SPECIAL NOTE – THE BITCOIN OPPORTUNITY

Picture: Bitcoin - This currency is not physically printed or minted by any central bank. It is “mined” using computing power in a distributed network that anyone can join. The same network also processes transactions made with this virtual currency, effectively making Bitcoin a self-sustained payment system.

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INTRODUCTION: CHANGING CONSUMER TRENDS

Globalisation, innovation and technology have not only changed the way people live but also impacted consumer trends. Consumers now have new tastes, are more mobile than ever and are targeting new markets and asset classes. For example, there has been a strong interest in contemporary and modern art investments over the years. According to Knight Frank, luxury spending has been on the increase on the back of renewed interest in classic cars, yachts, private jets, collectables (fine wine, antiques, paintings, jewellery and watches). A research done by New World Wealth states that UHNWIs (ultra-high-net-worth individuals are those with net assets of over USD30m excluding their primary residence) are increasing mobility on the back of private jet ownership. For example, networking with UHNWIs will take one from Davos in January, to the Masters in Augusta in April, Monaco Grand Prix the following month and the Aspen Ideas Festivals in June before ending the year at Art Basel in Miami as illustrated below; Private jet travel to key global events

Source: Knight Frank/Net Jets & WINGX Advance

Overall, increased mobility and new technological trends are demanding that consumers be in full control of their money and have a good degree of payment freedom. In our view, a digital currency such as Bitcoin will soon become more appealing not only to the high net worth individuals (HNWIs) but also to an emerging generation of tech-savvy individuals. Bitcoin exists outside the institutional banking system and the control of governments. It is possible to send and receive any amount of money instantly anywhere in the world at any time. There are no bank holidays, no borders and no imposed limits when it comes to Bitcoin. In this note, we evaluate the Bitcoin as an emerging digital currency from two perspectives; (i) Bitcoin as a payment system and (ii) Bitcoin as an investment asset.

BITCOIN AS A PAYMENT SYSTEM Bitcoin is a form of cryptocurrency or digital currency that facilitates both a secure, decentralized payment system and a tool for the storage, verification and auditing of information, including digital representations of value. The unit of account of the Bitcoin system is bitcoin. As of 2014, symbols used to represent Bitcoin are BTC, XBT, and . Small amounts of Bitcoin used as alternative units are millibitcoin (mBTC), microbitcoin (µBTC, sometimes referred to as bit), and satoshi (named after Bitcoin's creator). A satoshi is the smallest amount within Bitcoin representing 0.00000001 bitcoin, one hundred millionth of a bitcoin. Bitcoin was introduced on 31 October 2008 to a cryptography mailing list and released as open-source software in 2009.

Satoshi Nakamoto, a software developer proposed Bitcoin as an electronic payment system that is based on mathematical proof. The idea was premised on creating a currency independent of any central authority and that is transferable electronically, more or less instantly, with very low transaction fees. The system is peer-to-peer and transactions take place between users directly, without an intermediary. These transactions are verified by network nodes and recorded in a public distributed ledger called the blockchain, which uses bitcoin as its unit of account.

CREATING BITCOINS New bitcoins are generated through a very competitive and decentralized process called "mining". This process involves computer programmers offering their computing expertise and power to verify and record bitcoin transactions into the blockchain. Successful miners are rewarded with transaction fees and newly created bitcoins. The developers of Bitcoin wrote a computer code designed to release new coins every 10 minutes. This was done by automatically adjusting a "proof of work" problem after every 2,016 blocks, based on the time it took to solve the previous set. In theory, the rate is adjusted every two weeks (20,160 minutes), although this happens faster if processing power is added to the network during the period. The number of new bitcoins created is automatically halved over time until issuance halts when there are 21 million bitcoins in existence. From January 2009 to November 2012, the reward was 50 bitcoins, resulting in

10,500,000 being created (210,000 blocks). The reward halved to 25 bitcoins thereafter and so on. Miners originally used the CPU's in normal PC's but this has transitioned to Application Specific Integrated Circuits that are hardwired in the foundry to carry out the algorithm. When more miners join the network, it becomes increasingly difficult to make a profit and miners must seek efficiency to cut their operating costs. In future, Bitcoin miners will probably be supported exclusively by numerous small transaction fees. No central authority or developer has any power to control or manipulate the system to increase their profits. Every Bitcoin node in the world will reject anything that does not comply with the rules it expects the system to follow. As additional computational power is brought on, the likelihood of any particular miner or group of miners controlling a significant share of the processing power decreases. This, in turn, increases the overall strength of Bitcoin's decentralized nature.

BUYING & SELLING BITCOINS Bitcoins can be bought and sold both on and offline. Participants in online exchanges offer bitcoin buy and sell bids. According to a study published in April 2013, using an online exchange to obtain bitcoins entails some risk. However, exchanges have since implemented measures to provide proof of reserves in an effort to convey transparency to users. Below are some of the on-line Bitcoin exchanges;

Exchange About Based

Coinbase operates one of the most popular wallets and is a simple way to buy Bitcoin. USD5 bonus on sign up.

USA

LocalBitcoins matches buyers and sellers online and in-person, locally worldwide.

Finland

BitQuick claims to be one of the fastest ways you can buy Bitcoin.

USA

CoinCorner allow purchases with credit and debit cards for verified users.

Isle of Man

Bitbargain has a vast range of different payment options for UK buyers.

UK

Xapo is Known for it is ease of use and Bitcoin cold-storage vault.

USA

Source: Coindesk

Offline, bitcoins may be purchased directly from an individual or at a Bitcoin ATM. Bitcoin kiosks are machines connected to the internet, allowing the insertion of cash in exchange for bitcoins. Bitcoin kiosks do not connect to a bank and may also charge transaction fees as high as 7.0%. As of 2016, it was estimated there were over 800 Bitcoin ATMs operating globally, the majority being in the United States. A Bitcoin ATM in California

Source: Coindesk

TRANSACTING AND BITCOIN WALLETS In February 2015, the number of merchants accepting bitcoins for products and services passed 100,000. Instead of 2%–3% typically imposed by credit card processors, merchants accepting Bitcoins often pay fees in the range from 0% to less than 2%. A wallet stores the information necessary to transact bitcoins. While wallets are often described as a place to hold or store bitcoins, due to the nature of the system, bitcoins are inseparable from the blockchain transaction ledger. A better way to describe a Bitcoin wallet is something that "stores the digital credentials for your bitcoin holdings and allows you to access and spend them. Bitcoin uses two cryptographic keys, one public and one private. At its most basic, a wallet is a collection of these keys. There are several types of wallets. Software wallets connect to the network and allow spending bitcoins in addition to holding the credentials that prove ownership. Software wallets can be split further in two categories: full clients and lightweight clients. Full clients verify transactions directly on a local copy of the blockchain (over 80 GB as of November 2016), or a subset of the blockchain (around 2 GB). Because of its size and complexity, the entire blockchain is not suitable for all computing devices.

Lightweight clients on the other hand consult a full client to send and receive transactions without requiring a local copy of the entire blockchain. This makes lightweight clients much faster to setup and allows them to be used on low-power, low-bandwidth devices such as smartphones. When using a lightweight wallet however, the user must trust the server to a certain degree. When using a lightweight client, the server cannot steal bitcoins, but it can report faulty values back to the user. With both types of software wallets, the users are responsible for keeping their private keys in a secure place. Besides software wallets, internet services called online wallets offer similar functionality but may be easier to use. In this case, credentials to access funds are stored with the online wallet provider rather than on the user's hardware. As a result, the user must have complete trust in the wallet provider. Physical wallets store the credentials necessary to spend bitcoins offline. Examples combine a novelty coin with these credentials printed on metal. Others are simply paper printouts. Another type of wallet called a hardware wallet keeps credentials offline while facilitating transactions. Below are different wallets that can be used by individuals for transacting;

Electrum Bitcoin wallet Bitcoin paper wallet (bitaddress.org) Trezor hardware wallet

Source: Mastering Bitcoin (Antonopopoulos)

The Bitcoinpaperwallet.com paper wallet with the private key concealed

Source: Mastering Bitcoin (Antonopopoulos)

Overall, bitcoin transactions between wallets are not linked to a bank account. Anyone can use Bitcoin and there is no need for account verification, identity checks or proof of residence.

BITCOIN AS AN INVESTMENT ASSET A digital representation of value. Bitcoins have no physical existence beyond the record of transactions that are “stored” or reflected on the blockchain. Each bitcoin is a digital representation of a unit that can be transferred from one user to another without the involvement of intermediaries or third parties, thus facilitating direct end-user-to-end-user transactions with little or no transaction costs. The current value of bitcoins is therefore determined by supply and demand in the open market. Bitcoin proponents contend that bitcoins have value based on their ability to provide access to the Bitcoin Network and their use as a store of value and medium of exchange. Although the holding of bitcoins does not have any financial history such as precious metals, bitcoins are easily divisible, transferrable and fungible and appear to command a positive value relative to their cost of production (cost of mining). Despite its digital rather than physical existence, bitcoins also share several characteristics with gold bullion; (i) both can act as a store of value, (ii) there is a limited quantity of each available and therefore an infinite supply will never be created, (iii) bitcoins are difficult and expensive to “mine” or generate and (iv) their market prices are volatile.

Price Volatility Like other currencies, the price of a bitcoin is determined by supply and demand. There are only a limited number of bitcoins in circulation and new bitcoins are created at a predictable and decreasing rate. This means that it does not take significant amounts of money to move the market price up or down, and thus the price of a bitcoin is still very volatile.

Bitcoin holders do not trade them often. It should also be mentioned that many miners, especially major participants or those that cooperate in mining pools, often exchange their earned bitcoins into national currency immediately to cover their overheads. The fact that only a small proportion of all bitcoins seems to be used for transactions suggests that most of them are held for more long-term purposes, such as currency exchange speculation or saving. According to Economist Mark T. Williams, as of 2014, Bitcoin had volatility seven times greater than gold, eight times greater than the S&P 500, and eighteen times greater than the USD. Attempting to explain this high volatility, a group of Japanese scholars stated that there is no stabilisation mechanism. According to a Forbes journalist, the high volatility is related to the uncertainty of its long-term value and the fact that it is a startup currency. People are still experimenting with the currency to figure out how useful it is.

Price Analysis of Bitcoin

Source: Coindesk

An analysis of price movements reveals that the Bitcoin has gone through various cycles of appreciation and depreciation. During the 2012–13 Cypriot financial crisis, the Bitcoin price began to rise, reaching a high of USD266 on 10 April 2013, before crashing to around USD50. On 29 November 2013, the cost of one bitcoin rose to the all-time peak of USD1,242. In 2014, the price fell sharply, and as of April remained depressed at little more than half 2013 prices. As of August 2014, it was under USD600. On 4 November 2015, Bitcoin had risen by more than 20%, exceeding USD490. The Financial Times associated the rapid growth with the popularity of "socio-financial networks" MMM operated by Russian businessman Sergei Mavrodi.

The risk profile of bitcoins appears to be very high, with many commentators expressing the opinion that an investment in Bitcoin has a binary potential return (that bitcoins will eventually command either a high value or almost no value at all). Part of the uncertainty regarding bitcoins is drawn from the lack of a consensus regarding their intrinsic value. However, there are uses where volatility does not matter, such as international remittances. As of 2014, pro-bitcoin venture capitalists argued that increased trading volume such as that generated by high-frequency trading exchanges would in the long term decrease price volatility.

Bitcoin Financial Trading Global trade in bitcoins currently consists of individual end-user-to-end-user transactions, together with OTC and facilitated exchange-based Bitcoin trading. A small United States derivative market for Bitcoin trading has also emerged, with some recent entrants seeking U.S. Commodity Futures Trading Commission (CFTC) regulation and oversight of their activities.

Trading Bitcoins through CFDs There is an opportunity that exists for traders who understand the complexity and the inherent volatility of this digital currency to trade Bitcoin through CFDs. In fact, Bitcoin can be seen as a good addition to a financial portfolio from a risk diversification perspective. One may trade Bitcoin in long and short positions against a range of currency pairs such as XBT/USD, XBT/GBP, XBT/EUR and XBT/JPY. Another approach would be to speculate on the value of Bitcoin using a BINARY.

Investing in Bitcoin as a store of value Hedging against inflation. Some Argentinians have bought bitcoins to protect their savings against high inflation or the possibility that governments could confiscate savings accounts. During the 2012–2013 Cypriot financial crisis, Bitcoin purchases in Cyprus rose due to fears that savings accounts would be confiscated or taxed. Bitcoin Funds. Individuals and institutions may also invest in Bitcoin funds. The first Bitcoin Fund was established in Jersey in July 2014 and approved by the Jersey Financial Services Commission. Also, in 2012 an attempt was made by the Winklevoss twins to establish a Bitcoin ETF. As of early 2015, they have announced plans to launch a New York-based Bitcoin exchange named Gemini, which has received approval to launch on 5 October 2015. Venture capitalists such as Peter Thiel's Founders Fund, which invested USD3.0 million in BitPay, do not purchase Bitcoins themselves but invest in Bitcoin infrastructure and companies that provide payment systems to merchants, exchanges and wallet services.

Strengths of Bitcoin

1. The Bitcoin Network is decentralized and there is no central point of trust. Unlike traditional payment systems, Bitcoin is not administered by any centralized authority or controlled by any rights holder. Instead, it was introduced to the world as an open source project. It can be accessed by any person by downloading Bitcoin software and accessing the peer-to-peer network;

2. Transparent. All Bitcoin Network transactions are cleared in the blockchain, meaning a complete and auditable record of all activity exists. There is no risk of chargeback fraud. Bitcoin stores details of every single transaction that ever happened in the network in a huge version of a general ledger, called the blockchain. All information concerning the Bitcoin money supply itself is readily available on the blockchain for anybody to verify and use in real-time. No individual or organization can control or manipulate the Bitcoin protocol because it is cryptographically secure;

3. Financial access. Although it cannot provide all of the services of banking institutions and its technical complexity may be too high for many users, Bitcoin can provide value storage and electronic payment services for users who lack access to

traditional financial services. In addition, since fees are so low, bitcoins can be used in transactions that are economically unattractive for most merchants, especially in developing countries. Coins can be both divided and recombined to create essentially any denomination possible;

4. Instant transactions. Bitcoin Network transactions register nearly instantaneously.

Confirmation and clearing of those transactions can occur within minutes to over an hour. For many other payment systems, clearance can take far longer. When one sends money, it will arrive as soon as the Bitcoin network processes the payment;

5. Anonymous. Funds are not tied to real-world entities but rather Bitcoin addresses.

Owners of Bitcoin addresses are not explicitly identified, but all transactions on the blockchain are public. To heighten financial privacy, a new Bitcoin address can be generated for each transaction. For example, hierarchical deterministic wallets generate "rolling addresses" for every transaction from a single seed, while only requiring a single passphrase to be remembered to recover all corresponding private keys;

6. A secure mode of payment. The Bitcoin network itself is highly secure due to the use of cryptographic and decentralized blockchain protocols. The public-private key pairs used provide ample security against the risk of a hacking or an accidental instance of two users generating the same private key. There is no single, centralized point of failure, which limits the susceptibility of the Bitcoin Network to downtime and hacking. Bitcoin transactions can be performed without having to reveal sensitive personal and financial information to the recipient, limiting the potential exposure of such information to database hacks;

7. Low fees and friction. The Bitcoin verifiers’ market currently bears very low transaction fees and this can be attractive in micropayments where fees can dominate. Bitcoin is also appealing for its lack of additional costs traditionally tacked upon international money transfers, due to disintermediation. There is also no cost to accessing the Bitcoin Network; and

8. Transaction irreversibility. Bitcoin transactions quickly become irreversible. This attracts a niche market where vendors are concerned about credit-card fraud and chargebacks. When bitcoins are sent, there is no getting them back, unless the recipient returns them.

Weaknesses of Bitcoin Relative to the advantages discussed, there are also weaknesses relating to Bitcoin as an investment asset and payment system;

1. Volatility – The total value of bitcoins in circulation and the number of businesses using Bitcoin are still very small. Therefore, relatively small events, trades, or business activities can significantly affect the price. In theory, this volatility will

decrease as Bitcoin markets and the technology matures. Never before has the world seen a start-up digital currency, so it is difficult to forecast how it will play out;

2. On-going development – Bitcoin software is still in beta. New tools, features, and services are being developed to make Bitcoin more secure and accessible to the masses. Some of these are still not ready for everyone. Most Bitcoin businesses are new and still offer no insurance. In general, Bitcoin is still maturing;

3. Security dependent on individual user sophistication. While the blockchain and the

cryptographic protocols that underlie Bitcoin are secure, users must safely store and use their private keys in order to safeguard their bitcoins. Securing private keys either on a computer or other medium requires proper personal computing and home security;

4. Relatively complex. Bitcoin is not consumer friendly. Often, third-party software and

solutions that can simplify the use involve entrusting bitcoins to such third parties;

5. Difficult to access. While the Bitcoin Network is open access and liquid markets exist in certain economies, few of the exchanges and services that allow the purchase of bitcoins are regulated and have a significant operational history. Furthermore, the opening of accounts with regulated exchanges requires anti-money laundering and “know your client” (KYC) verification and account funding that makes it difficult for new users to acquire bitcoins quickly;

6. Limited retail and institutional adoption. While it far outpaces any digital currency

in adoption and enjoys network effects relative to other digital assets, the use of Bitcoin remains somewhat limited relative to existing payment systems or financial technology. Many people are still unaware of Bitcoin. The list of Bitcoin users remains small and still needs to grow in order to benefit from network effects; and

7. Lacks protection against mistakes. Unlike traditional electronic payments, bitcoin

transactions cannot be reversed and no administrator can restore access. As a result, a mistaken bitcoin transaction or a lost private key will result in a user’s loss of funds.

CONCLUSION In conclusion, the digital revolution is fast changing the way individuals, households and businesses are transacting and investing. We believe that a virtual currency such as Bitcoin holds a long term promise for a much faster, secure and efficient payment system. Readers may also want to ponder some famous quotes on Bitcoin hereunder;

Virgin Galactic is a bold entrepreneurial technology. It's driving a revolution and Bitcoin is doing just the same when it comes to inventing a new currency.

Sir Richard Branson - Founder of Virgin Records, Virgin Galactic, and other businesses

I really like Bitcoin. I own bitcoins. It's a store of value, a distributed ledger. It's a great place to put assets, especially in places like Argentina with 40 percent inflation, where $1 today is

worth 60 cents in a year, and a government's currency does not hold value. David Marcus - CEO of Paypal

I am very intrigued by Bitcoin. It has all the signs. Paradigm shift, hackers love it, yet it's

derided as a toy. Just like microcomputers. Paul Graham - Creator of Yahoo Store

Gold is a great way to preserve wealth, but it is hard to move around. You do need some

kind of alternative and Bitcoin fits the bill. I'm not surprised to see that happening. Jim Rickards - American Lawyer, Economist and Investment Banker

I'm a big fan of Bitcoin... Regulation of money supply need to be depoliticised

Al Gore - Former US Vice President and winner of Nobel Prize

Bitcoin has the potential to become an international currency. Vinny Lingham - South African Internet entrepreneur who is the co-founder & CEO of Gyft

It's money 2.0, a huge huge huge deal.

Chamath Palihapitiya - Former head of AOL Instant Messenger

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