How Russian businessmen make business on cryptocurrency
The main world e-currency has become a full-fledged means of payment. Forbes chose three projects, in which those who come from Russia make money on Bitcoins.
In six years, Bitcoin, created by a character under the nickname Satoshi Nakamoto, has excited the entire financial world and has become a means of payment; today it is possible to pay with it for purchases and services not only over the Internet. Bitcoins are the fruit of imagination and effort of Nakamoto, but, oddly to say, the market of this cryptocurrency is largely similar to the gold market. And though Bitcoin has no material embodiment and is merely the code lines, its price is largely dependent on effort that has been spent to get it with the help of computer resources. To mine one Bitcoin using a special miner it is necessary now to select a 64-digit code.
The amount of the new currency is limited, every 10 minutes 25 Bitcoins maximum appear in the world, and it is estimated that their mining shall be completed till 2140, when will be “issued” 21 million Bitcoins, now is 13.3 million units of the currency in circulation.
And the more Bitcoins are mined, the more difficult it is to mine them further using computers and the more power is require.
The easiest way to participate in the fashion financial race and try to make money on it is to invest directly in the cryptocurrency, however Bitcoin rate is very unstable: from one cent in 2008 Bitcoin has increased to $1000 in 2013, and in early autumn of 2014 it has fallen below $400. So it seems less risky to make venture investments related to cryptocurrency infrastructure.
Russian billionaire, who made his fortune on investments in Internet companies, Yuri Milner F57 and one of the founders of VKontakte Lev Leviev in the summer of 2013 invested in start-ups related to Bitcoins. Milner has invested several million euros in the Xapo company, developing Bitcoin wallet, and Leviev has allocated half million euros for the BlockTrail company, which tracks Bitcoin transactions. These transactions are freely accessible, so anyone can check who and how many Bitcoins has mined. If in 2011 cryptocurrency you could mine using a standard computer, a year later have become popular special farms with several computer video cards, and now are used expensive chips. And though the process of mining does not benefit for the global economy, tens of thousands of people around the world are engaged in mining.
Three projects of natives of Russia related to Bitcoins.
Code – in the money
Until May of 2014 it was impossible to be in the room of one of the Soviet standing plants near the Baltiyskaya metro station in St. Petersburg because of the temperature +50° C. The cause of the unbearable heat was 18 farms – specially welded constructions with computer video cards, which were mining Bitcoins day and night. That’s how business of Georgy Basiladze and Dmitry Gunyashev looked like. Having spent on farm and room rent about 2 million rubles the partners have earned 4 million rubles in a year. “It was not the biggest platform. I’ve been in rooms having up to 80 farms within. Now the majority of Russians-miners have left for China. Electricity is cheaper there, moreover, there are produced special chips and nobody mines on video cards” – says Gunyashev. The reason for stopping of Bitcoins mining he names the rising cost of equipment, rent and electricity bills, exceeding 25 000 rubles per month. In addition, the Bitcoin rate has fallen dramatically, and the partners began to work at a loss.
But still they did not give up business with Bitcoins and decided to apply previous experience. Gunyashev owned the online shop of electronics and was good at programming and online sales, and Basiladze worked at NordWest Energy Fund and Finnish investment bank Evli, so he knew IT and banking technologies well.
They sold the farms and invested in a company that was engaged in acquiring of Bitcoin payments, as well as selling of cryptocurrency to individuals in Europe. Gunyashev and his wife moved to London and at the beginning of 2014 registered Cryptopay. For a long time partners could not open a bank account, as bankers did not understand what were going to do natives of Russia, only after six months they managed to agree with two small European banks. As a result, the partners were first who opened acquiring service for Bitcoins in the UK, and then started offering their service in Europe. Now they have about a hundred customers – shops, cafes and restaurants. “We allow business owners accepting Bitcoins as payment for goods and services. They instantly receive money into the bank account in pounds, euros or dollars. We nullify the risks of rate volatility, “- explains Basiladze.
“Customer comes to a restaurant or shop with a mobile phone, and Cryptopay allows you to instantly turn Bitcoins in any currency and make the payment to the seller’s benefit.”
The customer pays 1% from the amount of transaction.
Most of customers of Cryptopay are in England, Germany and France. Partners had to abandon the idea of developing relations with online shops in Russian. “The Russian Prosecutor’s Office sends notices to all business owners in Russia that accept Bitcoins” – says Gunyashev.
Cryptopay has already got competitors. The American company Coinbase began to work in London, in Europe are developing projects-analogs, such as Swedish Safello. Basiladze in London Gunyashev and have sold 16% of Cryptopay to venture investor – Hong Kong Seedcoin – for $100 000. The company’s staff totals only five people, but despite the fall of Bitcoin rate, its cash flow increased and it became self-supporting. Soon Cryptopay founders are hoping to hold another round for investors and raise $500,000.
Exchange in Dominica
When on the September 1, 2011 school student Marat Karatov in Verhnerusskoe village of Stavropol Territory asked €1 million from Dmitry Medvedev for development of a non-profit project of Windows alternative, the free operating system ReactOS, the chief coordinator of the project Aleksey Bragin, who once worked at Parallels, got a glimmer of hope for the development of this system on the national level. Later ReactOS was shown to Vladimir Putin, but the state did not give money for development the operating system. And Bragin decided to earn money on the side project.
Fortunately ReactOS community consists of 10 000 people worldwide, it includes programmers from Russia, Germany, Holland and other countries who modify the system for free in their spare time.
One of Russian programmers (Bragin does not disclose his name) was a member of the world’s largest miners pool of Bitcoins Deepbit, it was he who told Bragin about cryptocurrency. Bragin mined one Bitcoin, but did not continue mining. “Exchangers appeared first, and since the currency fluctuated strongly, to protect it I came up with an idea to create futures contracts on Bitcoin”, – says Bragin. He believed that while this idea reaches big exchanges in Chicago and New York, it will take years. So he borrowed from relatives and friends $100 000 to run the ICBIT platform and mobilized familiar programmers worldwide.
Building exchange without experience is not easy, as there are no benefits for brokers beginners. Therefore Bragin used principles accepted at the Moscow exchange, where he used to create trading robots to trade currency and RTS index futures. He registered the platform in Dominica, now the company totals eight people.
As a result, he made the world’s first ICBIT exchange, where derivatives are traded, calculated in Bitcoins, three-, six-month and annual Bitcoin-dollar futures contracts. Nowadays 15000 traders trade at ICBIT. Among them there are small investment funds and individuals from the United States, Great Britain, China and Russia.
“The exchange is popular among those who actively mine Bitcoins and want to insure against devaluation”
“In the early stages, we did not involve individuals, because didn’t want to spoil the reputation with Forex market association. Although we should admit that customers are interested in gambling”, – says Bragin. ICBIT plans to create a pool of market makers as at the Moscow exchange so customers with a significant amount of Bitcoins could manipulate the quotations.
ICBIT commission is from 0.0001 to 0.0003 Bitcoins for one contract. Now revenues are growing rapidly as Bragin’s platform temporarily took almost monopolistic position. Its competitor, Bitcoinica exchange, owned by seventeen year old Chinese boy Tong Zhou, has collapsed. According to Aleksey Bragin, income is enough for development, his debt of $100 000 he paid in 2012. Now he is conducting a dialogue with venture capital funds from the UK: “We are not yet interested in selling thing that brings profit. We will start working with funds, but we do not need seed investments”.
Since 2007 Aleksey Kirienko, Anatoly Knyazev and Vladimir Maslyakov controlled algorithmic hedge fund Global Hedge, which traded financial instruments outside of Russia. Fund capital totaled only $8 million, and due to high costs and small amount of assets it had to be closed. According to Kirienko, the partners have earned more than €500 000. Instead of asset management in 2011, they decided to start broker business in Malta and established Exante. In parallel with this Knyazev, who has worked as a programmer for a long time, discovered and began tracking Bitcoins rate of this currency. When the price of Bitcoin fell from $30 to $1, and began to rise again, Knyazev told partners about the currency. “I was impressed with the technology. This is an incredible paradigm shift”, – says Knyazev. And the partners decided to open a new fund in Bitcoins, and named it Bitcoin Fund.
It took them long time to explain the regulator and the banks of Bermuda what Bitcoins are and how they are mined and stored. “They saw that $100 000 come on the account and go somewhere in Slovenia (there is located Bitstamp exchange. – Forbes). The point is Bitcoins can be stored on a flash drive”, – explains Knyazev.
Despite the difficulties, in 2011 HSBC Bermuda Bank agreed to open an account for Bitcoin Fund, and Deloitte Malta became the auditor. Also, it was difficult to choose the exchange to buy Bitcoins as there isn’t any controlled platform. “The exchange was either someone’s private company, or in the worst case, a personal account of the programmer,” – says Knyazev. Partners went to Japan to agree on Mt. Gox platform, to Slovenia to Bitstamp, and also in the United States to Tradehill.
“Bitcoin Fund strategy is not original, partners simply buy Bitcoins.”
The price of one fund unit equals to the value of one Bitcoin. The fund does not charge a success fee, the management fee is 1.75% of assets per year, and there is also a transaction fee of 0.5%.
According to Knyazev, initially partners invested a lot of their own funds in the fund and purchased Bitcoins at $13-50. At the same time in their fund invested hedge funds, family offices, and even banks, though the company does not disclose their names. At the peak the fund had 94 000 Bitcoins, or about $100 million. On interest income for 2013 Bitcoin Fund was a leader among all funds in the history of Bloomberg with the result of 6,400%. In addition, partners of Exante successfully sold their shares in the Bitcoin Fund, once cryptocurrency hit $1000. They gave the same advice their customers. After that, amount of the fund has decreased markedly and there remained only 12000 Bitcoins. Earned on Bitcoins funds Exante directed on increase of the capital to $18 million.
Financial experience contributed to success, too, for example, the fund managed to avoid bankruptcy of Mt. Gox exchange (Bitcoin Fund was one of the largest customers), as the fund did not keep Bitcoins on the platform itself. According to Knyazev, Bitcoin Fund was also a target for hackers who attacked the exchange and owners of Bitcoins as Bitcoin wallet of the fund was among top three in the world. “We provided for degrees of protection and kept Bitcoins in Europe, Asia and Russia. The protection system made it impossible to conduct operations with our Bitcoins from one geographical point, to do that you had to be in two places at the same time”, – tells Kirienko.
Development of Bitcoin Fund further will not be easy, as new serious competitors keep appearing, for example, Exchange Traded Fund (ETF) on NASDAQ has been already announced. Nevertheless, the partners left some of their savings in the fund, because they believe in the prospects of cryptocurrency. “Currency is now being increasingly used as means of payment, including due to lower volatility. There is potential for growth of Bitcoin if not in ten, then five times, “- says Knyazev.