05 Jan 2021
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What is Bitcoin? Bitcoin is a cryptocurrency invented in 2008 by an unknown person or group of people using the name Satoshi Nakamoto. It’s a decentralized digital currency without a bank or single administrator that can be sent from user to user on the peer-to-peer bitcoin network without the need for intermediaries. Transactions are verified by network nodes through cryptography and recorded in a public distributed ledger called a blockchain.
A blockchain is a transaction between two parties that is recognised by the entire network and there’s no need for clearance which speeds up the transaction process and takes out the fluff. Bitcoins are created as a reward for a process known as mining and they can be exchanged for other currencies, products, and services. Research from the University of Cambridge estimates that in 2017, there were 2.9 to 5.8 million unique users using a cryptocurrency wallet, most of them using Bitcoin.
Chandler Guo was a pioneer in cryptocurrency and in 2014, he set up an operation to produce Bitcoin in a secret location in western China. Mining Bitcoin is a power-hungry enterprise involving dozens of computers, so he sourced power from a hydroelectric station. At its peak, his machines were capable of mining 30% of the world's Bitcoin.
In the early days Bitcoin was relatively worthless, but history was made on 22nd May 2010 when the first real-life products, two pizzas, were bought with Bitcoin. At the time, each bitcoin was worth less than a penny. Fast forward to 2017 and one bitcoin was worth a staggering $20,000 as frantic buying from retail investors forced the price into a huge unsustainable bubble that then crashed to $3,000 per bitcoin. More than a decade since pizza day, the world’s first cryptocurrency is now worth more than $30,000 per bitcoin, making the equivalent price for the pizzas in excess of $300 million.
The price of Bitcoin has seen many peaks and troughs since it was created over a decade ago. What’s driving the market right now, and is the current high value sustainable? The latest push to new all-time highs driven in part by big money coming in from financial institutions and wealth investors, which didn’t typically happen during the first 10 years, making some believe that the extreme volatility of the value of Bitcoin is a thing of the past.
Cryptos and blockchain technology could change the way we buy everyday goods and services. Big names such as PayPal are entering the cryptocurrency market with customers soon able to buy and sell Bitcoin and other virtual currencies using their PayPal accounts. With serious backers and Bitcoin being embraced as a currency by over 100,000 merchants worldwide, a more sustainable transformation could be underway.
What are the down sides to Bitcoin? A physical electronic wallet sits on your hard drive and there have been instances where coins have been stolen by hackers moving the investment to another private key address. Some analysts have predicted that the value of Bitcoin will soar and with financial institutions and wealth investors engaged, a greater level of protection is clearly needed to stop this type of theft. The answer is segregated accounts in a physical safe with a custodian and a security guard to store and protect the hard drives holding the bitcoins.
Is Bitcoin a bit like gold? Each time a new bitcoin is created it gets added to the pool of bitcoins in circulation but because of the way that the mathematical algorithm behind it works, there’s a known supply limit and there can never be more than 21 million bitcoins in circulation. According to Wikipedia we’ll arrive at this limit in 2140. As the supply is limited, Bitcoin isn’t like an average currency and could be compared to gold as it’s a store of value that may represent a lucrative asset.
Cryptocurrency has proven to be a volatile investment. The recent soaring price has raised concerns that Bitcoin is due for another dramatic drop, but some are convinced that its high value is here to stay. There’s no income from Bitcoin and it costs you as an investor to safeguard it, it’s also based on the greater fool theory where someone must be willing to pay more than you for it to have value. Is the hope that it will stabilise and increase in value so it can be bought from you in future at a higher price enough of an incentive to buy it? If you don’t take a chance, you could miss the boat, risk can generate phenomenal returns, but with the road not yet well travelled, are the stakes still too high to make the precarious leap into the world of cryptocurrency?
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This information is for UK Professional Advisers only and should not be given to retail clients.The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.
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