Author Archive

Ciaran Ryan

The Writer's Room is a curated by Ciaran Ryan, who has written on South African affairs for Sunday Times, Mail & Guardian, Financial Mail, Finweek, Noseweek, The Daily Telegraph, Forbes, USA Today, Acts Online and, among others. In between he manages a gold mining operation in Ghana, and previously worked in Congo. Most of his time is spent in the lovely city of Joburg.

Crypto pioneer buys a R600k house with crypto and it ends up costing R200k

Written by Ciaran Ryan. Posted in Uncategorized

Using a smart contract, with no ID, email or customer information required. From Moneyweb.

AltCoin Trader founder Richard de Sousa purchased the property ‘completely outside of the banking system’. Image: Supplied

AltCoin Trader founder Richard de Sousa purchased the property ‘completely outside of the banking system’. Image: Supplied

Richard de Sousa founded crypto exchange AltCoin Trader in 2015 and has been a pioneer in bringing crypto to the broader South African market.

He lives, eats and breathes crypto. He decided to start exiting the traditional financial system several years ago – going off the grid, if you will, though says he still has several trusts and bank accounts.

He started buying bitcoin when it was $6 (around R91); today it is close to $20 000 (R303 805).

When bitcoin reached R10 000, he figured it was a good time to convert some of his gains to property.

He purchased a R4.3 million property for 420 bitcoin, which at today’s valuations is close to R128 million. He sold more than 90% of his bitcoin – something he regrets to this day.

“We all made mistakes when it came to crypto. When bitcoin hit R10 000 I thought I had done well out of it and I wasn’t sure where it would go next, so I decided to pour some of my profits into property. In retrospect it was a mistake, but I’m okay with it.”

A story to shake the banks

De Sousa has another story to tell that should have the banks very worried indeed.

He recently spotted another property for sale on the West Rand with an asking price of R650 000.

He jumped onto the website, which offers crypto-based financial services, including loans.

He decided to borrow the money for this house using his Ethereum crypto coins as collateral.

He then applied for a loan from Oasis, without having to go through the Know Your Customer (KYC) routine, nor did he have to provide an ID or an email address.

Here’s where it gets interesting: there are no monthly repayments.

In fact, you can choose to defer any payments for 20 years, or 40 years, if you so wish. When De Sousa took out the loan, the interest was 0%. Today it is 2%.

This is a mortgage lending model that could smash the banks’ hold on this market over the next few years.

He goes over the loan process in this Youtube video:

De Sousa’s loan was based on a smart contract, which is a type of contract linked to the blockchain, where certain conditions must be fulfilled before the collateral is called in. In this case, he had to provide roughly R1 million Ethereum as collateral to cover a loan valued at R650 000 to buy the property.

Should the Ethereum price drop below R650 000, the “smart contract” would automatically liquidate his Ethereum, deduct a 13% liquidation fee (or penalty) plus the loan amount, and refund him the balance.

Read: The future of money and payments

It took De Sousa less than 10 minutes to apply for the loan and place his collateral in the form of Ethereum coins into a vault at Oasis. He retained custody of the coins for the duration of the loan. Only the smart contract had the right to call on his collateral, and only under the conditions outlined earlier.

He wrote to the home seller’s attorneys and told them he would make full payment in cash into their trust account within seven days. “I gave myself seven days to do this, but in reality I only needed a couple of days.”

The loan for R650 000 was made in a crypto currency called Dai, which is backed 1:1 by the US dollar. He moved the Dai to the AltCoin Trader platform, sold it for rands (and made an extra 4-5% on this leg of the transaction because US dollar-linked cryptos typically sell for a higher price in SA due to local exchange controls, making it more expensive to acquire hard currencies).

With the Dai now converted into rands, Da Sousa transferred R650 000 to the house seller’s attorneys, and the deal was concluded.

The seller had no idea of the novel funding structure that took place in the background.

At this point, De Sousa was under no obligation to make monthly instalments on the loan.

He could ignore this for the next 20 years, or longer – the only risk he faced was that Ethereum’s price would drop below 66% of his collateral requirement, at which point his crypto would be liquidated under the terms of the smart contract.

One way to avoid your collateral being compromised in this way is to top it up with more Ethereum should there be a severe price drop.

Read: Six bitcoin will buy you a R1.4m house

De Sousa was under no obligations to make any monthly repayments on the loan, so he left it for several months. Seven months later, the Ethereum price had gone up three times, so he was now sitting with R3 million in collateral instead of the original R1 million.

At this point he decided to settle the loan in full. In effect, he paid about one third (or R200 000) of the house’s asking price by simply waiting for his Ethereum to increase in value. The house is now tenanted and earns a monthly income.

“I did all of this completely outside of the banking system, which is fraught with risks,” he says.

“You miss two payments under a mortgage contract and the banks have their lawyers all over you. This way I avoided the banks altogether, and that makes me extremely happy.”

It’s the ability to take out loans like this that should encourage mass adoption of cryptos. Smart contracts are backed by cryptos such as bitcoin and Ethereum. Rands and US dollars (unless in the form of Dai or any other so-called ‘stable coin’ backed by actual fiat currencies) won’t get you far in this world.

You have to exit the matrix and enter the crypto universe. Then all sorts of possibilities appear, says De Sousa.

VBS Bank liquidators take a scalp in the form of Firmanox

Written by Ciaran Ryan. Posted in Journalism

Firmanox’s ‘far-fetched’ story to dodge R24m owed to the bank didn’t pass muster with the court. From Moneyweb.

Among other things, the bank agreed to pay more than R1.3m to Firmanox as sponsorship towards Shembe Unyazi TV, which was to be broadcast across SA and the world. Image: Supplied

Among other things, the bank agreed to pay more than R1.3m to Firmanox as sponsorship towards Shembe Unyazi TV, which was to be broadcast across SA and the world. Image: Supplied

The untangling of the mess around VBS Bank, which was placed in liquidation in 2018, continues to ricochet through the courts.

Read: Eight suspects arrested in SA’s ‘biggest bank robbery’ VBS fraud case

Last month the Johannesburg High Court placed Firmanox in liquidation after finding it owed the bank R24 million and was unable to pay its debts. This was for the 2016 purchase of six vehicles and an overdraft facility.

Firmanox, a brand communication, media and advisory services company, had argued that it was not indebted to the bank, and pointed to agreements signed with the bank to enter into a business deals whereby the bank would be required to make financial contributions.

VBS curator Anoosh Rooplal presented evidence to the court that in March 2017, VBS’s then chair Tshifhiwa Matodzi had generated a list of overdrawn bank accounts which were to be “cleared” or removed from the bank’s balance sheet before the financial year-end on March 31, 2017.

Fictitious deposit

One of these accounts was that of Firmanox. Two days before the financial year-end, a fictitious entry was created in Firmanox’s overdrawn bank account in the amount of R15.5 million to clear the overdrawn account.

“It is undisputed that there was no actual deposit of R15.5 million made into Firmanox’s bank account. Instead, according to the liquidator, it was made to appear as if a deposit had been made, whereas in reality Firmanox remained indebted to VBS in the amount to which its account was overdrawn,” reads the judgment.

VBS and Firmanox had entered into an agreement to form a company, Shembe Unyazi Bank of South Africa (Subsa), which would be 60% owned by the bank and 10% by Firmanox, with the aim of providing financial services across the country.

The agreement stipulated that VBS would pay R5 million towards the implementation phase of the company roll out.

It would also pay two monthly amounts of R666 000 to Firmanox as sponsorship towards a new TV channel called Shembe Unyazi TV, which was to be broadcast across SA and the world.

Firmanox also relied on a memorandum of understanding which required VBS to make other payments to it in terms of the business arrangements between them.

On this basis Firmanox denied it owed anything to the bank.

“The agreements on which Firmanox relies do not explain the overdraft debt,” says the judgment. The only contractual obligation on VBS was to provide initial funding of R5 million and monthly payments of R660 000 commencing on April 25, 2016.

Firmanox did not deny the existence of the fraudulent scheme at VBS, only that it was not a beneficiary of or participant in the scheme. It also did not deny the credit entry of R15.5 million in its account in March 2017.

Read: How VBS looted municipalities

Court perplexed

The court was perplexed by Firmanox’s denial of the existence of vehicle finance agreements, when the company had paid eight monthly instalments on the six vehicles, but stopped suddenly when its overdrawn account was credited with an amount of R15.5 million .

The court also found it peculiar that two other companies whose VBS accounts received fictitious deposits just prior to the 2017 financial year-end, BLT and Sabicorp, were also parties to the agreement with Firmanox.

Rooplal claimed that the debt owed by Firmanox to VBS forms part of a larger fraudulent scheme perpetrated on VBS which resulted in a loss to it of more than R1 billion, “which scheme led to its ultimate liquidation”.

The court found Firmanox’s story “patently far-fetched and implausible” and “beset with contradictions and difficulties” and ordered its final winding up.

Read:Ex-PIC CEO denies bribe to help VBS Mutual Bank

More public shame for PIC officials linked to VBS

Alternative investment returns knock the JSE out of the park

Written by Ciaran Ryan. Posted in Journalism

An astonishing array of high-yielding alternative investments were on display at the Alternative Investment Conference last week. From Moneyweb.

Protecting capital, outperforming benchmarks and beating inflation – a long list of investment possibilities exists. Image: Shutterstock
Protecting capital, outperforming benchmarks and beating inflation – a long list of investment possibilities exists. Image: Shutterstock

Given the flaccid returns from JSE stocks over the last decade, it’s little wonder that yield-hungry investors are scouting an incredibly rich landscape of alternative investments yielding 20% or more a year.

There were some astonishing products on display at the Alternative Investment Conference last week. They included private equity, hedge funds, cryptos, structured products, venture capital and 12J investment funds.

One of the problems with traditional private equity – investing in the non-listed space – is lack of liquidity. Investors only get a return once the investment is exited after five or seven years.

Sasfin’s new venture Scott Street One has solved this by creating a secondary market for pre-existing private equity investments, and is currently raising R750 million with a target return of more than 15%.

Developments like this could unlock huge amounts of capital for otherwise neglected though promising companies.

There has been some criticism of 12J investment funds for delivering below-par returns, but that’s certainly not the case for Infinity Anchor Fund, whose Infinity Performance Fund was the top performing fund in its class for the last year with an annual return of 15%. “We invest in asset rental businesses that have asset backing and regular rentals. The risk is low and this allows a clear exit strategy,” said Gaurav Nair, the company’s CEO.

Read: Understanding the benefits – and risks – of alternative investments

Reka Borole and Ross Tasker of Khulisa Investment Partners pointed to the yield-rich opportunities lurking in 12J and structured finance products (sometimes wrapped in options to protect capital or sweeten returns) offering internal rates of return of up to 25%.

It is returns like these that that are capturing the attention of serious investors around the world.

“SMEs [small and medium-sized enterprises] in SA lag those in Europe due to lack of funding, and the effect is to lower employment and contribution to GDP,” said Tasker. “With strategic advice, the economy can have an entirely different trajectory.”

SMEs finally get some love from investors

There’s a swarm of companies now pouring money into SMEs, perhaps the most neglected segment of the SA economy.

“SMEs are the engine room of the economy and generate the most GDP, but only thrive when investors make liquidity available,” said Stephen Greenwood of Valloop Management. “Alternatives [investment] will dominate the investment space, and it will drive the need for product with a blending of risk and return.”

Valloop has solved the SME funding drought by providing a single portal for the types of debt typically required to grow a business: asset finance, working capital, private equity and vanilla debt.

Traditional sources of funding can cripple an SME with interest costs. They may pay 10% on private debt, 7.5% on asset finance, and 6.5% on real estate finance. Valloop starts generating a return on its various financing products as soon as the deal is concluded. This means it earns fixed annual income of about 3.5% and annual capital growth on about 16% – a total annual return of close to 20%.

This investment approach also eliminates the need to exit an investment after five years. As long as the returns are coming in, the fund can elect to stay invested for the long term. Workers are given a share in the business to align corporate goals with that of management and owners.

Read: Alternative investments can ward off lacklustre portfolio returns

It’s a similar story at Aurik Capital, which has found a way to connect investors with SMEs in search of growth capital. It targets SMEs with turnover ranging from R12 million to R300 million, a good growth story and seasoned entrepreneurs.

“We have a pipeline of about 338 SMEs that have grown 28.9% annually in revenue, though this will likely drop to 25% post-Covid,” said Pavlo Phitidis of Aurik Capital. “Most of our businesses are not start-ups. They have a history of more than 17 years and are growing. SMEs have trouble accessing capital for growth, and investors are unable to tap into this market.”

Businesses can sign up online with Aurik and load up business information for assessment. If successful, they are put on a growth programme to make them investment-ready.

Targeting bigger SMEs

Caleo Private Equity takes a slightly different approach, targeting companies with turnover of between R20 million and R200 million. The fund looks for growing companies capable of either dominating their sector or being purchased by another player.

“Our investor base is made up people who built their own businesses and have good networks to other opportunities,” said Caleo director Glen Scorgie. “We have an aversion to funds which have a finite life – this means you’re selling because the fund is coming to the end of its life. This may not be the best time to sell.”

All private equity fund managers take an active role in the development of the investee companies, and bring their networks and capital to bear to get the best out of their investments.

The rise of hedge funds

Some hedge funds have delivered returns of 100% and even 200% during the year of Covid, and while these are exceptional, fund managers have found a ready ear from investors on the hunt for yield at a time of extraordinary volatility.

According to Jacques Conradie, MD of Peregrine Capital, the ability of hedge funds to adopt a bi-directional approach (profiting from rising as well as falling stock values) has helped these funds withstand the whiplash of the last few months. “A bi-directional investment strategy means we can back expected winners and bet against losers. In this year it was especially important to protect capital,” he said.

Long short list

“When did you last see a short list this long?” asked 36One fund manager Cy Jacobs, pointing to the trove of opportunities for hedge fund managers to profit from JSE companies that have tanked over the last five years, such as Steinhoff, Brait and Nampak. Previously only available to institutions and the wealthy, retail investors can now get involved through unit trust-type funds offered by 36One and others.

“We delivered a positive return when the rest of the market was falling, through the strategies we can apply; R1 million invested with us in 2005 would have given you R8 million today,” said Jacobs.

Source: Bloomberg via 36One Asset Management

Hedge funds cover a broad range of investment appetites. Some are very low risk, others quite aggressive. Some are highly geared, others have no gearing at all.

Given erratic returns on the JSE and declining bond yields, competition for investment capital will inevitably circle around to alternatives that can protect capital, outperform benchmarks and beat inflation. And there were plenty of those on display last week at the Alternative Investment Conference.

A brief history of the Royal Bafokeng Nation’s mining story

Written by Ciaran Ryan. Posted in Journalism

A succession of carpetbaggers has tried to deprive the Bafokeng of their ancestral endowment. From Moneyweb.

The nation has managed to diversify its portfolio from relying solely on mining. Royal Bafokeng Platinum (pictured) is one of three legacy assets within the holding company. Image: Supplied
The nation has managed to diversify its portfolio from relying solely on mining. Royal Bafokeng Platinum (pictured) is one of three legacy assets within the holding company. Image: Supplied

It was the Bafokeng’s great fortune – or misfortune, depending on who you talk to – to occupy land holding some of the richest deposits of platinum in the world.

The platinum lay undisturbed for several decades until a commercial use was found for it, first in industrial applications and later in autocatalysts. It sparked a new round in a centuries-long campaign to dispossess the Bafokeng of their ancestral rights.

Few South Africans today are aware of the struggles the Bafokeng nation, now numbering some 350 000 people, endured throughout South Africa’s storied political history.

As detailed exhaustively in the book ‘Platinum Man’ by Ciaran Ryan and a University of North West academic study entitled ‘People of the Dew’ by Andrew Manson and Bernard Mbenga, the Bafokeng have fought for more than 100 years to retain title to the land their ancestors occupied for hundreds of years. They have had to defend their land and ancestral rights against a succession of predators, from Mzilikazi (then fleeing Zulu King Shaka’s carnage) to the British colonists and the Boers.

Title deeds were entirely foreign to the Bafokeng concept of communal property rights, but the tribal leaders were fast learners. With the arrival of the Boers in the 1800s, the Bafokeng found themselves with no land to call their own. The then head of the Bafokeng, Kgosi Mokgatle, despatched hundreds of young men to work in the Kimberley diamond fields and return with cash in hand.

This cash was used to purchase farms, one by one, until the Bafokeng accounted for 20% of all land owned by black communities in the then Transvaal.

Under apartheid, most of its ancestral land disappeared into the now defunct homeland of Bophuthatswana, and with that the royalties to which it was entitled from platinum mining. It was a brazen act of grand larceny.

When the ANC came into power in 1994, it chose to separate surface from mineral rights and vest the latter with the state. The Bafokeng – often dubbed The Richest Tribe in Africa – had to contend with yet another attempt to relieve it of its ancestral endowment.

Some 84% of Impala Platinum’s mining lease area was on Bafokeng land on which it earned royalties – which anyone in mining knows is a fluid and fabulously creative concept.

Profits can disappear at the stroke of a pen, and in the Bafokeng’s case, they often did. Impala started mining its land in 1966 but it was only in 1978 that it received its first royalty payment. There were many years after that when no royalty payments were received.

It was the late Steve Kearney, then CEO of Impala, acting against the wishes of his seniors within the then Gencor group (later acquired by BHP Billiton), who decided to restore some trust and cordiality to the relationship between Impala and the Bafokeng.

“We remember him with gratitude and love,” says Kgosi Leruo Mologleti, head of the Bafokeng. “Steve was nearly fired by Gencor for seeking an accommodation with the Bafokeng. However, when the Impala share price rocketed, trading at R1 200 or more than 17 times from when he took over, Gencor looked the other way with a smile.”

Until then, Impala was content to rely on apartheid-era courts and tribal administration contrivances to prevent the Bafokeng from having access to details of mining activities on its land.

The Bafokeng might have owned the land, but they were not allowed to know what was happening below its surface.

Says Molotlegi: “It was Steve Kearney who opened up the Impala books for our perusal, who acknowledged the one-sided nature of the royalty agreement we then had with Impala, and who respected us as a people with legitimate rights and expectations. It was Steve who negotiated a much improved royalty agreement and reframed the relationship between us. The royalty was increased from a mere 13.5% of taxable income, to 22.5 % plus one and half million shares and one board seat.

“So significant was the Impala-Bafokeng fight that Kearney ultimately helped to resolve, that former President Nelson Mandela would comment at the funeral of my father, Kgosi Lebone I, in 1995: ‘The current legal battle between Bafokeng people and the mining houses is a stark reminder of the awkward economic legacy we inherited. Government will not interfere in the legal process, but it is not disinterested in the case, whose outcome, we believe, will have wide impact.’ We reached settlement in 1999, after 15 years of litigation.”

It was the start of a new era, with Royal Bafokeng Holdings (RBH) being formed through the amalgamation of two companies: Royal Bafokeng Resources (RBR) established in 2002, and Royal Bafokeng Finance, established in 2004.

Steve Kearney was the founder chairman and CEO of RBR, which housed Bafokeng stakes in:

  • Impala Platinum Mine (Implats);
  • Bafokeng Rasimone Platinum Mine (BRPM), later rebranded Royal Bafokeng Platinum (RBP); and
  • Merafe Resources.

These three Bafokeng legacy assets would account for more than three-quarters of the value of the RBH portfolio. Kearney also played a fundamental role in the initial negotiations with Impala and for the BRPM mine with Anglo American in the Bafokeng’s quest for an equitable deal.

RBR and RBF were amalgamated to form RBH, by which time Kearney had sadly passed on. The final piece of the Bafokeng mining story involved the conversion of its royalty agreement into an equity share in Impala, which was executed in 2007. The Bafokeng did this because there was talk of the government appropriating mining royalties for its own benefit, on the basis that mineral rights are part of national patrimony for the benefit of all South Africans.

Through RBH, the Bafokeng managed to diversify its portfolio from relying solely on mining, to a diverse asset base in financial services, property, infrastructure and telecommunications. Mining accounts for less than 15% of the portfolio.

It is all thanks to the labours of Bafokeng men and women, and the wisdom of tribal leaders and friends such as Steve Kearney, who had the foresight and the willingness to resist a succession of carpetbaggers who would deprive the Bafokeng of their ancestral rights.

Transaction Capital’s results a sobering window into SA’s economic plight

Written by Ciaran Ryan. Posted in Journalism

The ultra-poor have become poorer; the rest are on the rebound. From Moneyweb.

Image: Karel Prinsloo, AFP via GettyImages

Image: Karel Prinsloo, AFP via GettyImages

We learn from Transaction Capital’s results for the year to September 2020 that 77% of unsecured loans across the economy are overdue, as are 23% of vehicle and mortgage loans.

These should be frightening figures to anyone paying attention, and show the devastation caused by the lockdown. With SA’s unsecured lending valued at just over R300 billion, and mortgage and vehicle loans at R1.4 trillion, that’s a sizeable proportion of financial sector assets now in some level of distress. Part of this would be accounted for by the repayment holidays extended by the banks at the start of the lockdown in March this year.

What’s also alarming is the plight of the ultra-poor, defined as those households living on less than R8 000 a month.

Figures from University of Cape Town’s Liberty Institute of Strategic Marketing show the number of ultra-poor adults has climbed to 77% from 56% of the population in just over three years.

Transaction Capital’s business – focused around financing and servicing minibus taxis, debt collection and more recently the used car business, following the acquisition of 49.9% of WeBuyCars – withstood the Covid lockdown with some dignity. For the five years to September 2019, the company delivered blistering compound annual growth of 23%. That trend was interrupted by the events of the last few months with a 66% drop in core headline earnings per share.

Read: Transaction Capital swoops on WeBuyCars

Though the poor have been hardest hit by Covid, they are also least likely to qualify for credit.

Non-performing loans may increase

Transaction Capital’s CEO David Hurwitz says collection rates on non-performing loans are back to roughly 90% of pre-Covid levels. “At the start of the lockdown, the banks were primarily focused on providing debt relief to customers. We saw very little evidence of customers being handed over to their legal departments, but we expect to see an increase in non-performing loans coming out of the banking sector.

“Our experience is that there has been a rather sharp recovery in customers’ ability to service outstanding loans.”

There are 27 million credit-active consumers in SA, of which almost 40% or 10 million had impaired credit records in June 2020.

Transaction Capital’s Consumer Credit Rehabilitation Index (CCRI), which measures South African consumers’ propensity to repay debt, had deteriorated 3.4% at September 2020 compared with the prior year. This was the largest annual decline since the CCRI’s inception in June 2017.

“The 2.2 million jobs lost in the second quarter of 2020 alone, will escalate economic strain in the consumer sector with concomitant reductions in credit extension and retail sales,” says the Transaction Capital results statement.

The economic outlook for the coming years gives little cause for optimism.

SA Taxi, WeBuyCars

“The recovery of South Africa’s fragile economy is in any event likely to lag that of the global economy, with GDP only expected to reach 2019 levels by 2024, says the results commentary for the 2020 financial year. “Although SA Taxi, (Transaction Capital Risk Services (debt collection) and WeBuyCars are well placed to return to their long-term track records for growth, further sharp downturns in socioeconomic conditions in South Africa remain the primary downside risk to our expectations for growth and returns in the years ahead.”

Transaction Capital is arguably the largest taxi-focused business in the country, providing finance, insurance, auto repairs and loyalty programmes to taxi operators. Hurwitz told Moneyweb the R1.8 billion purchase of a half-share in WeBuyCars was executed with speed when it became clear that South Africans faced with lower disposable incomes would switch from purchasing new to used cars.

This was a prescient move: WeBuyCars increased monthly sales to more than 6 250 in the last three months, up from 5 900 at the start of the year.

This will make a substantial contribution to profits going forward.

The SA Taxi division offered repayment holidays to taxi owners at the start of the lockdown, and longer relief measures to some 3 000 taxi clients engaged in long-distance travel, which had been prohibited from operating in the early months of the lockdown. The cost of this relief was about R400 million.

Bitcoin hits seriously overbought territory, but the ride may not be over

Written by Ciaran Ryan. Posted in Journalism

The previous high of $20 000 is now in sight. From Moneyweb.

Image: Chris Ratcliffe, Bloomberg

Technical analysts have been pointing out all year that bitcoin is in overbought territory, but that hasn’t stopped its incredible ride since the beginning of 2020.

It’s fun looking back at some of the forecasts made at the beginning of the year, and how desperately wrong they have been, but allowance must be made for the hazards of forecasting something as volatile as bitcoin.

Remember that bitcoin started 2020 at $7 179, and this week traded at $18 380 – a gain of 156%.

In February, when it broke $10 000, the overbought signals started flashing on screens everywhere, then again in September when it punched through $12 300.

Back in July, the options market gave bitcoin a 7% probability of hitting its all-time high of $20 000 by the end of 2020. Now it seems like a virtual certainty.

Bearish signals

Earlier this month, crypto intelligence firm Santiment pointed out that signals of a sell-off event are appearing. One of these signals is the number of daily active addresses (DAA) versus price divergence. DAA is the number of unique crypto addresses interacting with (sending or receiving) a particular coin on a daily basis. These are active users rather than holders, and there is a strong correlation between the number of DAAs and bitcoin’s price action.

A sharp divergence has emerged between the number of active bitcoin addresses interacting with the network, and bitcoin’s price – which is a bearish signal.

Another interesting indicator is social sentiment, which is positive versus negative mentions of bitcoin on social media. Mentions of bitcoin have been heavily weighted to positive in recent months, which is often a signal of a trend reversal. This is not to say bitcoin will drop like a stone, though some correction should be expected as it reaches its previous all-time high of $20 000.

Also notable is the relative strength index (RSI) shown in the graph below, which is now seriously overbought. RSI is a momentum oscillator that measures the speed and change of price movements, and oscillates between zero and 100. The RSI is considered overbought when above 70 and oversold when below 30.

But bear in mind that bitcoin hit seriously overbought territory on the RSI signal on no less than three occasions in 2017, the first time when it hit $5 000. It punched through that level with ease and only corrected on the third RSI overbought level at $20 000. If you sold on the first signal, you would have missed the elevator ride to $20 000.

In a newsletter to clients, Stansberry Research advises treating bitcoin like any other tradeable asset and avoid the hype, being careful to allocate no more than 5% of your investment assets to crypto.

It says one simple strategy for those gripped by the trader’s worst enemy – fear of missing out, or FOMO – is to take some profits when cryptos as a basket (such as that offered by Revix and EC10) rise 10% or more, and to buy when they drop 10% or more. This has proven more profitable than a buy-and-hold strategy.

Another workable strategy is rand cost averaging, which is a way to accumulate bitcoin over time by making regular purchases, either weekly or monthly. Since January 2018, this strategy would have yielded an overall return of more than 50%, notwithstanding the 84% drop in price in December 2017 and November 2018.

Then there are those who see bitcoin at seriously higher levels over the next year, so a buy-and-hold strategy might suit them better.

As Moneyweb previously reported, Citibank head technical analyst Tom Fitzpatrick notes some unmistakable similarities between the 1970 gold market and bitcoin. On this basis, he sees bitcoin at $318 000 by the end of 2021.

This rise will be peppered with “unthinkable rallies followed by painful corrections,” he adds.

Is the blockchain vulnerable to hacking by quantum computers?

Written by Ciaran Ryan. Posted in Journalism

Yes, but some smart technologies are already in the works to defend against this. From Moneyweb.

As the value of crypto assets increases the incentive for hackers rises proportionately, but the issue is being tackled proactively. Image: Shutterstock
As the value of crypto assets increases the incentive for hackers rises proportionately, but the issue is being tackled proactively. Image: Shutterstock

There’s a lingering fear among crypto investors that their bitcoin might get swooped by a hacker.

That’s not very likely, but it’s not impossible either, particularly once quantum computing gets into the wrong hands. Last year Google’s quantum computer called Sycamore was given a puzzle that would take even the most powerful supercomputers 10 000 years to solve – and completed it in just 200 seconds, according to Nature magazine.

That kind of processing power unleashed on the bitcoin blockchain – which is a heavily encrypted ledger of all bitcoin transactions – is a cause for concern.

Read:Crooks and crypto in SA

Regulation of crypto assets moves forward in SA

The encryption technology used by the bitcoin blockchain has proven itself robust enough to withstand any and all attacks. That’s because of its brilliant design, and ongoing improvements by an ever-growing community of open-source cryptographers and developers.

A report by research group Gartner (Hype Cycle for Blockchain Technologies, 2020) suggests blockchain researchers are already anticipating possible attacks by quantum computers that are perhaps five to 10 years away from commercial availability. It’s a subject called ‘Postquantum blockchain’ which is a form of blockchain technology using quantum-resistant cryptographic algorithms that can resist attack by future quantum computers.

The good news is that quantum-resistant algorithms are likely to remain several steps ahead of the hackers, but it’s an issue that is drawing considerable attention in the financial, security and blockchain communities.

Postquantum cryptography is not a threat just yet, but crypto exchanges are going to have to deploy quantum-resistant technologies in the next few years, before quantum computers become generally available.

Phishing is probably a bigger threat

In truth, you’re far more likely to be hit by a phishing scam, where identity thieves use emails, text messages and fake websites to get you to divulge sensitive personal information such as bank account or crypto exchange passwords.

As a user, you should be using LastPass or similar software to generate complex passwords, along with two-factor authentication (requiring the input of a time-sensitive code before you can access your crypto exchange account). Most good exchanges are enabled for this level of security.

There are many sad stories of bitcoin theft, but these are usually as a result of weak security on the part of the bitcoin holder, much like leaving your wallet on the front seat of your car while you pop into the shop for a minute.

Like all tech breakthroughs, quantum computing can be used for good and bad.

On the plus side, it will vastly speed drug discovery, molecular modelling and code breaking. It will also be a gift to hackers and online thieves, which is why financial services companies are going to have to invest in defensive technologies to keep customer information and assets safe.

Most crypto exchanges invest substantial amounts in security. The vast majority of crypto assets (about 97%) are stored in encrypted, geographically-separated, offline storage. These cannot be hacked.

The risk emerges when bitcoin are moved from offline (or cold storage) to online, such as when a client is about to transact.

But even here, the level of security is usually robust. A further level of protection is the insurance of all bitcoin that are stored in online systems. They also have systems in place to prevent any employee from making off with clients’ assets, requiring multiple ‘keys’ before a bitcoin transaction is authorised.

There have been hacks on crypto exchanges in the past (though not on the blockchain itself), and millions of dollars in crypto assets stolen. In more recent years, this has become less common as exchanges moved to beef up their security systems.

In 2014 Mt.Gox, at the time responsible for about 70% of all bitcoin transactions in the world, suffered an attack when roughly 800 000 bitcoin, valued at $460 million, were stolen. In 2018, Japan-based crypto exchange Coincheck was hit with a $534 million fraud impacting 260 000 investors.

As the value of bitcoin and other crypto assets increases, the incentive for hackers rises proportionately, which is why problems such as quantum-enabled thievery are already being addressed.

Crypto intermediaries must now be licensed FSPs

Written by Ciaran Ryan. Posted in Journalism

FSCA proposes regulating crypto intermediaries as financial advisors. From Moneyweb.

The FSCA states that the draft declaration does not attempt to regulate, legitimise or give credence to crypto assets. Image: Moneyweb
The FSCA states that the draft declaration does not attempt to regulate, legitimise or give credence to crypto assets. Image: Moneyweb

It’s been a long time coming, but it looks like the sheriff has finally arrived to the Wild West that is the crypto market.

On Friday, the Financial Sector Conduct Authority (FSCA) published a ‘draft declaration’ that defines crypto assets as a financial product under the Financial Advisory and Intermediary Services (Fais) Act.

This means that anyone giving advice or acting as an intermediary – such as a crypto exchange – would have to register as a financial services provider and comply with the requirements of the Fais Act.

This will include crypto asset exchanges and platforms, as well as brokers and advisors.

The FSCA declaration proposes improved disclosure to customers to highlight the “high risks in investing in crypto assets”. Those involved in crypto assets will have to adopt a more robust advice system, including proper risk assessments, when giving advice to purchase crypto assets such as bitcoin.

Crypto exchanges and other crypto intermediaries will henceforth be licensed as financial services providers. This licensing process will also improve the quality of data for policymakers and regulators about the crypto environment, “and to consider whether there is a need for further regulatory interventions,” according to a FSCA statement.

“The draft declaration in no way impacts the status of crypto assets in the context of other laws such as exchange control regulations, requirements under the Pension Funds Act and Collective Investment Schemes Act and so forth, nor does it attempt to regulate, legitimise or give credence to crypto assets.

“The draft declaration is merely intended to be an interim step in mitigating certain immediate risks in the crypto assets environment, pending the outcome of broader developments currently taking place through the Crypto Assets Regulatory Working Group (CAR WG), which will inform future policy interventions to be implemented across a variety of regulators and laws.”

Virtually all crypto exchanges in SA, anticipating such regulation was on its way, pre-emptively adopted Fais-type standards, including ‘Know Your Customer’ (KYC) processes prior to on-boarding new customers.

Position paper progress

The Intergovernmental Fintech Working Group, involving government, regulators and industry players, published a position paper in May 2020 to develop a regulatory framework for crypto assets, focusing on areas such as:

  • The implementation of an anti-money laundering and counter-terrorism financing regime,
  • A licensing and supervisory regime from a conduct of business perspective, and
  • A regulatory regime for the monitoring of cross-border financial flows.

The FSCA’s latest declaration on crypto assets gives partial effect to some of the recommendations contained in the May 2020 position paper.

“The FSCA acknowledges the impact that the draft declaration will have on businesses that are currently furnishing financial services in relation to crypto assets, and more specifically the fact that such business would not be able to operate legally unless they have obtained a FSP licence in terms of section 8 of the Fais Act,” says the FSCA. For this reason, various “transitional arrangements” for businesses already operating in this space will be put in place before publication of the final declaration.

Commenting on the proposed regulations, Jon Ovadia, founder and CEO of crypto company Ovex, says this will have a beneficial effect on the crypto sector

Industry comments

“We’re not surprised by this, as we knew it was coming. We’re excited by it. A big hurdle for us is not being regulated by the FSCA, which has deterred many people from getting involved in this sector.

“I think regulations will help bring credibility to the crypto sector and help weed out those involved in crypto scams,” said Ovadia.

“At present there is no sure way of knowing who is legitimate and who is operating a scam, and the people are understandably confused by this, so we see this as a positive development.”

Farzam Ehsani, co-founder of crypto exchange VALR, comments as follows: “VALR will always welcome prudent and appropriate regulation, particularly as it relates to consumer protection. We have been working with the South African regulators for many years to inform a regulatory framework that does exactly this. It is important to note, though, that today’s draft declaration of crypto assets as a financial product under the Fais Act by the FSCA was not one of the 30 recommendations in the Position Paper on Crypto Assets that was published by the regulators in April this year.

“Furthermore, all of the products in the Fais Act have a central issuer and crypto assets such as Bitcoin do not. Gold, for instance, is not classified as a financial product under the Fais Act. We look forward to engaging fully with the FSCA during the comment period to ensure a fair, relevant and appropriate regulatory position for the benefit of all South Africans.”

The public has until January 28, 2021 to comment on the draft regulations. Tweet

Bitcoin ‘vulnerable to correction’

Written by Ciaran Ryan. Posted in Journalism

Though Citibank sees it at $318 000 in 2021. From Moneyweb.

A drop in active addresses interacting with the network is a sign that holders are trading rather than holding, though it doesn’t necessarily mean they are preparing to sell. Image: Andrey Rudakov, Bloomberg
A drop in active addresses interacting with the network is a sign that holders are trading rather than holding, though it doesn’t necessarily mean they are preparing to sell. Image: Andrey Rudakov, Bloomberg

As bitcoin burst through $16 500 this week and with $17 000 now in sight, the euphoria of 2017 – when it briefly hit $20 000 – has returned with a vengeance.

A weaker US dollar index and expectations of further monetary stimulus to prop up ailing economies around the world are behind the latest price surge in the benchmark cryptocurrency.

In a recent report entitled Bitcoin: 21st Century Gold, Citibank MD Tom Fitzpatrick notes some unmistakable similarities between the 1970 gold market and bitcoin. When former US President Richard Nixon abolished the gold standard in 1971, the dollar devalued and gold surged.

“Bitcoin’s move happened in the aftermath of the Great Financial crisis (of 2008) which saw a new change in the monetary regime as we went to zero percent interest rates,” says Fitzpatrick.

Governments today have responded to the Covid crisis with massive monetary stimuli, creating an environment similar to gold in the 1970s. Fitzpatrick, who worked at Nedbank in Johannesburg in the 1980s before rising through the ranks at Citibank, sees bitcoin at $318 000 by the end of 2021, and gold between $4 000 and $8 000 an ounce.

But a lot can happen before then – and two developments may spoil the party.

First, news that US biotech firm Moderna has achieved 94.5% efficiency in its Covid vaccine trials and the likelihood of an imminent return to something approaching the ‘old normal’.

Second, a drop in the number of active addresses interacting with the network. This is a signal that holders are trading rather than holding their bitcoin, though it does not necessarily mean they are preparing to sell.

The news of another possible Covid vaccine from Moderna comes barely a week after Pfizer announced its vaccine had achieved success rates of 90% in trials. The Pfizer announcement was accompanied by a sharp, though short-lived, drop in the bitcoin price on the presumption that such a development meant that fears over the pandemic may start to fade and this would benefit the world economy and the US dollar. The Moderna announcement had no such effect, with bitcoin surging towards $17 000.

According to analytics firm Santiment, the number of active addresses hit a 33-month high two weeks ago, the largest since January 2018 before bitcoin crashed by 85% after its massive spike to $20 000 in December 2017.

Read: Bitcoin is the bubble that keeps on giving

Comparisons have been made between bitcoin and the dotcom bubble that came crashing down in the early 2000s. Out of that crash came Facebook, Amazon and other tech giants.

But bitcoin has just emerged from a major crash that began in early 2018 and ended in 2019. It is prone to volatile swings, and is due for a correction after its amazing run in 2020.

But not everyone is convinced the current bull market is anywhere near running out of steam, Citibank among them.

Bitcoin tore through resistance levels at $15 700 in recent weeks and could see support building at this level as it makes a push for its previous high at $20 000.

Read: Bitcoin on the brink of fresh year high following PayPal embrace

The election fiasco in the US has added to the general sense of uncertainty, with sentiment remaining firmly with safe haven assets such as gold and bitcoin.

This might prompt disbelief among more conventional analysts, but Citibank’s Fitzpatrick notes that bitcoin has been in an ascending parallel channel since 2013.

He writes: “You look at price action being much more symmetrical or so over the past seven years forming what looks like a very well defined channel giving us an up move of similar timeframe to the last rally [in 2017].”