In 2011, Gareth Grobler, a former Investec banker who was working in London building up his own software company EyeDesk, was tipped off about this payment system that went by the innocuous name of bitcoin. "I thought it had to be a scam," says Grobler from London, where he spends most of his time. "I spent three days looking at it from top to bottom, trying to figure out where the flaw was."
At the time, bitcoin was a fledgling experiment in digital or "cryptocurrencies", created only three years earlier by the mysterious Satoshi Nakamoto, a pseudonym for what may or may not be one individual.
But the more Grobler learnt about the philosophy underpinning bitcoin (the first truly independent peer-to-peer currency, premised on the cuddly libertarian ideals of markets free from government meddling), the more he grew entranced.
The rewards being reaped from bitcoins are high, but so are the risks
So in 2012, Grobler sold his company to Britain’s National Health Service and began trading bitcoin. The next year, he launched ICE³X, a Joburg-based bitcoin exchange that now has thousands of eager clients.
If it sounds like Grobler (38) has supreme insight, this isn’t exactly true, since bitcoin was nothing more than a wild experiment on the fringes of the Internet. It could have gone wrong; instead he got ridiculously lucky. "I bought thousands of bitcoins when it was only US$12 per coin, so with the price now at nearly $6,000, you’d say I must be a billionaire. But there’s nobody who bought bitcoin for $12 who held onto it until today. People are too greedy for that," Grobler says.
The elegance of bitcoin is that it is based on a technology known as blockchain that solved a mathematic and computing problem: it created a centralised "ledger" on which every transaction is recorded transparently for everyone to see in real time.
So, unlike global currencies such as the rand, where supply is determined by the Reserve Bank, everyone can see the moment a bitcoin is mined, used or sold.
Of course, it’s not the elegance of a technology experiment that has led to South Africans becoming so obsessed with bitcoin that the country is responsible for the third-most Internet searches for the term, after Nigeria and Bolivia. Rather, it is the promise of untold riches. In a country where the rand has shed 48% of its value in a decade (falling from R6.86 to R13.26/$), the soaring value of bitcoin presents a promise of riches that perhaps only gold-rush miners can understand.
This week, the price of bitcoin neared the $6,000 mark for the first time — a steepling 784% rise from the $635.51 it cost a year ago. If you want to kick yourself, consider that if you’d invested R10,000 in bitcoin (in the US) in January 2011 when it was $0.30, you’d now be worth a staggering R365m. Even R10,000 spent on bitcoin four years ago would now be worth more than R600,000.
It’s those sorts of numbers that have caused people to lose all reason. It’s why everyone from your Uber driver to the hair stylist and the teller at Shoprite is asking how to get into bitcoin.
But at the same time, it’s this trajectory that has some of the smartest investors in the world labelling bitcoin the biggest bubble since Holland’s tulip mania of 1637.
Grobler estimates that while there are probably up to 120,000 South Africans who now own bitcoin, less than 1% of them are genuine "investors".
He says: "Most people are speculating. It’s people taking their R25,000 bonus and putting it into bitcoin — and it’s a high-risk gamble. You’ve got no regulation around it, and anything can happen."
It may seem a surprisingly cautious statement from a man who founded ICE³X, one of SA’s two largest bitcoin exchanges.
"Look, I’m realistic," he says. "It’s an amazing technology and a tool that generates wealth which can be applied in thousands of ways, but right now it’s only being used for speculation — and that’s dangerous because so few people understand it".
Luno, SA’s largest bitcoin exchange, based in Cape Town, polled South Africans earlier this year on their motivations for investing in bitcoin. The results were intriguing. Most people, 39.6%, said they saw it as an "investment", while 14.3% used it to "speculate". Only 12.9% saw it as a "payments tool". But Grobler’s point about the dangers of assuming bitcoin is a one-way ticket to an Atlantic seaboard villa is well made. It’s a point made often by other nonbelievers, many of whom are hardly low-profile.
Famously, last week Jamie Dimon, the CEO of the world’s third-largest bank, JPMorgan, said: "I don’t personally understand the value of something that has no actual value.
"If you’re stupid enough to buy it, you’ll pay a price for it one day."
Howard Marks, the head of US alternative investment management firm Oaktree Capital (assets under management: $99bn) called bitcoin an "unfounded fad or perhaps even a pyramid scheme". Ray Dalio, founder of Bridgewater, the world’s largest hedge fund, called it a "highly speculative market".
But Dimon is the most vociferous, the poster boy of bitcoin atheists. In September he told CNBC that he’d fire any employee trading bitcoin for being "stupid", adding that the cryptocurrency is "just not a real thing".
Dimon’s comments have raised the hackles of many who argue that bitcoin, and cryptocurrencies, are to money what the Internet was to print media in the 1990s.
Bitcoin evangelists are quick to point out that all money — particularly modern currency — is built on quicksand, supported only by the trust that somebody will take it.
Chris Becker, an Investec economic strategist and a Bitcoin true believer, says it’s a "valid, very well-functioning digital money where you can transact peer-to-peer without needing any central intermediary".
He points out it is a hyper-secure payment system that has been down for less than 0.0001% of the time since it began trading over eight years ago.
But that doesn’t fully explain the phenomenal rise in the bitcoin price.
It’s a surge that has taken even the most ardent punters by surprise. Saxo Bank, which compiles a yearly "outrageous predictions" report, had reckoned on only $2,100 as a peak for the cryptocurrency in 2017. Luno, partly owned by Naspers, which allows users to buy and sell bitcoin, says that just 3.2% of customers surveyed believed the price would top R60,000 this year.
But is it all going to end in tears, as Dimon believes?
At the recent Allan Gray investment summit, experts from Old Mutual, Sanlam and other firms said they hadn’t bought into bitcoin because there was no way to value it.
In other words, there are no assets — its price depends entirely on whether someone is willing to pay you more for it tomorrow.
But for bitcoin believers this is a superficial view. They’ll argue that any currency is simply a medium of exchange.
However, currency values depend on faith: the value of the rand, for example, depends on your assessment of a country’s economic position and belief that a government stands behind the currency.
Says Becker: "You’ve got to think of cryptocurrencies and bitcoin as new networks and new economies (that aren’t) constrained by borders."
He is scathing of Dimon’s argument that if a currency isn’t backed by a government, it’s invalid. "Who backs gold? Gold has been the longest-surviving money, along with silver ... and no-one backs it. It’s the qualities of gold and silver that have made them the best money for 6,000 years."
By contrast, paper money has only been around for less than 100 years. "This experiment with government money has failed so many times: we’ve had 56 (bouts of) hyperinflation in the past century — that’s devastating for countries and people," he says.
A paper last year in the London Review of Books, titled "When bitcoin grows up", points out that we don’t realise how intangible our concept of money really is anyway. "In 2006, the total amount of money in the world was $473trillion ... of that, less than a tenth, about $46trillion, was cash in the form of banknotes and coins ... what it is instead is entries on a ledger. It’s numbers on your bank balance, the electronic records of debits and credits that are created every time we spend money."
Dominique Collett, an executive at Rand Merchant Investment (RMI) Holdings and founder of its fintech arm, AlphaCode – which recently invested in bitcoin platform Luno — says trust is what drives currencies.
"If I look at the momentum this [cryptocurrency] system has got going, the amount of money that’s being invested in it, and the number of smart people who are putting money into [it] ... I don’t think this is a bubble: I think this is a lot of really smart people saying this is an alternative system."
Collett, a London Business School graduate, describes herself as a "hardcore bitcoin believer". She bought her first bitcoin in 2014. As the current financial services system "gets a little shakier, this alternative system becomes more attractive", she argues.
"I don’t think we’ve worked out the messes of the financial crisis of 2008; I think we’ve put a Band-Aid over quite a big problem. The way government fixed the crash was with quantitative easing — we’ve got too much money in the system and there’s enormous debt to be repaid," she says.
Grobler, with his background in investment banking, says he can understand why bankers would be resistant to the notion of cryptocurrencies. "Banks make money by transferring money from A to B and charging interest. They create money from thin air. Now there’s a mechanism, a verified, peer-to-peer mechanism, that allows anyone to do it for far less. If I were a bank, I also wouldn’t be happy," he says.
He says while bitcoin can’t be "put back in the box" at this stage, there are three possible obstacles. "First, something else can come that’s better — and it hasn’t happened in eight years. Second, some government can try stop it, or, third, some public relations nightmare could harm it."
Otherwise, he says, there’s only the sky — and a hard limit of 21m coins — to halt it.
But many have veered away from it, following the sound Warren Buffett principle that if you don’t understand it, you’d better not invest in it. After all, it isn’t even clear if bitcoin is a currency or an investment
And even if you think you understand it and are debating buying bitcoin, are you too late to the party anyway?
If you’re confused, you’re in good company — some of the best investment brains that the Financial Mail spoke to are still grappling with these questions.
Piet Viljoen, chairman of investment company RECM, says he started buying bitcoin about 18 months ago "mainly to see how it worked" and what he could buy with it.
"I never managed to buy anything of use with it and in hindsight I’m glad I didn’t use it to spend on anything" — particularly given bitcoin’s astonishing rally, he says.
Six months ago, RECM started a hedge fund, wanting to buy bitcoin, but Viljoen says they couldn’t get it past the trustees or the regulators. "We’ve done some transactions, but all in our own names; but we’d love to be able to do certain arbitrage transactions," he says.
Asked whether bitcoin will burn its apostles, Viljoen says: "I’m almost 100% convinced it’s not a fraud, but I am a bit worried about the price action. It’s supposed to be a currency, but it can’t be that if the price does what it does."
Viljoen reckons that as a means of exchange it fails because of its volatility and says that "a lot of water has to flow into the ocean before bitcoin will prove its worth as a store of value".
But it also isn’t an asset class, really. Hywel George, Old Mutual Investment Group’s director of investments, says: "I would not describe it as an asset class in its own right. If you’re going to treat it as an investment destination I would treat it as a currency." George agrees that the "explosion" of money printed since the gold standard was abandoned in 1971 is what makes cryptocurrencies so beguiling.
"It’s quite an interesting concept in terms of bringing some sense of normality back to what has been a very unusual period of very strong printing of money," he says.
Grobler says the debate over whether bitcoin is an asset class or currency is misguided. "Is ice water? Under the right circumstances, yes. So bitcoin can become a currency if you use it as one. In its raw format, it’s an accounting ledger. It’s now being seen as a speculative instrument because that’s what people are using it for, but it’s so much more," he says.
Grobler says that arguing there’s no underlying asset is like saying accountants don’t have value. "They do a job, and that job has a value. Bitcoin is an accounting system, and that has value. How much value? Well that depends on supply and demand."
But, the CEO of one prominent listed investment holding firm (who asked not to be named, presumably for fear of getting it wrong), said: "How can a currency appreciate from $1 to current levels of $5,000? It simply doesn’t make sense ... Currencies strengthen — but by 20% or 30%, not 5,000 times."
At the AGM of SA’s largest listed company, Naspers, in August, CEO Bob van Dijk said his company wouldn’t be putting money into bitcoin. Speaking to the Financial Mail this week, Van Dijk said: "Bitcoin is very speculative; for a company like ours to put money directly into it would not be an acceptable risk."
He points out there’s no asset underpinning the value, and its value stems entirely from its scarcity. "Jamie Dimon is right that you could lose all your money. But to write it off completely is extremely shallow. But, of course, you can’t say in which direction it will go," says Van Dijk. He says he has, however, put some money into bitcoin "as an experiment" and has done "quite well out of it".
So, rather than bitcoin, Naspers has made two small investments in blockchain companies — $4m in Luno, and $5m in a company called Coins, in the Philippines. "I’m a big believer in the potential of blockchain, especially for consumer-facing industries. We don’t really know quite what it can do yet, so we’re learning from it," he says.
Ask any true believer whether it’s a bubble and they’ll point to the fact that only 21m bitcoins can ever be mined. This limits its scarcity and is one of its central attractions.
Described as a "geometrically declining supply curve", the way it works is that "miners" create new bitcoins the whole time, but it becomes harder and more complicated to generate the code to do so. This slows down the process. In the first four years of its existence, 50 new bitcoins were created every 10 minutes. That halved to 25 every 10 minutes and now bitcoins are being created at a rate of 12.5, which will halve again in 2020.
Becker says for this reason it’ll never actually reach the 21m supply cap, but just get close to it in around 2140. "It’s built as a deflationary money," he says. "So there’s no Ben Bernanke (former head of the US Fed) who can just decide on a whim that he wants to print more. That’s in the code and no-one can jinx it."
Comparing it to tulip mania, he says, is also way off the mark. "Only 0.4% of the world’s population [are] using it. People calling it tulip mania — come on. Home ownership rates in the US housing bubble were about 69%; in the Nasdaq bubble, just about everybody owned [tech shares]. [In] manias, adoptions tend to get quite high, so if bitcoin is still below 1% adoption then it’s just nuts to say this is a bubble."
Others are less convinced.
Old Mutual’s George says: "Interest is being generated largely because the instrument happens to have gone up. So you’ve got the ‘fear of missing out’ syndrome, which is one of the most powerful investment emotions known to man. It’s not a good reason to invest in something in its own right."
Deon Gouws, chief investment officer of local investment firm Credo Group, had his bitcoin epiphany in February 2014. Gouws is convinced that cryptocurrencies are a "large part of the future" — but he is uncertain whether bitcoin itself will be the winner. "There probably is a bubble in the overall world of crypto, be it bitcoin or ethereum or the Paris Hilton coin," he says. Which will pop and which will survive isn’t clear yet. "The best example I have is 20 years ago, if you entered an Internet search engine, the big one was Yahoo…. You might have thought it was going to be the future, but you were wrong — you should have identified Google as the likely winner."
Gouws says Dimon and the critics don’t really understand cryptocurrencies. "They’ve just looked at a chart and they see that it looks like tulips in Holland and it’s a nice throwaway line. It’s brave to stake your professional reputation on that."
Though he admits bitcoin is a "bit of a lottery", this doesn’t make it a fraud or a pyramid scheme. Still, despite Gouws’s personal conviction, he’s not putting his clients’ money into it. "We don’t dabble with people’s money. We have ‘stay rich’ or ‘get rich slow’ portfolios."
If you do, however, want to take a punt, how do you get your hands on bitcoin?
And do you buy it or "mine" it?
Ian Shak, an IT professional at Saicom, says he initially tried mining, using a fairly powerful gaming PC. "I ran it for about a week and I realised that this mining was hard work. (My) machine sounded like a helicopter, it was working so hard, and after a week or so I had mined a fraction of a fraction of a bitcoin. I thought, hang on: I don’t know how much electricity this thing has used, but it’s obviously a lot," he says.
That’s when Shak gave up on the mining and bought some bitcoins instead. He’s not kidding that mining is hard work. According to Bitcoinmining.com, "miners use special software to solve math problems and are issued a certain number of bitcoins in exchange". These miners have a dual function: they also keep the network secure by verifying transactions.
Many South Africans have bought their bitcoins from Luno, which acts as an exchange, and provides a digital wallet to store bitcoins. Other options include ICE³X, CryptMarkets, 23option.com and Bitcoinzar.
Luno’s Werner van Rooyen says: "Bitcoin mining is a very expensive and technical matter. Since you need access to cheap electricity and powerful hardware, most bitcoin mining happens in places like China."
As with SA’s actual mines, Eskom probably rules that out.
Becker warns, however: "If you’re just going to go and buy bitcoin without understanding what it actually is and just expect and hope that you’re going to make money, it’s like anything else — you’re probably going to lose money."
Right now, there’s also no regulation protecting consumers who invest in bitcoin and lose everything. That could change, as the Reserve Bank is mulling over how to regulate cryptocurrencies.
RMI’s Collett says regulation is inevitable — and companies like Luno that are already talking to regulators will be the winners. "At some stage bitcoin is going to be regulated, it is going to go mainstream, and the guys who are going to build sustainable businesses in this area are the guys who are engaging with regulators already," she says. Already, a number of local merchants say they "accept bitcoin" — including Takealot.com, Earthchild, Lancet Laboratories, the Organisation Undoing Tax Abuse, Superbalist and, curiously, the Nelson Mandela Children’s Home.
But given the small number of people who have bitcoins, and the fact that it would be nuts to spend a valuable commodity on buying products online, this seems more a marketing gimmick than anything else.
Still, the $64m question is: Where will bitcoin’s price be in a year? Will SA’s bitcoin investors be licking their wounds from a devastating collapse, or considering buying their fourth Camps Bay mansion?
At this point, it’s hard to tell.
Collett says: "I personally believe that prices are going to continue to march upwards, but I’m in my early 30s — I’m at that stage in my life where I can take risk."
Those who aren’t, shouldn’t.
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