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The twins and the bitcoin boom

The internet currency bitcoin has recently reached record heights. This is also partly due to the American twins who are famous for their quarrels with Facebook founder Mark Zuckerberg.

Do you know the Winklevoss twins, sometimes jokingly referred to as Winklevii? Cameron and Tyler Winklevoss became known to a wider audience with the "The Social Network," a 2010 Hollywood film about Facebook.

In the film and in real life, the twins accused Facebook founder Mark Zuckerberg of stealing their idea. They sued him in 2004, and eventually received a payment of 65 million dollars.

The Winklevoss brothers have mainly invested their money in activities related to bitcoin, the digital currency. "Coin," one of their projects, is currently seen as the main reason behind bitcoin's recent surge. For the first time, the bitcoin surpassed a fine ounce of gold in value, reaching close to $1,300 (1,230 euros) last week.

"Coin" is an Exchange Traded Fund (ETF) which tracks the price of bitcoin. The fund is seeking approval by the Securities and Exchange Commission (SEC), the US financial markets regulator. A decision is due by March 11.

Milestone for bitcoin

The Winklevoss fund is not the only bitcoin ETF waiting for approval by the SEC. By the end of March, a decision is due on a fund called SolidX. A third investment vehicle, the Bitcoin Investment Trust (BIT), has already been opened to a select group of wealthy investors, while waiting for general approval.

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For the internet currency, SEC approval for bitcoin ETF would be a milestone. At the moment, investors willing to bet their money on bitcoin face several drawbacks: they need to open a digital storage "wallet," acquire bitcoins at one of several specialized trading platforms, pay half a percent or so in fees - and then hope their platform of choice is safe.

The fate of Mt.Gox serves as a reminder of the risks involved. In 2014, the world's biggest bitcoin trading platform went bancrupt, and 650,000 bitcoins disappeared without a trace. Their market value today: 800 million dollars.

In Germany and Sweden, tradeable papers based on bitcoins exist already, but in the form of Exchange Traded Notes (ETN). If the issuer goes bust, investors lose their money, which is not the case with funds.

300 million dollars in a week?

A bitcoin fund with approval from the SEC could make it easier and safer to invest in the currency, thus attracting institutional investors.

Some $300 million could pour into a bitcoin ETF in its first week, Spencer Bogart, head of research at Blockchain Capital, toldBloomberg news agency. "I'd be very surprised if it did anything but double from whatever levels it is at beforehand,” Bogart said.

Such an increase in demand is likely to raise the price of bitcoin further. "It would certainly not go down," said Oliver Flaskämper, founder and CEO of Bitcoin Deutschland AG, operator of the trading platform bitcoin.de. But it is difficult to know how much has already been priced-in by markets, he adds.

"It's quite possible that prices will rise only moderately following the approval, because that is what markets have been expecting," Flaskämper told DW.

Should the SEC refuse to approve bitcoin ETF, however, the value of bitcoins is likely to drop significantly.

Flaskämper does not view bitcoin ETF as competitors to trading platforms like his, arguing that funds have to buy their bitcoins somewhere. "Bitcoin.de earns money when bitcoins are traded, whether prices are going up or down," Flaskämper said. "But generally, we enjoy rising prices more. In the past, a drop in price has also dampened interest in bitcoins, and trading volumes declined."

Bitcoin Deutschland AG - Oliver Flaskämper, Vorstand (bitcoin.de)

Oliver Flaskämper of trading platform bitcoin.de

Not for the faint of heart

The price of bitcoins has been extremely volatile, making the currency a high-risk investment. At the end of 2013, for example, the price of bitcoins surged to more than $1,000, before dropping to $500 within a few weeks. A year later, the bitcoin was down to only $200 before starting its long climb to its current all-time high.

Even the Winklevoss twins admit that speculation is a big risk for investors in the currency. "Currently, there is relatively limited use of bitcoin in the retail and commercial marketplace in comparison to relatively extensive use by speculators, thus contributing to price volatility," they write in a filing to the SEC.

Still, bitcoin advocates like trading platform operator Oliver Flaskämper believe the value of bitcoins is bound to rise in the medium and long term, simply because the total amount of bitcoins is limited to 21 million units by the currency's algorithm. Currently 16.2 million bitcoins are in circulation, and 1,800 new units are added each day.

"In the coming years, we will see the occasional price bubble, but also new record highs - unless of course bitcoin is banned or suffers technical difficulties," he told DW. For this year, Flaskämper is convinced the currency can crack the $1,900 threshold.

Governments and central banks have no control over the amount of bitcoins in circulation, and thus their value. Bitcoin proponents see this as the internet currency's strongest feature. Nevertheless, bitcoins are far from immune to political pressure. In February, China's central bank threatened to close down trading platforms should they not comply with money laundering regulation. Within moments, bitcoin lost 10 percent of its value.

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