Bitcoin in the UAE: Should you be using it?
Amber Haque believes bitcoin offers numerous advantages to her Dubai business.
The Pizza Guys became the first restaurant in the UAE to accept bitcoin payments in February after Ms Haque, its co-founder, realised it could ease card transaction fees racked up from providing card readers for cashless delivery customers. Payments then take a few days to arrive, says Ms Haque. However, bitcoin transaction fees are a fraction of the cost and almost instantaneous. “I do recommend it for small enterprises that manage their cash on a daily basis,” she adds.
Customers have so far made about 50 bitcoin transactions at The Pizza Guys. However Ms Haque has chosen not to switch her bitcoins to dirhams just yet. “Right now we are holding on to it,” she says. “But we are looking to spend it. We want it to be a viable form of payment. My flour comes from Italy. Now, how cool would it be if I could buy my flour in bitcoin?” Again, using bitcoin would remove the banks’ currency conversion charges.
As a decentralised digital currency, bitcoin is still at an experimental stage. While Ms Haque highlights the case for a business interest, what about the ordinary investor?
Earlier this month, the Financial Planning Association, the US’s largest organisation for certified financial planners, concluded that bitcoin can help boost an investor’s portfolio.
While highlighting the risks involved in investing in alternative currencies, its report suggested: “individual investors can benefit from holding a small amount of bitcoins in a diversified portfolio”.
Three new regulated financial products (two exchange-traded funds and one derivative instrument) are also in the offing, potentially offering investors more choice and fewer risks.
Bitcoin enthusiasts claim that because it is not controlled by any central bank, the currency is not subject to any inflationary pressures. Transactions are low-cost and almost instantaneous. It also offers users anonymity because payments can be made without personal details being linked to the transaction.
However, it is this anonymity that makes it appeal to money launderers, drug pedlars and other criminals - and bitcoin’s reputation has been tainted by association. The collapse in February of Mt Gox, the largest bitcoin exchange, also undermined the bitcoin ecosystem’s credibility. The equivalent of half a billion dollars vanished – apparently stolen by hackers. The crime is being investigated by police in Japan, where the exchange was based.
The currency is also volatile: 1 bitcoin was worth about US$15 at the start of 2013, shooting up to a high of $1,151 by December. It is now trading at about $400. Experts say this is due to its lack of liquidity. A survey last year conducted by Finnish entrepreneur Risto Pietilä estimated that 47 people control about 30 per cent of all bitcoins so far in existence.
Consumers also have little protection from fraud, theft and carelessness: lose or forget the private key to your wallet – the unique series of numbers that denote your account – and the money is gone.
Nevertheless, the venture capitalist Tim Draper, an investor in Skype and Hotmail, paid millions for the nearly 30,000 bitcoins confiscated from Silk Road, a defunct online marketplace. (They were valued at about $17million on the day of the auction but he will not say how much he paid.) Mr Draper predicts 1 bitcoin will climb to $10,000 in three years.
“If you look at the past three years, bitcoin has done incredibly well,” says Andrew Prince, a financial adviser at Acuma Wealth Management. “But there is always the fear that it’s smoke and mirrors. In reality it’s not a regulated vehicle. It’s not a known or recognised currency and therefore you’ve got to question what its valuation is based on. And that makes me a little nervous.”
The central banks of Lebanon and Jordan last year warned institutions and exchanges about the perils of using bitcoin, highlighting its lack of regulation, volatility and attraction to criminals. The UAE central bank has so far not issued any guidance.
However, for those who want to take the risk, investing is relatively easy for the individual.
In the early days, anyone with a computer could easily “mine” bitcoins – use their computer to process blockchain transactions in exchange for the currency.
This is no longer feasible for the average individual. Competition from other miners now requires significant investment in processing hardware.
One solution, however, is to “mine” another, less well-known, alternative currency such as litecoin and then exchange those for bitcoins, advises the UAE bitcoin enthusiast and business owner Tariq Kaddoumi.
Alternatively, Mr Kaddoumi’s Umbrellab has started testing the UAE’s first bitcoin ATM in its Media City offices in Dubai in April with a view to rolling out more across the country when government regulations on its use are clarified.
The ATM allows investors to buy bitcoins directly; to do this they need to set up a wallet or account – one of the most popular is Blockchain Wallet – and these generally show the rates of exchange between fiat currencies and bitcoin. The ATM route is becoming increasingly popular in the US. Customers pay in cash or swipe their credit cards and the machine sends bitcoins to the designated wallet.
To buy smaller amounts of bitcoin, it is possible to find nearby sellers via localbitcoins.com. Sellers post their transaction rates and preferred method of payment which can be cash, Western Union or via bank transfer. Buyers are protected by an escrow service.
Larger amounts can be bought via an exchange, to which buyers link their bank accounts, such as Coinbase. Igot, an Australian exchange, opened offices in Dubai at the end of August. The company currently has two main objectives, according to Vignesh Raja, in charge of Igot’s strategy and business development in the UAE. The first is to educate the local population about the benefits of bitcoin; the second to persuade online vendors such as Namshi and Souq to accept bitcoin as a method of payment.
The reception so far has been “pretty good”, Mr Raja says, with inquiries coming from the UAE and Saudi Arabia. Igot has recorded about Dh1m in transactions since it launched.
For those looking for a more hands-off approach, accredited investors have been able to buy into the Bitcoin Investment Trust (BIT) since September 2013. The fund tracks the average dollar price of the currency, to date attracting $70m in assets, Barry Silbert, the founder and chairman of SecondMarket Holdings, which manages the trust, told The Wall Street Journal. SecondMarket plans to open BIT to the general public in the fourth quarter of this year.
The Winkelvoss Twins Tyler and Cameron – best known for suing the Facebook founder Mark Zuckerberg – are also on the verge of launching a smiler fund called Winkelvoss Bitcoin Trust. The Securities and Exchange Commission has been reviewing the application since it was filed 14 months ago, the Journal reported.
Meanwhile, the US Commodities Futures Trading Commission has approved the launch of a bitcoin derivative instrument which is being marketed to large financial institutions. The product, created by Teraexchange, allows investors to hedge against future fluctuations in the currency. No bitcoins are used in the process as the swaps are denominated in dollars.
And even venture capitalists are investing in start-ups building alternative currency platforms such as payment processors, wallets and exchanges, according to Jeff Desjardins, the founder of Visual Capitalist, an investment website.
Alex Sanchez, a 26-year-old Spaniard based in Dubai, has traded bitcoin for the past two years along with other alternative currencies and stocks. His says intersted investors must know what they are doing.
“If you don’t, it’s better that you stay away,” he cautions. “If [bitcoin] fails, because something breaks the bitcoin ecosystem, then tomorrow 1 bitcoin will be worth zero dollars. It’s a really high-risk investment.”
For the financial adviser Mr Prince, the currency might be a step too far for his client’s interests.
“If you want to invest $10,000 and you are prepared to write that off if something goes wrong: fine,” he says.
What is Bitcoin?
Bitcoin is a virtual currency created in 2009 by a programmer or a group of programmers known by the pseudonym Satoshi Nakamoto. Bitcoins are “mined” or created using an algorithm, at a steady but diminishing rate until 21 million are in existence; this is expected to happen in 2140 at the current rate of creation. Currently there are about 13 million in existence. Transactions are recorded on a public ledger called the “blockchain”, meaning that once a transaction has been completed it cannot be undone and nor can the Bitcoin be re-spent by the previous owner.
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Updated: September 26, 2014 04:00 AM