Sat | Nov 17, 2018

Kelley Reid | Lifting the veil on cryptocurrency

Published:Wednesday | May 16, 2018 | 12:00 AM
Blockchain technology for mobile money payments
In this January 29, 2018 photo, a smartphone displays an app of Coincheck Inc, the virtual currency exchange. Earlier this year the Tokyo-based Coincheck exchange reported a ¥58-billion ($547 million) loss of a cryptocurrency called NEM due to suspected hacking.
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Cryptocurrencies have dominated the conversations in the financial world just as much as the 'bear bond market ending' and 'Brexit'. For those of us who are unsure about what the term cryptocurrencies means, let's break down a few points about this digital currency.

 

What is cryptocurrency?

 

Think of a cryptocurrency as a virtual JMD or USD currency, with no Bank of Jamaica (BOJ) or Federal Reserve regulations and is mined instead of printed.

The first of its kind and the most infamous cryptocurrency is bitcoin (BTC) which started in 2009. BTC's market capitalisation rivals most developing countries gross domestic product and manages to outperform the other 1565 cryptocurrencies such as ethereum (ETH) and lightcoin (LTC).

The unregulated currency has received a lot of backlash from many prominent forces in the financial sector, including Jamie Dimon, CEO of JPMorgan & Chase (JPM), who in October 2017 called bitcoin a "fraud". He was found backpedalling a few months later.

It is understandable why banks such a JPMorgan do not like the idea of cryptocurrency as it represents a threat to the bank's current revenue streams which have been taking a hit as the bond markets perform less than stellar.

 

Cryptocurrency advantages

 

The advantages of cryptocurrencies start with easy and fast payments without a credit card or signing documents. Instead, the person uses electronic wallet information to transfer funds to someone else, which will diminish income for money transfer companies like Western Union and MoneyGram.

Furthermore, as information security remains a concern, cryptocurrency reduces the fear that you will be robbed blind by merely swiping your card into the wrong ATM. The digital currency uses military-grade cryptography. Therefore, the transactions remain secured where only the sender and the receiver are granted access and payments can never be reversed.

Another advantage, to the consumer, is low or no fees. Naturally, the banks hate this one. Financial institutions make their money from providing a service and charging you, but with cryptocurrencies, these fees can be eliminated or extremely low.

 

Cryptocurrency disadvantages

 

On the other hand, the disadvantages of cryptocurrency are certainly not forgiving. As mentioned above, the transfers done are irreversible, so if a transfer was sent to the wrong person and the person refuses to return payment, you might as well forget about it.

Some companies and banks are not a fan of cryptocurrencies and thus refuse to accept them and may limit where crypto users can conduct business. Bear in mind that physical stores also have a preference for 'real' money rather than digital money.

Nothing is more painful than losing your wallet/purse, and the same goes for cryptocurrencies. If you stored your digital currencies on your computer system or mobile phone and lose it, then short of retrieving the device there's no way to get your money back.

 

'Not for the faint of heart'

 

The current investors are looking to cryptocurrency as an investment option rather than another payment method, but many are concerned about the sustainability as well as the bubble.

Before we go any further, let's clarify the term 'bubble'. While the word is often used to describe the impending doom of markets, bubbles can sometimes be productive. Let's not forget the dot-com bubble created failed companies but also created Amazon, Google and many others. That being said, blockchain technology which is the back office of sorts to cryptocurrency has other real-world applications outside of cryptocurrency which a lot of companies such as Google and IBM are exploring.

Investing in cryptocurrencies are not for the faint of heart, and we dare venture to say it's for the very, very aggressive clients or accredited investors who are diversified and can tolerate a five per cent portfolio loss.

Bitcoin enjoyed an exceptional bull run growing by +500 per cent. However, 2018 belongs to the bears, as bitcoin lost half its value and endured a sell-off in excess of 57 per cent that mimics the 2008-2009 financial crisis.

Cryptocurrency is marked by volatility with historical spikes and pullbacks that cause most analysts heart attacks. Due to no central authority, cryptocurrencies are subject to the law of supply and demand. Similarly, cryptocurrencies may act like an equity, but Bitcoin has no intrinsic value like a company and therefore does not generate income.

The US Securities and Exchange Commission has said it will not approve any cryptocurrency exchange-traded funds for listing on a major US exchange until fund operators can convince the commission that investors will be protected.

 

The local context

 

Jamaica is making strides in the financial sector which coincides with the sentiments expressed in Vision 2030; the country is on the fast track to lead the financial industry in the Caribbean. The BOJ is pushing awareness of the cryptocurrencies and examining potential benefits.

While it is still in the early stages, one thing is clear, investors and businesses such as GraceKennedy are looking to utilise cryptocurrencies.

However, with a country that is still struggling to get up to date client Know Your Customer (KYC) data and the fact that we export crime (scamming), this untrackable currency may do more harm than good to the country's fundamental financial structure without proper regulations and support from external sources.

- Kelley Reid is asset manager at Stocks & Securities Limited (SSL).