Most investors would consider themselves lucky to experience double digit growth in a year.
However for those who have taken the plunge and invested (or gambled) in cryptocurrencies, they have seen the growth of their investments hit the triple or even quadruple digits.
While it keeps fluctuating, the value of bitcoin has risen by around 800% over the past year. At the time of recording this interview, the increase was at just under 700%.
Meanwhile the value of ether has jumped a whopping 12-fold.
So who are the initial up-takers buying these currencies and reaping the rewards - for now at least?
Scott Milat - an adman and aspiring entrepreneur intrigued by blockchain technology - is one of them.
Speaking to interest.co.nz in a Double Shot Interview, Milat shares his philosophical views on cryptocurrencies and provides some practical advice about how to go about investing.
Speculation on the future potential value of the technology
To begin with, Milat cautions against thinking about cryptocurrencies in the same way you would dollars and cents.
“These aren’t traditional currencies. This is not a traditional financial asset. This is something completely different. The technology that enables cryptocurrencies - blockchain technology - it’s a very powerful new development,” he says.
“If you were an early investor in Uber, within four years you made 2000 times the return on your investment. These new technologies can unlock massive value, and I think what we’re seeing at the moment is speculation on that potential future value.”
That potential future value is what prompted Milat to research bitcoin for a year before investing in it.
He says the concept around decentralised autonomous organisations, or the ability to have a governance structure on the blockchain, is what really caught his attention.
“Rather than having a board of directors… you essentially have an agreement in place, written out in a computer programme, and everyone works within that distributed autonomous organisation,” he explains.
“Essentially the code itself has all the reward structures in place.”
How do cryptocurrencies derive their value?
While one can see how the blockchain technology behind these smart contracts can drive efficiencies, the value of cryptocurrencies is a little harder to understand. Currencies derive their value from how much demand there is relative to supply. So how do these laws of demand and supply work when people are “mining” bitcoin?
Milat explains cryptocurrencies always have a maximum supply.
“So there’s only ever going to be 21 million bitcoins, and that number is fixed…
“The people who mine bitcoin are essentially providing the computing power that bitcoin needs to operate. Bitcoin rewards the people that are giving that computing power by paying out a small amount of bitcoin. That amount of bitcoin the software pays out over time, reduces.
“We’re currently at around 16.6 million bitcoin in circulation.”
Milat says the 21 million bitcoin mark is expected to be reached in 100 years’ time.
“It’s really hard to say what the situation will be once that happens.”
New Zealand regulator ‘agile’
As for what will happen to cryptocurrencies, as the likes of China bans exchange platforms and initial coin offers (ICO), Milat believes they’ll come round to the idea.
“China has pressed pause. There are reports coming out that they have now kind of tightened up the requirements for KYC [know your client] for a lot of exchanges. And it looks like they’ll probably allow a certain amount of exchanges to re-open,” Milat says.
He believes larger countries closing their doors to cryptocurrencies, have provided opportunities for smaller countries to open theirs’ and fill the gap in the market. After all, people in China can use platforms in the likes of Gibraltar to trade currencies.
What is the New Zealand government’s stance on the matter?
Releasing commentary on Wednesday, the Financial Markets Authority (FMA) says it’s keen to “facilitate responsible innovation, and ensure that the regulatory regime remains relevant and agile”.
Its view is that the specific characteristics and economic substance of an ICO determine if it’s a financial product – if it is regulated, and if so how.
ICOs and token events are a form of fundraising where you receive tokens that carry certain rights, such as providing access to a new product or service, or an interest in an underlying asset or project.
As for cryptocurrency services, like wallets, exchanges and broking, it says the providers of these must be on the Financial Services Providers Register, comply with fair dealings provisions in the Financial Markets Conduct Act and be a member of a disputes resolution scheme.
Anonymity not always a bad thing
Nonetheless, one of the key features of cryptocurrencies is that they are decentralised. While cryptocurrency enthusiasts will criticise government authorities for meddling with markets, the reality is cryptocurrency trading is fraught with crime.
Put to Milat, he says he doesn’t want to support criminal activities.
And while the anonymity provided by some cryptocurrencies enables them to be misused, this feature is also what can make them attractive to legitimate users.
Milat says: “If financial institutions and the private sector are going to get on board with public blockchain technologies, they don’t want their transactions to be completely open and transparent.
“So with Monero and Zcash, which are the anonymous currencies at the moment (the main ones), the technology that they’re building will enable private firms to transact on a public blockchain, which is the equivalent of saying that these private companies will have the ability to use the internet for their business and be able to have those transactions private.
“So there’s actually a massive value-add in having privacy around the cryptocurrency.”
How to try to avoid the risks
Asked how he has tried to dodge the risks associated with cryptocurrencies, Milat says he purchases his digital currencies directly from people. In other words, he meets up with them, and makes the trade.
“That’s kind of just a benefit of being involved in the whole space,” he says.
The FMA suggests those keen to trade cryptocurrencies use exchanges based in New Zealand, as this will increase the chances of recovering any money lost.
“Most online exchanges are unregulated and operate exclusively online, with no connection to New Zealand. This means it is hard to find out who is offering, exchanging, buying or selling,” it says.
“It also makes it unlikely investors will recover their money if things go wrong.”
There are currently only a few small New Zealand exchanges around - none of which Milat has used before.
The FMA also suggests: “Know what you’re getting into, including how the currency is stored and transferred, and how to get your money back.
“Understand how to access a payment record. You may need to prove you’ve made a payment – to get a refund for example…
“Using cryptocurrencies may make investors a target for scammers.
“Consumers need to be aware that cryptocurrencies are volatile, their value can change quickly and they aren’t widely accepted in the same way as legal tender.
“The currency held in digital wallets is at risk of being stolen, just like a real wallet.”
The other difficulty trading cryptocurrencies is that banks aren’t keen on the idea.
They’ve been known to close the accounts of people involved in cryptocurrency trading due to the risk of this breaching their obligations under the Anti-Money Laundering and Countering the Financing of Terrorism Act.
Put to Milat, he says: “Yes, the banks will and have closed down people’s bank accounts. And that normally happens if you’re going to be transacting a lot back into New Zealand dollars, and your bank account goes up by a large sum overnight. That’s going to raise some questions.”
He likens the situation with banks to that of a trader he knows, who contacted the Inland Revenue to inquire about how to ensure his earnings are taxed appropriately, only to be told: ‘We have no idea how to treat these things'.