Booming cryptocurrencies fire up investment interest

Value of virtual money spiking but technical details hamper spread

by

Staff Writer

Virtual currencies have been playing an increasingly significant role in finance, with investors around the world buying the digital tokens and driving up their value dramatically.

Markets in Japan are no exception.

Industry insiders say cryptocurrencies will spread more widely, establishing their position as an asset class and enabling their use in more stores. Public trust in the electronic money is expected to improve as the government moves to protect consumers by introducing stricter controls on exchange operators.

But in the long term, how deeply cryptocurrencies will penetrate people’s lives is still anybody’s guess. Some experts say many people won’t partake because the currencies are too difficult to use and understand.

The value of virtual currencies has skyrocketed in the past year or so. One bitcoin traded for less than $600 about a year ago, but became worth more than $4,000 this month.

One ether, the cryptocurrency with the second-highest value after bitcoin, now trades for about $300 versus about $11 a year ago.

“Virtual currencies have been becoming an attractive investment asset. That’s the main reason their prices are rising,” said Yasutake Okano, senior consultant at Nomura Research Institute.

The perception that digital money is a safe haven appears to be gaining ground. According to media reports, more people are shifting yen- and won-denominated assets into cryptocurrencies as concerns about war with North Korea grow.

Okano said that while bitcoins once dominated the market, the prices of alternative digital tokens have been rising.

“The market is really booming,” he said.

BitFlyer Inc., a Tokyo-based startup that provides exchange services for virtual currencies, says it had 600,000 customers as of May — up from 200,000 a year ago. Most of them are Japanese, the firm said.

Fisco Ltd., which also operates an exchange, is holding seminars about investing in virtual currencies for beginners.

Because bitcoin’s high volatility has become headline news, “more investors and consumers are interested in investing,” said Masayuki Tashiro, Fisco’s chief product officer.

A Fisco seminar in Tokyo last week attracted 20 people, and one participant said he wanted to learn more about cryptocurrencies.

“I’ve been interested in virtual currencies as they seem to be on a growth trend this year,” said the 39-year-old man, who declined to be named.

The man, who has invested in traditional assets like stocks and bonds, said that it is difficult to understand how virtual currencies work but that he was “positively considering investing.”

While virtual currencies continue to grow as an investment asset, Japan is seeing more stores accept them as payment.

In April, major electronics retailer Bic Camera Inc. launched a bitcoin trial at one of its stores. The trial expanded to all stores in July.

Department store Marui Co. began a similar experiment earlier this month at the Shinjuku Marui Annex in Tokyo.

Mike Kayamori, head of Tokyo-based cryptocurrency exchange Quoine, said it will become more common in Japan to pay with bitcoin.

“There are Japanese people who have made a small fortune from bitcoin recently due to its sharp price increases. These people must be really eager to use it,” Kayamori said.

Revisions in April to such laws as the Banking Act and the Payment Service Act are another factor that could facilitate the spread of cryptocurrencies, he said.

The new regulations stipulate that virtual currencies have “asset-like values” that can be used in making payments, and that they can be transferred digitally. But they also impose traditional corporate regulations on the exchanges, such as requiring them to register with the government and submit annual reports.

To prevent virtual currencies from being used for money laundering or terrorism, exchange operators are also obliged to verify the identities of those who open accounts.

Attendees listen to a seminar on virtual currencies hosted by Fisco Ltd. last week in Tokyo.
Attendees listen to a seminar on virtual currencies hosted by Fisco Ltd. last week in Tokyo. | KAZUAKI NAGATA

At this point, people who have already purchased virtual currencies just remain early adopters, Kayamori said.

“We are still in the run-up period to the starting point. I think it will take about a year after the enforcement of the legal revisions for more firms to launch related businesses and for the market to grow more,” he said.

Kayamori said that his firm has already applied for registration but that the assessment process is taking longer than expected. This is apparently because of recent developments, including bitcoin’s split this month into two separate cryptocurrencies — bitcoin and bitcoin cash — after users known as “miners” failed to reach an agreement with developers over a scalability issue.

Because bitcoin is not managed by a central authority, the two sides had to find common ground but couldn’t, prompting some of the miners to create a new currency.

Miners are people with powerful computers who check whether other users are trying to alter records on the public bitcoin ledger. They are rewarded with bitcoins for maintaining the ledger’s accuracy.

The increase in trading volume is creating problems for bitcoin, including longer transaction times and higher fees. The average transaction fee, which was less than $1 per bitcoin about a year ago, has risen to roughly $4.

Bitcoin miners and developers had discussed potential solutions, such as shrinking the data or expanding the block size in the blockchain — the cryptographic ledger that keeps track of every single bitcoin transaction, making counterfeiting virtually impossible.

In light of the split, the Financial Services Agency is probably cautious about approving exchange operators, Kayamori said.

Moreover, the recent boom in so-called initial coin offerings — in which startups issue their own virtual money and sell it directly to investors — probably poses another sensitive issue for the FSA, he said.

Initial coin offerings allow startups to raise money without going public or using intermediaries, such as venture capital firms. Investors can then sell this virtual money via cryptocurrency exchanges — a practice that could completely change the way companies traditionally raise funds.

While the spread of volatile cryptocurrencies is likely to continue, it is still unclear whether they will become an accepted standard in the long term.

“I think ordinary consumers have the perception that bitcoin is something difficult,” said Nomura Research’s Okano.

Some have difficulty grasping how virtual currencies work, and these knowledge gaps can be exploited by fraudsters.

The National Consumer Affairs Center of Japan said inquiries about virtual currencies jumped to 847 in fiscal 2016, compared with 194 in fiscal 2014.

Moreover, Okano said the process of buying virtual currencies is bothersome for people who lack IT literacy. For instance, exchange operators require that clients upload their IDs to create an account, but this might thwart ordinary consumers.

If the convenience improves, more people might get on board, but cryptocurrencies “still have a long way to go,” Okano said.