By Alon Harnoy, Esq. and Dov Kalton, Of Counsel
How do I buy and sell Bitcoins?
Bitcoin hit an all-time high price of $17,801.94 on December 15, 2017 with many analysts predicting even higher prices. Where does one acquire Bitcoin?
Bitcoins transactions can be done in many familiar ways. There are brick and mortar ATM’s in several countries (coinatmradar.com) where one can deposit currency and purchase Bitcoin. Some also allow selling of Bitcoin, but many do not. There are several Bitcoin ATMs in New York City, and Tel Aviv also has a few. The Bitcoin ATM (aka The Bitcoin Embassy) located across the street from the Tel Aviv Stock Exchange is so busy with Bitcoin purchasers that the ATM is closed every 90 minutes to remove the cash used to purchase Bitcoin because the ATM fills up to capacity.
There are online Bitcoin exchanges, similar to stock exchanges, where one opens an account as one would any brokerage account, and can trade Bitcoin, just as with stocks, bonds, commodities or Forex – Blockchain, Nadex, HitBtc etc. Speculation in these exchanges have contributed to recent price surge of the cryptocurrency.
After you purchase Bitcoin you need a place to store your new bitcoins – a virtual “wallet”. This is crucial since your only ability to transact with Bitcoin is to be in secure possession of this “key” that records your purchase. Some purchasers will keep their “key” on their computer or back it up to a USB drive or keep a hard copy printout of the code of their bitcoins. The safer route is to “store” your bitcoins with a secure exchange which has invested in secure infrastructure so hackers cannot steal the code. Buyers beware! A British man who had mined 7,500 Bitcoins in 2009 and stored them on his computer mistakenly discarded it with his Bitcoins stored only on his hard drive. The present value of the Bitcoin he erroneously discarded is presently worth upwards of $100 Million US Dollars!!! Even Elon Musk tweeted last month that he has misplaced a part of a bitcoin key.
Other horror stories include websites and even major Bitcoin exchanges being hacked and Bitcoin disappearing, most famously with Mt. Gox, the Japanese trading site which subsequently went bankrupt (At the time, this caused a major drop in the price of Bitcoin but the price has more than rebounded.) There are regulated exchanges, especially in the U.S. and U.K., which provide a greater, although not total, sense of security, which require more personal information from the account holder.
What do Professionals Say About the Price of Bitcoin?
In addition to the physical concern about the integrity of your Bitcoin is the underlying value concern related to the cryptocurrency. The current value of Bitcoin is highly speculative and the price may fluctuate even more now that futures have begun trading on the CBOE and CME. On the day the CBOE began trading Bitcoin futures, the CBOE website temporarily crashed and trading had to be halted twice in the first week of trading because of price swings. In a recent press conference, outgoing Federal Reserve Chair Janet Yellen echoed the opinion of many other noted financial analysts and economists in stating that Bitcoin is not a “stable source of value” and a “highly speculative asset”.
Jamie Dimon, CEO of JPMorgan Chase said of Bitcoin in September 2017, “that it is a fraud… it’s just not a real thing and eventually will be emperor’s new clothes.” He said Bitoicn is like the tulip craze of the 1600s where Dutch tulips skyrocketed in price before having a castastrophic fall. “It’s worse than tulip bulbs. It won’t end well. Someone is going to get killed”.
Similarly, we find Bitcoin to be extremely speculative and without inherent value, and note speculation in Bitcoin is similar to gambling in a casino – one might make money in the short run but as a long term strategy it is flawed.
Bitcoin is not the only cryptocurrency presently on the market. Termed “altcoin” by some as an alternative to Bitcoin, the alternative currencies feature different technologies and networks and currently are more affordable than Bitcoin. Presently, the most popular altcoins are Litecoin and Ethereum which are trading at a fraction of the price of Bitcoin. Since so many other cryptocurrencies are being developed recently, one must question the fundamental value proposition of Bitcoin.
What Are Initial Coin Offerings?
Another cryptocurrency fad that is worth mentioning and is a cause for concern are ICO’s – Initial Coin Offerings. Initial Coin Offerings have been utilized recently by companies looking to raise capital to fund their businesses. In exchange for a monetary investment, investors receive unique cryptocurrency “tokens” which essentially is a unit of currency giving investors access to features of a project run by the issuing company but technically is not a share of ownership.
In many cases, the tokens could theoretically go up in value in concert with the value of the company and are liquid and can be traded similar to the way a stock would be traded on an exchange. The tokens are issued and distributed on a blockchain or cryptographically secured ledger. During an ICO, companies usually exchange their cryptocurrency for Bitcoins, however, some ICOs involve the exchange of money as well.
The purported advantage of an ICO token would allegedly be the ability to sell the token without the need for a stock exchange and its concomitant regulations and costs.
What do Regulators Say about Initial Coin Offerings?
The first ICO is typically attributed to Mastercoin. Mastercoin’s ICO in 2013 raised over $5 million in Bitcoins through the sales of their own Mastercoin tokens. There have been many other ICO offerings but recently, much to the chagrin of the purveyors of these ICO’s, on December 11, 2017, the SEC recently issued a cease and desist order for the Munchee or MUN token offering that recently took place. A key question for all ICO offerings: “Is the coin or token a security?”
In October and November of this year, Munchee, a California business that created an app to review restaurant meals sought to raise capital through the sale of a “MUN token” that would be issued on a blockchain or distributed ledger. They sought to raise $15 million dollars and assured investors that the tokens would appreciate as the company’s fortunes improved and that the token would be able to be sold on secondary markets. On December 11th, the SEC issued an order stating clearly that such a token constituted a “security” pursuant to Section 2(a)(1) of the Securities Act and that the company violated Sections 5(a) and 5(c) of the Securities Act in not offering and selling these securities pursuant to a registration statement filed or in effect with the SEC. In essence, the SEC ruled that an ICO is no different than an IPO and that the rules in place for IPO’s must be followed.
On December 11, 2017, SEC Chairman Jay Clayton issued a public statement on ICO’s saying: “I believe that initial coin offerings – whether they represent offerings of securities or not – can be effective ways for entrepreneurs and others to raise funding, including for innovative projects. However, any such activity that involves an offering of securities must be accompanied by the important disclosures, processes and other investor protections that our securities laws require.”
How does the Blockchain work? Stay tuned for our next article….