The rising stakes of Bitcoin

Experts are warning would-be investors that the digital currency bubble could burst at any time

Luis Doncel
José Luis Cáceres in his project accelerator lab in Madrid
José Luis Cáceres in his project accelerator lab in MadridCARLOS ROSILLO

Félix Brezo has come to terms with the fact that he is never going to retrieve the $6,630 he lost in Bitcoin assets. In reality, the money never existed as such in his wallet. A computer scientist, Brezo bought 39 cents in Bitcoins five years ago, worth at the time no more than $2.

Bloomberg calculates that just 1,000 people control 40% of the Bitcoin market

After making the initial investment, Brezo decided to protect the code that gave him access to his cryptocurrency with another password. However, five years later, he had forgotten what that password was. And in the world of digital currency, no password means no money.

Welshman James Howells took a more serious blow in 2013 when the hard drive where he stored the access code to his 7,500 Bitcoins – currently worth $127 million – was thrown out with his computer. Howells has offered compensation to anyone who can track down the multi-million dollar machine, but so far, no one has claimed the reward.

These are just two examples of the inherent risks of Bitcoin, which has skyrocketed in the second half of this year. What was worth $1,000 in February jumped to $4,000 in August and $6,000 in October. It then leaped to an eye-watering $16,000 where it stands on December 19.

But while interest is growing in this new digital gold, alarm bells are ringing over its lack of regulation and exposure to risk. Here are some guidelines for those considering trying their luck.

How do I buy Bitcoin?

Before you start, you have to set up a digital wallet by downloading an app. Among the best known are Mycelium and Blockchain. However, you can also buy digital currency directly by opening an account in a digital currency exchange such as Coinbase.

I have five bitcoins. How do I get my hands on the $85,000 they are worth?

In Spain, you can go to any of the 10,000-odd cash machines that use Halcash technology, allowing money to be sent to cell phones. Once at the cashpoint, you can withdraw the money via a code sent to you by SMS. This is the procedure used by Bit2Me, the biggest exchange for Bitcoin in Spain. Its founders have also created the Tikebit tool that allows you to buy Bitcoin in more than 11,000 outlets.

The value of Bitcoin has soared. Should I invest?

Experts across the board are advising a great deal of caution. Bitcoin is extremely volatile and can plummet as quickly as it can soar. Certainly, it’s only soared so far, but there are no guarantees it will continue on this flight path. Experts advise investing an amount you can afford to lose. As a spokesman for the global fund management firm Blackrock says, “If you’re investing in Bitcoin, you need to be prepared to lose everything.”

Bitcoin is extremely volatile and can plummet as quickly as it can soar

News of investors greedy for profit and mortgaging all their worldly possessions to buy into Bitcoin suggests a bubble that can only end in tears. “It’s like the dot-com bubble,” says José Luis Cáceres, managing director of the Madrid-based ideas factory for digital transformation, NWC10. “It’s very likely it will burst. But Blockchain, the technology that underlies Bitcoin will keep going, just as the internet continued after the dot-com bubble.”

What are the risks?

Investors thinking of buying Bitcoins should be aware that it is an extremely volatile market influenced by a mere handful of investors. Bloomberg calculates that just 1,000 people are in control of 40% of the market. The big Bitcoin players who show their hand in the market are referred to as ‘whales’. Bulgaria, for example, is a whale. One of the poorest countries in the EU, it owns 210,000 Bitcoins. If it cashed these in right now, it would be €3.5 billion better off – the equivalent of 13% of the country’s national debt. And the transaction would seriously rock the market. “One of these big investors could sink the price,” says Brezo, a security analyst with Telefónica. “One of the risks of Bitcoin is that it is not regulated.”

The Securities and Exchange Commission that regulates markets in the US has just warned small investors that the level of protection for Bitcoin is far lower than offered by traditional markets, leaving it wide open to fraud and manipulation.

Will the bubble burst soon?

That’s the million-dollar question. While some believe a crash is imminent, others claim Bitcoin still has a good a way to go before it goes into freefall. There are even those who believe it has a promising future. “The Bitcoin market has dipped at times but I believe it can only increase over time,” says Leif Ferreira, founder of Bit2Me. “The money has more and more uses and many governments are investing heavily in it. Which means a lot more growth.”

If you’re investing in Bitcoin, you need to be prepared to lose everything Blackrock spokesman

A gamble that’s paying off?

At the start of the year, Bit2Me, the biggest exchange for Bitcoin in Spain, was shifting €100,000 a month. Now it’s shifting €7.5 million, such is the frenzy gripping the market. “Almost no one is selling. Around 95% of our customers want to buy, mostly speculators,” says Leif Ferreira, Bit2Me’s founder who started the trading company with €300 three years ago and now has more than 40,000 clients on his books. “They believe that the price has not yet peaked.”

Bitcoin and Blockchain – the technology underlying the digital currency – is also of interest to entrepreneurs, such as project accelerator NWC10, an ideas factory set up two years ago for digital transformation that specializes in Blockchain. “We are not as focused on the market price of the currency as on the potential for transformation that is behind the Bitcoin project,” says José Luis Cáceres, managing director at NWC10.

English version by Heather Galloway.

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