Picture: 123RF
Picture: 123RF

Bitcoin has made a comeback and recovered some of the losses it incurred since the bubble of 2017 burst. And while bitcoin remains risky, this brief dream of spring has revived the crypto community’s worst instincts. Unsavoury marketing practices still abound, and SA consumers might be more exposed than they think.

Depending on how you look at it, bitcoin seems to be making a comeback. Since the beginning of 2019, which was the trough of the latest bear market, the price of the volatile crypto asset has roughly doubled, giving crypto enthusiasts some of those autumn 2017 goosebumps.

Facebook coin would be an immediate competitor for bitcoin and most cryptocurrencies, because of the sheer size of its 1.5-billion strong user base

However, if you take the performance over the past year, things look more bleak. A mere 2% increase year on year makes bitcoin about as profitable as simply leaving your money in a cheque account. The big difference is that bitcoin is one of the most volatile assets in the world, while your money sits perfectly safe in a traditional bank account.

Consumers must not be fooled by bitcoin’s most recent recovery, as huge risks still loom on the horizon. Sometimes in a place you least expect them, at your local retailer.

The crypto community has always been plagued by fierce infighting between rival groups. This infighting has led to a fracturing of bitcoin into three very different crypto assets.

First, there is bitcoin core, what most people would call the “real” bitcoin. On exchanges, bitcoin core trades under the label BTC and has about $137bn, by far the highest market capitalisation of all crypto assets.

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There is also bitcoin cash, which trades as BCH on exchanges and has a total market capitalisation of about $7bn. Despite the similarity in name, though, there are significant differences in the two assets. Bitcoin cash is, as the name suggests, supposed to be used similar to cash and allows users to send money relatively quickly from one to the other. Not fast enough to pay for a coffee before it gets cold, but faster than the average of 10 minutes it takes for a bitcoin transaction to be processed.

Crucially, the bitcoin cash community has split further in a hissy fit that could easily feature in a modern remake of Monty Python’s Life of Brian. While one group kept trading under the name bitcoin cash, a smaller group started trading their own coin under the name bitcoin “Satoshi’s Vision”, or BSV.

Most customers will not care about the infighting or the minutiae of different crypto assets, but with bitcoin making a comeback, BSV tries to capitalise on BTC’s brand name and popularity.

But customers in SA should pay particular attention, because SA start-up Centbee is offering customers the ability to buy BSV at, as it claims, thousands of retailers throughout the country. The company, founded by Lorien Gamaroff and Angus Brown, insists on branding BSV simply as bitcoin. Centbee argues that they use the official BSV logo, but both the icon BSV and the actual logo are almost indistinguishable from the original bitcoin logo.

Unsuspecting customers across SA can now go to retailers and buy BSV to send it to their Centbee wallet. But while the price of bitcoin is at about $7,700, the price of BSV is only at about $100 and that only after a highly suspicious price jump a couple of days ago. So, buyers beware, BSV is not the same as the original bitcoin. And if you think getting bitcoin for only $100 is a deal that is too good to be true, then it is probably too good.

There is a deeper story behind the highly unethical marketing of Gamaroff and Brown: BSV claims to be the one true heir of the original inventor of bitcoin, the anonymous and mysterious Satoshi Nakamoto, and thus insists on being the “true” bitcoin. Their ideology rests on the unsubstantiated claim of Australian businessman Craig Wright that he in fact is Nakamoto.

For years, Wright has been touring the world telling everyone willing to listen that he is the author of the original document describing bitcoin. To date, Wright has refused to provide conclusive proof of this claim, which would be trivial using modern cryptography. Instead, Wright performs media stunts, such as filing a worthless copyright claim on bitcoin.

What makes this situation so insidious is that SA has a huge problem with financial literacy. It is one thing for seasoned professionals to take risks and invest in different crypto assets. But by selling BSV to unsuspecting customers through retailers, Centbee deliberately targets a less informed segment of the market in the hopes of creating additional liquidity for their otherwise useless coin.

Not only does BSV lack a real use case, that much is true of pretty much any crypto asset, which is why they should be considered as speculative as playing the lottery, but following some of Wright’s antics, most reputable crypto exchanges decided to remove BSV from their offerings, which resulted in a highly illiquid market.

Assume you hold a $1m worth of BSV, how do you sell it? If you just dump it on the market, the price of BSV would drop, possibly by a lot, because the market capitalisation of BSV is only about 1% that of bitcoin core. So the most important thing you need is fresh liquidity, which is where Centbee and the thousands of SA retailers come in.

Customers need to realise two things. First, there are significant and important differences between the different breeds of bitcoin. BSV is not the same as what most people would call bitcoin. BSV is more risky, has almost no adoption, and is only traded on a few exchanges. The market for BSV is so thin these days, that it is quite likely that prices are manipulated, a risk that exists in all crypto markets, but is much less severe if the market is larger.

And second, if you have a substantial risk appetite and are prepared to lose everything you invest, then you might want to consider investing in a crypto asset. But only then, because huge risks remain. Chief among those is the threat by the Chinese government to outlaw bitcoin mining, the production of new bitcoins. Should this happen, it is quite possible that the price of bitcoin collapses entirely, dragging down all other cryptocurrencies.

Another huge risk comes from Facebook’s confirmed work on its own cryptocurrency, which would be integrated in WhatsApp. Facebook coin would be an immediate competitor for bitcoin and most cryptocurrencies, because of the sheer size of its 1.5-billion strong user base.

The SA crypto community should step up and take a stand against unsavoury practices such as those employed by Centbee. And the Financial Sector Conduct Authority should step in too, making it clear that such practices have no place in SA. If we want to establish the country as a global hub for crypto start-ups, we must make it clear that there is no space for unethical behaviour. Otherwise crypto assets will never reach their true innovative potential.

Co-Pierre Georg is an associate professor at the University of Cape Town and director of the UCT Financial Innovation Lab