Cryptocurrencies: Myths, realities

The government has promised to enact laws to regulate the trading of cryptocurrencies in Uganda. This comes in the wake of a potential loss of about Shs10b which had been invested by an estimated 300 clients.

The companies that reportedly conned the clients are Global Cryptocurrency Uganda Limited and DunamisCoin Limited, which operated branches in a handful of districts.

As the Criminal Investigations Directorate (CID) continues recording statements from the clients, there is need to bring the public up to speed about the myths and realities of cryptocurrencies.

The first cryptocurrency was Bitcoin (BTC) created by Satoshi Nakamoto in 2009 and uses the Secure Hash Algorithm (SHA-1) as its proof of work. Thereafter, other cryptocurrencies emerged like Ethereum (ETH) and Litecoin (LTC), among others. Trading in cryptocurrencies has become a global business valued at almost $1 trillion in 2019 and projected to grow at 12 per cent per annum from 2019 to 2024. This is where the myth begins.

Cryptocurrency trading is a speculative business. The investor speculates on the price movements via a trading account, buying and selling the underlying coins via an exchange. Some of the popular coin exchanges include Huobi (Singapore), Bittrex (USA), Bitfinex (Hong Kong), Coinbase (USA) and Bitstamp (UK) – but there are many other coin exchanges worldwide, of which one needs to find out whether they are licensed or not.

There is a myth that investments in cryptocurrencies are very lucrative and a sure way to make money. Probably, but not the astronomical 40 per cent per month gains promised by Global Cryptocurrency Uganda Limited and DunamisCoin Limited. Let us look at BTC coin (price was Shs12.6m in December 2018, then Shs26.4m in December 2019).

Its highest price ever was Shs70m in December 2017, which means that people who bought BTC in December 2017 are now crying one or two years later. Let us look at ETH (price was Shs327,263 in December 2018, then Shs526,177 in December 2019).

Its highest price ever was Shs4.9m in January 2018. Thirdly, let us look at LTC (price was Shs88,161 in December 2018, then Shs160,117 in December 2019). Its highest price ever was Shs1.04m in December 2017.
The reality is that BTC gained about 9 per cent per month from December 2018 to December 2019. ETH gained 5 per cent per month while LTC gained 6 per cent per month.

So, where does 40 per cent per month come from? If Global Cryptocurrency Uganda Limited and DunamisCoin Limited were to pay investors this kind of heavy return, they could survive for only one month.
Offering 40 per cent per month on a Shs10b investment is about Shs4b per month. From my calculation, if the Shs10b was spread equally on BTC, ETH and LTC, the gains would be Shs700m per month, which is far below the Shs4b promised.

Whilst government comes up with the laws and regulations, any investor interested in financial instruments and digital coins must consult an investment advisor licensed by the Capital Markets Authority.

Dr Albert Richards Otete,
Investment Advisor, Citadel