With Bitcoin having risen from R11,000 on 5 January 2017 to R35,200 on 22 June (taking lowest possible pricing), it is clear that the potential risks and rewards in investing in cryptocurrencies are now much higher than in the past.
Those already familiar with the currencies will be familiar with these risks, including the possibility of future taxes, hard market swings and the fact that they are still very much a developing technology.
One such risk to take into account (and the topic that seems to be most up for debate) is that of a “hard fork”, and the fact that Bitcoin may no longer be called “Bitcoin” come 1 August.
What is a “hard fork”?
Bitcoin is at a point where it is growing faster in usage than what the network can effectively handle and Bitcoin transactions have slowed down as a result, notes Werner van Rooyen, head of Growth at Luno.
“Since Bitcoin is software built on open protocols and consensus, any developer (or groups of developers) can propose changes and improvements to the technology, he said speaking to BusinessTech.
“Bitcoin miners can vote on these changes and whether or not they want to implement them, and Bitcoin users and platforms can decide whether to follow them or not.”
“If the proposed changes are significant enough, it results in a new version of the software, which may not be fully compatible with the old. If the change is controversial, the new version then ‘forks’ from the main branch and operates by the newly implemented rules.”
What happens on 1 August?
Van Rooyen said that there was a chance there will be such a fork on 1 August.
While it is not guaranteed, this could mean a “new” version of Bitcoin that could split from the existing chain and because of significant changes in the new proposal, Bitcoin miners (and Bitcoin platforms) will need to make some changes to their system to ensure compatibility.
As a result, Bitcoin miners, end-users and platforms will need to decide if they want to accept the new, old or both versions of the software.
“There have been Bitcoin forks in the past, admittedly when the cryptocurrency had fewer users,” said van Rooyen.
Using the recent fork on the Ethereum blockchain as an example, van Rooyen noted that nobody will “lose” their coins.
“If you held Ether before the Ethereum fork, you ended up with both the old and the new currency after the fork (ETH and ETC). With that specific hard fork, there was still support for the old tokens (ETC) and the new version (ETH).”
“Some platforms decided to support both versions, each commanding their own exchange rate, each with their own users and so on.”
Are South African Bitcoin investors in any danger?
If you’re not a Bitcoin developer or Bitcoin miner (just someone with some Bitcoin) you should make sure that you keep your Bitcoin with a reputable Bitcoin exchange with a team of developers that can handle complicated things like hard forks, warned van Rooyen.
“Many people shout doom and gloom when certain proposals gain momentum, including a few months ago when another fork seemed likely to happen. Many were recommending that you sell all your Bitcoin, but the price of Bitcoin has more than doubled since we last wrote about it (a fork)”.
“It’s impossible to predict what will happen this time, if anything at all.”
He pointed out that there were elements of cryptocurrencies, like “hard forks”, which are technical matters may scare off some investors.
“Those who disagree with the proposed changes but also those who just find it all very confusing and want to stick to traditional investments.”
“I can’t give investment advice. People should understand that Bitcoin and other cryptocurrencies are a new technology and short term volatility and changes are expected.”
“Don’t invest more than you can lose, but don’t lose sight of the greater picture. We’re seeing more and more investors – not just individuals but also institutional investors, asset managers and hedge funds – allocating a small percentage of their total investment portfolio in Bitcoin.”
The rise of other cryptocurrencies and how they may be affected by the fork
Van Rooyen noted that a fork in Bitcoin (or another large currency) could have a direct impact on other cryptocurrencies, but was not the only factor to consider.
“Historically, Bitcoin was the only cryptocurrency that commanded any sort of value, but we now have an industry that consists of various cryptocurrencies.”
“The market is young and still only roughly worth $114 billion (in total). When investor confidence is high in the overall market, you see money flow into various alternative cryptocurrencies (sometimes called “altcoins”).”
“There are many things you can do and buy with Bitcoin: including altcoins. Whether they make a good store of value, remains to be seen.”
Should we be speaking about regulations?
While a fork is now a well-understood risk of investing in Bitcoin it does beg the question whether crypt-investing would be a safer and more welcoming environment if it was better regulated.
While this doesn’t make it illegal (current laws financial laws still apply), there has been increasing demand to ensure regulation given the currencies’ growing popularity.
The South African Reserve Bank has stated in their position paper on virtual currencies that ‘regulation should follow innovation’, said van Rooyen.
“It’s like early days of the Internet: there’s a lot happening and a lot of potential for what is yet to come. Short term fluctuations and speed bumps are to be expected. I’m very optimistic about not just what Bitcoin has already achieved, but also about its future.”
This article is not intended to act as financial advice.