

Source: Mt.Gox

It’s not only investors and venture capitalists who are keeping a closer eye on Bitcoin. The authorities have also had a growing interest in digital currencies and are beginning to question their role in mainstream society.

In the US, the Financial Crimes Enforcement Network (FinCEN) issued guidance on virtual currencies earlier this year. As a result, money laundering rules now apply to virtual currency exchanges, since they operate like other money-order businesses. They will have to report any transactions over $10,000 and will have strict bookkeeping requirements.

The concern is that digital currency exchanges facilitate illegal activities like money laundering. This concern was validated earlier this week, when US prosecutors filed an indictment against the operators of digital currency exchange Liberty Reserve.

The Costa Rica-based company is accused of helping criminals launder more than $US6 billion in illicit funds and the action is being touted as the largest international money laundering case ever brought by the US. It also signals a step-up in action against these virtual currencies and the havens they have become for illegal activity.

In the UK, officials have also begun taking action, with a conference held earlier this month attended by members from HM Revenue & Customs, the Serious Organised Crime Agency, the Home Office and the intelligence officers. The conference was aptly entitled “The Future of Money”, and assessed the potential tax and security implications of virtual currencies.

In Australia, regulators have thus far been slow to react. The Australian Taxation Office (ATO) says it is still mulling over the tax implications of trading in virtual currencies, while there has been no official guidance released by the Australian Prudential Regulation Authority (APRA) or Reserve Bank as yet.

But it can only be a matter of time. And this poses a serious problem for Bitcoin. The currency was created to be free from the political and banking interference that has plagued fiat currencies. If it is no longer free from outside influence, and no longer anonymous, it loses a lot of its appeal.

But without proper regulation, it will never become a truly legitimate global currency. Either way, there will be many watching to see if this revolutionary currency can adapt to survive.