Are cryptocurrencies the 21st century gold rush?

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The struggle to get on to the housing ladder is one felt by many people.

But what if you could invest in part of a property with other investors drawn from across the world, in a currency immune to fiscal policy and political shocks?

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This is the dream being sold by an increasing number of firms being set up to offer shares in properties in cryptocurrency-denominated exchanges.

The basic premise is that buyers are able to invest cryptocurrencies into real-life properties, giving them either a small return from the rental income or a share in the property’s value.

In return, sellers can access equity in a global currency, even if their home property market is sluggish. But is investing through this system safe?

Bitcoin, the most well-known cryptocurrency, has been in existence since 2009 but has really gained traction this year, crossing the $US6000 ($7827) mark for one bitcoin.

‘It will blow up’

However, opening a bitcoin wallet online does not require users to give real names, or any information at all. There is no central body and bitcoin is not based anywhere – the network is maintained by the activity of its users, and was founded by an anonymous developer who went under the pseudonym Satoshi Nakamoto.

Critics say this has made it the currency of choice for online drug dealers and cybercriminals, and since its inception, it has been defined by wild swings in prices, scepticism from regulators, and hacking attacks that have led some to lose holdings worth thousands.

Bitcoin, the most well-known cryptocurrency, has been in existence since 2009 but has really gained traction this year. Bitcoin, the most well-known cryptocurrency, has been in existence since 2009 but has really gained traction this year. Photo: Bloomberg

Earlier this month, Jamie Dimon, JPMorgan Chase chief executive, said bitcoin was “a fraud”, suggesting that “eventually it will be closed”.

“Currencies have legal support. It will blow up,” he told a banking industry conference.

Jamie Dimon, JPMorgan Chase chief executive, has said bitcoin is "a fraud", suggesting that "eventually it will be closed". Jamie Dimon, JPMorgan Chase chief executive, has said bitcoin is “a fraud”, suggesting that “eventually it will be closed”. Photo: Bloomberg

Too big to ignore

But the phenomenon has become too big to ignore.

Earlier this month, the combined value of all the bitcoins in circulation surpassed $US100 billion; combined with other cryptocurrencies it is $US170 billion, around half JPMorgan’s market capitalisation.

Every time somebody from an incumbent industry knocks a new technology I have more confidence in it.

qbal Gandham, from online trading service eToro

Advocates argue that bitcoin, which allows money to move between accounts and across borders for free, represents a vital evolution in how money has evolved.

What’s more, it represents a threat to the established financial order, something that Mr Dimon and the like have a vested interest in protecting.

“Every time somebody from an incumbent industry knocks a new technology I have more confidence in it,” says Iqbal Gandham, who runs eToro, an online trading service.

Land registry

The fact that cryptocurrencies operate outside of regular fiscal rules is what makes them so attractive, says Antony Abell, founder of investment company Trust Me.

“There is a growing trend in the marketplace as people become aware of what fiscal policy, such as quantitative easing, has done to their currency,” he says.

Trust Me is currently developing a land registry and exchange for London, which will allow owners of property to sell “blocks” of their property as a securitised asset.

For the seller, this means that they can unlock up to 49 per cent of the asset value and still retain occupancy of the property, and investors can use bitcoin to buy as little as £250 ($428) worth of real estate.

The London exchange is set to open this year, followed by similar projects in New York and Toronto.

Transparency

“This means property is no longer restricted just to those who have a huge amount of capital,” Abell adds.

He explains that Trust Me will set limits on the exchange to protect against huge gains or losses in the value of bitcoin, and claims far from anonymising investors, using bitcoin opens deals to global participants in a transparent way.

“You can track a bitcoin through the system in a way you can’t with a $10 note,” he says.

Similarly, investment platform Brickblock is intended to allow investors to move their virtual money into real estate without requiring them to transfer it into a regular currency.

‘Unregulated market’

Jeff Woodward, the firm’s chief investment officer, admits that some of the criticism levelled at the market is not entirely unfounded.

“This is an unregulated market at the moment,” he concedes, “but we do expect that to change”.

The demand for using alternative currency has grown out of a wider dissatisfaction with the financial system, he says, adding: “People have become very tired with conventional funding and banks.”

The company will launch its maiden project later this year: an apartment block in Berlin worth €3.7 million ($5.6 million), which it will sell piecemeal to cryptocurrency investors, who in return receive a proportion of the rental income.

Rise of the ICO

The rise of cryptocurrencies has also enabled a new form of corporate fundraising that allows companies to raise huge sums without having to cede control to venture capital investors, or endure the rigour and expense of an initial public offering.

The initial coin offering, in which a start-up offers its own cryptographic “tokens” instead of shares or debt, in exchange for bitcoin or another cryptocurrency, has become the fashionable new way for young companies to raise funds.

More than $US2.1 billion has been raised in ICOs so far this year, a 3800 per cent increase on last year, according to CB Insights.

But ICOs are unregulated, several have seen crooks take off with the funds, and authorities have warned that the party may not continue after China banned them.

‘House of cards’

At present, the boom in funding is also down to a minority of investors who have seen their holdings soar in value.

The same could be said of bitcoin-based property investments: if cryptocurrency prices fall – some would say when – the market for such deals could slump.

“Right now it’s a sentiment-driven trading environment where nobody’s in a particular rush to sell … rather than anything fundamental,” says Michael Jackson of venture capital firm Mangrove.

A slump in one cryptocurrency would have a knock-on effect, seeing the rest tumble like a house of cards, he says.

If the tide turns, it might not only be bitcoin’s price that would suffer. An entire new investment industry would be at risk.

The Daily Telegraph, London

http://www.watoday.com.au/business/markets/are-cryptocurrencies-the-21st-century-gold-rush-20171029-gzaoeh.html

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