Bitcoin launched in 2009 and started increasing minimally in value in 2010 when individual coins jumped from USD 0.0008 to USD 0.08. In the past few weeks, we’ve seen bitcoin reach an all-time high of more than USD $40,000, helped by PayPal’s adoption and the influx of institutional funds, which lend bitcoin new legitimacy. There’s also been interest among retail investors and in the last week the US Office of the Comptroller of the Currency has stated that national banks can use blockchain networks and stablecoins for payments, further legitimising digital currencies.
However, meteoric rises and falls in value still seem to be the norm, as we saw this week as the price of bitcoin retreated due to a combination of profit taking and simple financial gravity. All of this led Bank of America to speculate that the current bitcoin run is “the mother of all bubbles” and the UK’s financial regulator, the FCA, issuing an unusual warning on crypto investments that noted, “If consumers invest in these types of product, they should be prepared to lose all of their money”.
The news is not all bad. Last week J.P. Morgan predicted the price of bitcoin could hit $146,000 as more big firms embrace it as an alternative to gold. ‘Just because Bitcoin can be a risky investment, it doesn’t mean that there isn’t interest or demand. For long-term investors who went in early or when bitcoin had a low valuation, bitcoin can be a lucrative investment. Experienced investors who have significant capital available to invest and who can afford to take big risks in the hope of big rewards are all enjoying the bitcoin ride,’ says John Hunter, Business Development Director, Guernsey.
Protecting investor interests
On the whole, investors buying bitcoin are aware of the risks, and they understand that if they have the potential to gain a fortune, they potentially stand to lose it all. While this is widely accepted, investors still want to protect themselves when they purchase or cash out bitcoin.
Market risk aside, investor concern often centres around the fact that fiat money is exchanged for a virtual asset and vice versa. Bitcoin ownership is recorded in legers but the relatively new nature of cryptocurrencies, the fact that all transactions are digital and the lack of regulatory oversight all play a part. In essence, those investing in bitcoin or cashing out their investment into fiat money want to protect their interests. The point at which fiat cash and a cryptocurrency meet can feel like a natural weak point.
Escrow agreements for bitcoin
Escrow agreements are increasingly popular for bitcoin transactions, and as John explains, they present a win-win for all parties. ‘Traditional escrow agreements are used to protect the interests of the seller and the vendor and it’s just the same for bitcoin transactions. Escrow becomes especially relevant when the value of bitcoin increases significantly and more cash needs to be deposited to purchase bitcoin, or there is a liquidation that translates to a significant amount of fiat money. Escrow is an ideal solution, which protects both parties. Not many people know this kind of service can be provided.’
How does it work?
An escrow agreement is drafted and contains the terms of the transactions and the conditions that must be met by all the parties involved. Then, alongside leading industry partners, ZEDRA acting as escrow agent oversees the transaction for the sale and purchase of bitcoin.
Proof of fiat funds and verification of the bitcoin take place and once the terms of the escrow agreement are met, the bitcoin is then transferred to the buyer and the funds are transferred to the seller. Bitcoin can either be sent via internet connected hot wallets, or it can be transferred utilising a cold storage custody platform.