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VOL. 42 | NO. 20 | Friday, May 18, 2018

Bitcoin fans rave, but understand it’s still a risky business

By Jeannie Naujeck | Correspondent

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By now, anyone who follows Wall Street even slightly has heard of cryptocurrency and its most famous spawn – bitcoin, which launched in 2009 but grabbed headlines last year for its wild swings in valuation.

Today there are some 1,500 digital coins on the market - including Bacoin, a faux cryptocurrency issued by Oscar Mayer to reward “investors” with free bacon as the value goes up.

But for bitcoin believers, cryptocurrency is more than just a bunch of baloney.

When the first cryptocurrency exchange opened in 2010, a bitcoin was worth pennies in U.S. dollars, and the currency bumped along below the $100 market until mid-2013.

It took until early 2017 to rise above $1,000 but starting last summer, bitcoin went on a tear, reaching $17,900 before losing half its value by February. That means anyone who bought in at the hype lost big.

Recently bitcoin has been hovering around $8,400 U.S. dollars, according to Coinbase, an online exchange where anyone can buy or sell digital currencies.

And since the early days, Ether, Litecoin and other digital currencies have joined bitcoin on the exchanges, which track movements in the valuation that can make investors paper millionaires - or big losers - overnight.

Back in bitcoin’s early days, Chattanooga attorney T.J. Gentle was CEO of Smart Furniture, a venture-backed company that allowed people to customize and order furniture online. Around 2011, he recalls, a customer offered to pay for a $10,000 order in bitcoin.

Smart Furniture turned it down.

“I’ve never had the heart to go back and see what that $10,000 in bitcoin in 2011 would be today,” Gentle admits.

A quick check reveals that the $10,000 order would be worth more than $14 million today. And at the height of bitcoin’s valuation last December, it was worth more than twice as much - about $33.5 million.

But while there are “bitcoin ATMs” scattered around the country, it’s still hard to spend digital currencies, although the online retailer overstock.com takes it, as well as some local retailers like the Nashville restaurant Flyte.

At a recent Bitcoins & Beer Meetup at Village Pub in East Nashville, half a dozen enthusiasts talked animatedly about the future of cryptocurrency – its prospects for a healthy return, and the future of blockchain technology. All are aware of the risk of putting U.S. dollars into unsecured, speculative currencies.

“It’s worth learning about and investing in, but only invest long-term what you can afford to lose,” says Lij Shaw, a record producer and engineer. “Because it’s still risky.”

But nearly everyone has his eye on the long term. James White, a Meetup regular who bought bitcoin early, says he owns no stock equities and is investing solely in cryptocurrency.

“I’m going long,” he says. “Go long and stay long.”

Cryptocurrency enthusiast Eddie Davis says he believes that while certain coins may come and go, digital currency is here to stay and will be embraced in developing countries where the ability to bank is limited.

“I think the driver is going to be the lack of financial availability in the Third World, where everybody has a cell phone and nobody has a bank,” he adds.

“If you want to buy a goat from the next village, now you pay in chickens. One day you’re going to pay in bitcoin or Ether.”

Davis, who says he was a day trader in the 90s, bought his first digital currency in February, after the crash. He’d been tracking it since last summer.

His interest was piqued after a friend offered to pay him for some mechanical work in Ethereum. Now Davis also holds Litecoin and bitcoin, and says that although his portfolio is up about 10 percent, watching his cryptocurrency rise brings other rewards.

“I put skin in the game to increase my interest and involvement,” Davis explains. “Now that I’m invested in it, the learning means something.”

The blockchain technology that powers cryptocurrency is also creating other ways to invest.

One couple at the Meetup talked about their plan to build a real estate portfolio by issuing blockchain-enabled security tokens through a crowd sale. Each security token will give the investor a share in an LLC, and proceeds will be used to purchase properties like a $16 million apartment building on Herman Street in Nashville and others in Tennessee cities like Memphis and Chattanooga.

Eddie Davis

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The couple, Luis A. del Mazo, Jr. and Tanya Rodriguez, who both work for Benchmark Realty, hopes to raise $10 million to $50 million for their project from individuals both inside and outside the United States. They must be “accredited investors,” with a minimum net worth of $1 million, excluding primary residence, and $200,000 income for each of the past two years.

“It is a gamble, and that’s why it’s for accredited investors,” del Mazo acknowledges.

“I think in the future a lot of people are going to do this to raise money for their businesses.”

Currently there are some 1,500 digital currencies out there. The best known are bitcoin, bitcoin cash, Ethereum and Litecoin. New currencies are being issued all the time as “tokens” through initial coin offerings (ICOs), often by startup businesses as a way to raise money. Many trade for pennies.

As with the real estate token project, ICOs give early investors the possibility of being in on the ground floor of a project that could take off in the future. But ICOs that promise high rates of return could violate Securities and Exchange Commission rules. The SEC is closely monitoring ICOs to protect consumers from fraud and abuse.

That’s as it should be, says Gray Sasser, attorney with Frost Brown Todd in Nashville, who advises companies in the area of blockchain and cryptocurrency.

“There are some truly bad actors in this space … people trying to stand up a token that does absolutely nothing, marketed in a get-rich-quick scheme. Any token that is marketed as something that is going to go up in value very quickly I would steer away from,” Sasser adds.

“These things should be considered long-term investments because they are usually at an early stage in the project’s lifetime, so to ever receive a return would be a long time in the future, and you should really only be investing in a project that you understand.”