The ascent of bitcoin, the cryptocurrency, has excited considerable commentary and the view that mainstream financial institutions are getting more comfortable with it.
Bitcoin prices have risen strongly in recent days. As of the time of going to press today around 8:00 GMT, it fetched around $51,800 per coin (source: Coindesk). The sharp gyrations in the cryptocurrency, and the story of how Tesla, the electric car firm led by Elon Musk, has put money into the field, continue to keep bitcoin in the public eye. This news service has interviewed firms about the space and continues to track its development. (See, for example, its interview with Nickel Digital Asset Management.)
In this article, John Hunter, business development director at ZEDRA Guernsey, part of ZEDRA, examines what is happening with bitcoin and the viewpoints of wealth managers and other parts of the traditional financial industry. The editors are pleased to share these views and invite responses. Jump into the conversation! The usual editorial disclaimers apply. Email firstname.lastname@example.org and email@example.com
Bitcoin launched in 2009, started to increase in value in 2010 when individual coins jumped from $0.0008 to $0.08. In recent months, we’ve seen bitcoin reach an all-time record high helped by PayPal, Mastercard, BNY Mellon’s adoption and the influx of institutional funds, which has leant bitcoin new legitimacy. There is also keen interest among retail investors; last month the US Office of the Comptroller of the Currency stated that national banks could use blockchain networks and Stablecoins for payments, further legitimising digital currencies.
However, meteoric rises and falls in value still seem to be the norm, leading Bank of America to speculate that the current bitcoin run is ‘the mother of all bubbles.’ The UK’s financial regulator, the Financial Conduct Authority, has also issued an unusual warning on crypto investments noting that “If consumers invest in these types of product, they should be prepared to lose all of their money.”
The news is not all bad. Last month JP Morgan’s prediction proved to point the right way ahead based on the last days' developments. They projected that the price of bitcoin could hit $146,000 as more big firms embrace it as an alternative to gold. Just because bitcoin can be a risky investment, it doesn’t mean that there isn’t interest or demand. For long-term investors who went in early or when bitcoin had a low valuation, bitcoin can be a lucrative investment. Experienced investors who have significant capital available to invest and who can afford to take big risks in the hope of big rewards are all enjoying the bitcoin ride.
Protecting investor interests
On the whole, investors buying bitcoin are aware of the risks, and they understand that if they have the potential to gain a fortune, they potentially stand to lose it also. While this is widely accepted, investors still want to protect themselves when they purchase or cash out bitcoin.
Market risk aside, investor concern often centres around the fact that fiat money is exchanged for a virtual asset and vice versa. Bitcoin ownership is recorded in ledgers but the relatively new nature of cryptocurrencies, the fact that all transactions are digital, and the lack of regulatory oversight all play a part. In essence, those investing in bitcoin or cashing out their investment into fiat money want to protect their interests. The point at which fiat cash and a cryptocurrency meet can feel like a natural weak point.
Escrow agreements for bitcoin
Escrow agreements are increasingly popular for bitcoin transactions and they present a win-win for all parties. Traditional escrow agreements are used to protect the interests of the seller and the vendor and it’s the same for bitcoin transactions. Escrow becomes especially relevant when the value of bitcoin increases significantly and more cash needs to be deposited to purchase bitcoin, or there is a liquidation that translates into a significant amount of fiat money. Escrow is an ideal solution, which protects both parties. Not many people know that this kind of service can be provided.
How does it work?
An escrow agreement is drafted and contains the terms of the transactions and the conditions that must be met by all the parties involved. Then, alongside leading industry partners, ZEDRA, acting as escrow agent, oversees the transaction for the sale and purchase of bitcoin.
Proof of fiat funds and verification of the bitcoin take place and once the terms of the escrow agreement are met, the bitcoin is then transferred to the buyer and the funds are transferred to the seller. Bitcoin can either be sent via internet connected hot wallets, or it can be transferred using a cold storage custody platform.