Based in Hong Kong, Richard Harris is a veteran investment manager, banker, writer and broadcaster – and financial expert witness. He has a regular column in the South China Morning Post.
Cryptocurrencies: Cybercoin is the next big market - for litigators
I have seen my first Bitcoin case already – and it is the tip of the iceberg. The case concerns something that would be illegal in a regulated world – and was pretty naughty outside. It is ‘dog-eat-dog’ out there and the pit-bulls range widely from seasoned old traders to teenage code scribblers. It is a brave new world where anyone can become an expert.
Or that’s what people think. One reason why Bitcoin (and for Bitcoin read cybercoin) has been so popular is because with something new, everybody has the sense that they are smarter than everyone else. In my research around town, I’ve been surprised at how few people are good in their field but not truly expert. The cybercoin business requires a vast range of skills. It is not good enough just to be a coder, or a software specialist, or a banker, or an investor, or a regulator – the skills required are surprisingly wide. That means there is plenty of scope for error.
The landscape is changing rapidly with a lot of the rules being made up as cyberpreneurs build their businesses. The blind are leading the blind and in that land the one eyed man is king. So this area is very fertile ground for expert witnesses - or will be. For people don’t sue each other when things go right but when they go wrong.
The regulators are stuck because they can’t pigeonhole cybercoin. Cybercoin is NOT a currency, for currencies do not have intrinsic value. There is a joke about a guy who bought pizza for the kids six years ago with bitcoin and paid about US$150,000 for dinner. And, by the way, that means that there is no such thing as a cybercurrency – they are cybercoins.
“ The landscape is changing rapidly with a lot of the rules being made up as cyberpreneurs build their businesses. The blind are leading the blind and in that land the one eyed man is king.”
Bitcoin is not an asset, such as gold. Gold has an intrinsic value confirmed over millennia of human civilisation. It is not an equity, which pays a dividend, although some have turned cybercoin into securities by calling them Initial Cybercoin Offerings. Bitcoin is like a derivative – an artificial creation based on a series of promises that one person gives to another. The only value is that another buyer/investor/sucker will pay more tomorrow to take it off your hands. Cybercoins have become the Kardashian of finance; they go up because they are going up. This is the Last Fool investment.
Bitcoin is for the time being a real investment. Futures are traded in Chicago. You can leverage bitcoin fifteen times on the Japanese bitcoin exchange, bitFlyer. Last December that leverage would have made the Bitcoin market up to US$4 trillion in size – that’s half the size of Japan’s money supply.
Cybercoin live largely in an unregulated market populated by investing hopefuls swimming around like shark food. Low regulatory standards and increasing risk are natural bedfellows of greed. This is when investors go crazy, doubling up for fear of missing out. They invest borrowed money. Scorpion products are developed which are nasty, poorly understood instruments with a sting in their tail and the potential for sudden monumental losses. Eventually, some event will encourage holders to exchange cryptocoin for real cash en masse - and that will hurt all assets and the economy as a whole.
This is not bad news for experts, for although few people litigate when the markets go up, it is when they fall that the cases begin to appear and what used to be acceptable is now seen as heinous behaviour. As the great investor, the Sage of Omaha, Warren Buffet said, “Only when the tide goes out do you discover who’s been swimming naked.”