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Bitcoin trade not for the faint of heart

/ 01:40 AM March 22, 2014

High risk and high reward investments abound, but rarely on the level of bitcoins—an unregulated virtual currency that is turning into one of the most volatile investment instruments available today.

The virtual currency was introduced five years ago to test the typically risk-averse Filipino market.

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This month, a wider range of Filipinos have been allowed to trade bitcoins through MetisETrade’s online platform, and more companies are mulling over plans to provide similar services.

But these developments came on the heels of what was suspected to be a hacking incident of Mt. Gox—a major bitcoin exchange in Tokyo last month where hundreds of millions of dollars worth of the virtual currency had been lost or stolen.

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The currency, a key feature of which is anonymity, also drew regulatory scrutiny for its use in the online marketplace called “Silk Road”—said to be the “eBay for drugs” before it was shut down by Federal authorities in the United States last year.

After the incident took place, Mt. Gox filed for bankruptcy protection in late February. The Japanese government last week issued guidelines indicating that bitcoins could be taxed.

Despite the inherent risks, the currency remains in use in various bitcoin exchanges worldwide due to its ability to bypass sometimes restrictive banking regulations, its efficient use and, for the speculative investor, the potential for high returns.

Returns may come in the form of wild price swings. After hovering around $30 to $50 a bitcoin for three years, the currency shot up to over $1,200 in 2013.

Those gains have since been pared and it is now trading at about $620 as of Friday, according to bitcoin news source Coindesk.

The price of the currency varies across global exchanges.

On March 1, MetisETrade introduced an online platform where Filipinos could trade, but not own, bitcoins on the Internet, the first of its kind in the country.

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MetisETrade started operations last year. It nw operates various Internet-based trading platforms focusing on alternative investments like precious metals, currencies and oil.

MetisETrade’s required minimum investment for Bitcoins is $100, making it more accessible than that required by most brokerage houses in the country.

But MetisETrade CEO Justin Jung made it clear that the investment should be considered high-risk and must comprise no more than 3 percent of a client’s total assets.

“This is only for investors who have the appetite for high risk. If you are low-risk, this is not the type of product you want to get involved with,” said Jung, adding that he expected the volatility to be its main attraction.

“Most of the time, from our experience, when we add new products, the bigger the volatility the faster the demand comes in,” Jung said.

To counter risks, Jung said, safeguards have been put in place, including investment caps based on a client’s net worth and level of experience.

Still, there is much uncertainty when it comes to investing in bitcoins compared with other instruments.

Determining its true value, for example, remains a difficult process, Jung said.

Apart from typical supply and demand factors, the value of a bitcoin can fluctuate wildly due to external events—like a scandal or news of fresh regulations such as the announcement in December when China’s central bank banned financial institutions from handling bitcoin deals.

Supply is partly dictated by the discovery of more bitcoins.

Bitcoins are usually acquired from exchanges or from individuals and companies for cash.

New bitcoins are obtained through a process called mining, where computers run special software to solve complex mathematical equations.

Bitcoins are thus finite in number, with a maximum of 21 million units estimated to be mined by 2040.

According to Jung, there are over 12.5 million Bitcoins today. This means that there are still over 8 million Bitcoins waiting to be discovered.

Where the currency’s price will go next remains anybody’s guess, even for the experts.

“In terms of the actual value of the bitcoin, we will never really know for sure. It’s only been five years,” Jung said.

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TAGS: bitcoins, Business, Investments, MetisETrade, virtual currency
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