Since Bitcoin gained popularity as the first cryptocurrency, many other alternatives are developed. They are Dogecoin, Litecoin, PPCoin, Namecoin etc. Over 30 or more coins are in circulation now.
Anyone with some start-up capital can build a website acting as cryptocurrency platform. If the funding stops, it’ll interfere with the exchange’s operation and even stopped investors from withdrawing money.
Currently, there are more than 30 digital currencies in circulation. There’s no fixed number in the types of currency, as new ones are continually developed while some will be obsolete.
China’s Response to Virtual Currency
With China’s government’s release of “Guarding Against the Risk of Bitcoin” statement, currently famous auction site like Taobao and search engine Baidu have stopped virtual currency trading.
However there are still a lot of investors eager to join the race of currency speculation. As the alternative coins are relatively cheaper than Bitcoin, some use them to trade bitcoins, and more rely on price hike to make some quick profit. Most of them are speculating on the coins’ prices. One of the new coins Quarkcoin even had a 300% price hike.
There are more than 200 QQ groups in China, which are discussion forums dedicated to bitcoin and other virtual currencies’ discussion. Many groups have reached the maximum limit of 1000 members. Baidu Post forum and other related forums have gathered over 65 million active users.
There’re specific terminology when we talk about cryptocurrency. “Mining”, “miner”, “block chain” etc, they describe the technical aspects of the virtual currency.
Investors Spends Thousands in Mining Equipments
“Price drops!” when a virtual currency fell from 0.2 yuan to 0.00002 yuan, an avid investor exclaimed while pounding on his keyboard.
Currencies like bitcoin are digital product, therefore the costs of producing them are relatively lower. An insider explained that to develop new coin, all you need is to make some changes to bitcoin’s parameters. Therefore most of the coins are deemed bitcoin’s alternatives.
The names of these coins also show their ambition and features: Litecoin, PPCoin, Dogecoin, Namecoin etc. People’s confidence in these coins is shown in their prices.
Virtual currency essentially is a string of data, so the easiest way to get a hold of these coins is through “mining.” First users need to a computer with high performance, with high range graphics cards to decrypt the transaction algorithms. Miners are competing against each other for the change to compute the algorithm, and in return they receive a set amount of coins for reward. Some miners choose to mine virtual currency on their own, and many join “mining pool” to share the costs and revenue.
Related computer hardware for cryptocurrency mining are in high demand now. Miners need to cash in quickly, or someone with better hardware will have higher chances in getting the coins. Mining can get expensive very quickly, not to mention the constant upgrade on mining hardware. In short, throwing in thousands of dollars on high range graphics cards is normal for beginners.
Besides hardware, mining process requires high power consumption for the computer, therefore high costs of electricity and sometimes air conditioning are required.
Some experienced miners have calculated the costs that to mine 1 bitcoin, it takes about $16 to $40 cost in electricity, depending on the location.
On January 7 this year, China’s largest online auction site Taobao has announced to ban all sales related to virtual currency, including all mining equipment, machines. Search engine Baidu is regulated to prohibit bitcoin payments. The reason is to protect people from the volatility in prices.
Even after the ban, advertisements such as mining pool for various virtual currencies still appear, ads with phrase like “experienced miners teach you how to mine x coin,” still attracts some investors.
China has declared that bitcoin doesn’t have equivalent legality with other state based currencies, and cannot be used for commodity trading.
This doesn’t stop people from investing. Besides the small drop in prices during the time when the statement was issued, bitcoin’s price rises again and stabilizes around $500.
Trap 1: Trading platform delays transactions, rumors of insider trading arise
Unlike the “printing money” mining approach, buying virtual currency directly from trading platforms is a form of speculation. And the operation is very simple. Different cryptocurrency has different prices on various exchanges. Some of these currencies can be converted directly to national currencies, while others can be traded into other virtual currency. Investors can try to keep an eye on each exchange and find a good deal, while these exchanges can trade with each other can profit from it. This practice is known as “brick moving”. In the process of “brick moving”, exchanges usually delay the transaction for individual investor, and caused frequent complaints. Exchanges will explain the delay is due to slow transaction confirmation, server migration, or system maintenance.
“I doubt their motives.” A experienced investor said. He usually trades among four different exchanges. However when “brick moving” occur, the coins are deposited after 2-3 days, and usually when the price falls.
Recently, a former virtual currency exchange employee has explained that: he was promoting a specific virtual currency, and the company controls over 90% of the total amount, so essentially the coin is worthless. Meanwhile, the exchange will buy this virtual currency with bitcoins from other exchanges, usually with high prices, then sell low at its platform, misleading investors to buy this worthless coin thinking that they have profited when they have never heard of this currency. If investors buy in small quantity, the exchange will allow them some profits.
However when the order is in large quantity, the exchange will delay the transaction, and continue buying from other exchanges, causing the price to drop even more. By doing this, exchanges have used worthless currencies to scam investors’ cash.
Trap 2: If exchange’s operation halts, investors might not get their money back
Virtual currency exchanges are similar to “underground money institutions”, with deep water and high risks. Cryptocurrency’s prices often are manipulated by these exchanges. If you make some money, you’re considered lucky, but even then you might not be able to withdraw your money. You can keep depositing money into the exchange, but when you try to withdraw, it’s difficult in doing so.
The largest bitcoin trading platform MtGox is facing bankruptcy, and simply posted “because of technical maintenance, all withdrawals are suspended. Thank you for your understanding and support.” Most investors’ funds are trapped at that exchange.
This move has attracted criticism, most investors feel abused by such established bitcoin exchange. Many investors have tried the customer service number with no result. Investor Wu said:
“Sometimes the exchange will say the website is under hacker’s attack, or a hacker has hijacked customers’ accounts. Whatever reason it has, you have no chance of getting your money back.”
Virtual currency is so easy to set up. Once you have enough capital, ability to build a website, anyone can establish a trading platform. To be successful, these trading platforms continually need investors to inject national currencies to fund the operation. However when experienced investors suffered some losses and choose to leave the market, and the number of new investors hasn’t reached a certain level, the funding for the exchange is broken. That’s why we see these trading platforms go bankrupt or suspend all cash withdrawal.
A bitcoin insider has said bluntly, mining virtual currency is equivalent of issuing currency; the action of brick moving is the same as foreign exchange speculation. However national currencies are backed by governmental credit and gold reserves, and bitcoin and its alternatives rely on mathematical algorithms and credit among investors. If there’s no credit, virtual currency essentially has no inherent value.
A financial law professor Huang has commented on bitcoin and other virtual currencies have no internal value. He suggests that individual investors should be careful before investing. Bitcoin’s price hike is more likely due to exchanges’ manipulation or dumping by early adopters.