Bitcoin has famously had a high-low journey with Tesla entrepreneur Elon Musk. It reached a record high of nearly $62,000 February when the electric car maker bought $1.5bn worth of Bitcoin and said it would accept cryptocurrency as payment for its vehicles.
But when Musk’s decision to renege on the pledge of accepting Bitcoin came in early May, citing environmental concerns, the price tumbled.
However, cryptocurrency as a whole has been pushed into the mainstream with the market soaring in value from around $600billion last year to $2trillion in April 2021.
To get an idea of how the value of Bitcoin – the market leader – has rocketed, there’s the now famous story of the guy who paid for two pizzas using Bitcoin – the first ever Bitcoin transaction on May 22, 2010. He paid 10,000 Bitcoins for the Papa Johns pizzas which today is worth over $500million.
Many of the High Street banks and financial institutions say that cryptocurrency is highly volatile with investors vulnerable to massive highs and lows in value. But Goldman Sachs and Morgan Stanley have announced an intention to launch specialist cryptocurrency teams.
And over the past 10 years, there is no doubting how a few genned-up individuals have got very rich indeed by buying and selling at the right time.
With so much hype but little understanding about cryptocurrency, we have put together an essential guide with the help of cryptocurrency expert Ben Lee, a director of PKF Francis Clark in the South West.
He said: “Having seen the birth of the internet, from dial up modems and simple html websites to what we have now has been extraordinary and the technology behind cryptocurrency is the next level for the internet.
“This has been the first time we have been able to store something of value digitally and it is the first time I have seen the emergence of a new asset class being created. You’ve got gold and property as traditional assets and here we have something relatively new – it is so interesting to see what people are going to do with it.”
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What is cryptocurrency and how does it work?
Cryptocurrency is a purely digital asset and transactions made in cryptocurrency are recorded in a super secure global ‘distributed ledger’ using blockchain technology. Every time a transaction is made that information is secured and locked away in a ‘block’, a new block is then generated which is linked to the previous block, to store subsequent transactions. It operates over a global network and therefore does not have any central points of control or any central points of transaction storage.
Blocks are a bit like boxes – they store a number of transactions and are solved/sealed a certain number of times a minute depending on the code. For example, on average bitcoin blocks are solved every 10 minutes, and all the transactions that have happened in that time are stored in the block, on the chain.
How do you make Bitcoin?
Bitcoins (BTC) are ‘mined’ or created by adding new groups of transactions (blocks) into the ledger – the blockchain.
Computer specialists are part of a global race to win the right to add a new block to the blockchain using specialist computer hardware. It consumes quite a bit of electricity which means ‘mining’ centres have emerged in places like China where energy is cheaper.
Bitcoin miners are paid in Bitcoin for creating a block and they take a transaction fee too. This system ensures the continuation of the currency.
Is it trustworthy?
In 30 years of blockchain, it has never been hacked so the system itself is secure. But the problem comes with its novelty and the scammers that have arisen to take advantage of the fact that people don’t really understand how buying and selling cryptocurrencies work. With around 8,000 cryptocurrencies out there – there are some non-starters among them and others that are outright scams.
Ben said: “What has become concerning is the scam space and we’ve all had scam emails about bitcoin offering amazing things. The problem is people want to get rich quick thinking if they buy now then the coins will be worth 1,000 times more next week but it doesn’t work like that.”
What gives cryptocurrency a value?
It is all based on trust, a network of people who are willing to buy into it and like any asset – art or antiques, say – it is only worth what someone wants to pay for it and that can fluctuate for many reasons. Rare resources that are finite, like gold or land have an intrinsic value.
The supply of Bitcoins is finite. No one can create or issue more Bitcoins at will. There will never be more than 21 million Bitcoins. So far 18million have been ‘mined’ with the supply expected to run out by 2140.
Why would you want Bitcoin instead of cash?
The big advantage of Bitcoin and other cryptocurrencies is that you don’t need to doff your cap to a bank or other financial institution. People who may not have access to a bank account can use Bitcoin and similar from an app on a mobile phone.
Traditional money sitting in a bank will attract a relatively small amount of interest but could be earning more for you invested in cryptocurrency – the problem is that the value can also go down.
Can you get rich from it?
“If you know what you are doing, you absolutely can”, said Ben. “People who are used to trading in stocks and shares and spread betting are familiar with how it all works and they have made a lot money.”
The case in point came in May when an executive at investment bank Goldman Sachs quit his job after making millions from investing in Dogecoin.
What are the good sides?
One of the benefits is unlike money, you can’t just print more, so you can use it to hedge against inflation, said Ben.
And because it does not involve any banks or financial institutions, there is no judgement on who can access it. It’s global and without banks involved, money can be transferred speedily without bank charges. Plus public currencies are fully traceable.
Ben said: “Part of this is the socialist movement which could genuinely be revolutionary in who has control over access to money.”
What are the downsides?
Energy usage, said Ben. “There have been reports that have suggested Bitcoin mining uses the same amount of electricity as Sweden but there has not been any data globally on how much energy banks use, for example”.
Can you spend it?
The first ever transaction was for two Papa John pizzas and Tesla has said it will accept Bitcoin for cars, though not anymore. There have also been reports of people buying houses with Bitcoin.
“It was designed originally for people to be able to buy and sell things without a bank account but people realise that it is also a good store of value and some hedge funds have between 2-7% of investment in Bitcoin.
“So it is both a currency and a store of value and more and businesses are asking whether they should accept cryptocurrency but the regulation hasn’t quite caught up yet.
There are now UK based exchanges that are regulated by the FCA.
There has been the emergence of the fixed value stable coin, which has a value is linked to a traditional currency like the pound or US dollar. It means the value remains stable rather than rising and falling like Bitcoin.
The Bank of England is the latest institution to look into creating a ‘Britcoin’ – a BoE backed digital currency linked to GDP. China has been a front-runner to launch a CBDC. followed by the European Central Bank which is studying an electronic form of cash but any launch was still several years away.
This could have interesting implications, said Ben, who pointed out that because transactions are fully traceable – taxpayers could follow exactly where their contributions get spent.
Is it a fad?
No, it has definitely got too big for that but it is still a way off becoming an everyday tool for most people.
Ben explained: “One of the biggest barriers is that for people who are not tech orientated, it is quite hard to understand.
“However, you will be surprised by how many people are buying and selling Bitcoin and probably people you would not expect. I think at the moment, people are dipping their toe, buying a little and when they make some money, buy some more.
“All it takes is for some people to make some money and tell their friends but there will be people who say I don’t understand it and I don’t want to know.
“At the moment I would say it is mostly the 20-40 year olds who are in that space.”
What do the UK regulators: FCA and HMRC say?
In January 2020 the FCA was granted new regulatory powers allowing them to supervise how cryptoasset businesses manage the risk of money laundering, and UK cryptoasset businesses must comply with MLRs and register with the FCA. However, the FCA has not been particularly forthcoming with registrations. COVID has not helped, but they have granted temporary registration to over 300 UK entities who had applied for registration by 16 Dec 2020. Any new businesses in this space are currently unable to progress registration, causing businesses to look overseas to conduct business.
In January this year HM Treasury released a consultation on the UK regulatory approach to Cryptoassets and stablecoins to maintain the UK’s position as ‘a world-leader in financial technology’. In reality, the UK is currently losing the global competitive race. There is a reason that Crypto Valley exists in Switzerland, and not within the UK.
HMRC are adapting to, but are not on top of this new asset class. Guidance on HMRC’s website was only made available in 2018 following a year in which Bitcoin hit an all time high, and earlier this year HMRC launched a Cryptoasset manual (although much of this was a rehash of the 2018 material).
Ben said: “It is evident HMRC are having difficulty defining some cryptocurrencies, as they are not all alike, and there is not enough being done to educate tax payers about the tax implications. The onus is entirely on the tax payer to understand and disclose any cryptocurrency gains, and we have seen a number of HMRC enquiries penalising tax payers for non-disclosure.”
What are your thoughts on Bitcoin? Do you trade in it, lost or made money? Tell us in the comments section below