Bitcoin, and other so-called cryptocurrencies, have been big news in the past couple of years, moving out of the shadows and into the consumer spotlight with many small-time investors looking to take advantage of cryptocurrency’s perceived value as an investment.
But what is a Bitcoin, and how do you buy it? And should Bitcoin form part of your investment portfolio?
What is Bitcoin?
Bitcoin, along with other virtual and cryptocurrencies like Ethereum, Ripple, Zcash and Litecoin, is digital money that isn’t backed by anything physical like gold. It exists only virtually, and the ‘crypto’ element of the description refers to the encryption that stops people stealing or faking/forging it.
One of the main features of Bitcoin and other cryptocurrencies is that they are free of any governmental control or influence. This independence is one of the reasons – if not the reason - for their existence.
Bitcoin was invented/create by Satoshi Nakamoto (the name is almost certainly a pseudonym) in 2008 but he insisted that Bitcoin is not his; the Bitcoin concept belongs to everyone and is completely independent.
Can I use Bitcoin like cash?
Yes. And no. While you can’t physically hold a Bitcoin, as it only exists in a virtual form unlike traditional currency like the British pound or the American dollar, you can use it in some places to pay for some goods. Its first commercial use was on the black market or dark web where the anonymity Bitcoin conferred was its most attractive trait.
Even this anonymity isn’t absolute though, because anyone can view the amount of Bitcoin held by a particular Bitcoin address, even if the identity of the person that holds it is anonymous. Anonymous, that is, until you make a transaction, at which point those you have made the transaction with will be able to link you with your Bitcoin address.
The use of Bitcoin to make more mainstream purchases is still more of a gimmick than a serious commercial proposition at the moment but its use is likely to become more widespread in the future, primarily through the use of smartphone apps, where it will work a bit like your Apple wallet.
Users must accept that a Bitcoin transaction is not reversible; there is no consumer protection mechanism in place in the event of a problem occurring.
As a result, most people use Bitcoin as an investment vehicle rather than a currency at the moment and that is unlikely to change in the foreseeable future for most of us.
Take control of your online data and privacy
If cryptocurrency is virtual, how do I store it?
Great question! You store your Bitcoin in a virtual wallet. Many different companies provide these and most are free but you’ll want to stick to a well-respected outfit: Bitcoin.org has a list of some of the better-known and more reputable ones here.
The wallets act like an account with a private bank and you access them through a website and/or a smartphone app.
How do I buy Bitcoin?
You need a Bitcoin address to buy Bitcoin through a digital currency exchange. Your Bitcoin address is a long string of numbers and letters that is created as a product of a randomly generated private key. This means that you can let people know your public address because the backwards calculation (i.e. trying to work out your private key from the 27-34 numbers and letters that comprise your public address) is impossible. This makes Bitcoin very secure and reasonably anonymous.
That security works both ways though, and the Internet is awash with stories of folk who’ve lost their address and so can’t access their Bitcoins. However, providing you’re sensible and use a reputable wallet to store them in then you should be safe.
How to invest online
How can I earn Bitcoins?
Bitcoins are ‘mined’ by computers, which solve complex mathematical equations in order to receive the cryptocurrency as a reward.
However, before you start to plan your own mining operation in the spare room you need to know that this is a tech-heavy and energy-intensive process – and it gets harder and slower as more and more people start mining, so it’s not really viable for the DIYer.
How many Bitcoin are left to mine?
There will only ever be 21 million Bitcoin, a figure that is creeping closer by the day. The mining process started in January 2009, and in April 2018 the 17 millionth Bitcoin was mined, leaving only 4 million left.
Do I have to pay tax on the Bitcoins I hold?
Yes, Bitcoins, and the goods or investments you make with them, are subject to tax in the same way as any other asset you hold.
As of 2017, the British government has stated that you need to pay capital gains tax on any profit you make from trading in it. There may be VAT liabilities too, so you should seek professional advice as to how this might affect you.
Five things you might need to pay tax on – and five things you won't
Is Bitcoin a good investment?
I bought a very small amount of Bitcoin last summer. My investment grew by 20% within days, and I got greedy and cashed it in. That was a bit premature because it continued to grow; I cashed in my investment when one Bitcoin was worth about £1900. In December 2017, one Bitcoin was worth around £13,300.
One Bitcoin is now only worth around £4,800. That’s still not a bad investment but it’s a bit of a kick-in-the-teeth for anyone who bought at the peak of the market with the expectation that it would continue to grow.
And that’s the problem; Bitcoin isn’t like most investments, and while almost every market can rise and fall dramatically under the rights circumstances, virtual currencies like Bitcoin are, by their very definition, an act of faith rather than a solid investment in something tangible.
Governments also view Bitcoin with scepticism. In fact, 23 countries have either an absolute or implicit ban on Bitcoin, arguing that the exchanges are not regulated or supervised, may lack safeguards and customer protection, are vulnerable to hacking and theft, and could be subject to both market manipulation and large price swings. Bitcoin advocates counter that with an argument that runs along the lines of “well, they would say that, wouldn’t they?”
I’m not an investment expert, so if you’re thinking of buying Bitcoin - or any other cryptocurrency - as an investment then you should do so with the utmost caution and only after seeking professional advice because even its strongest advocates point out that Bitcoin is hugely volatile and must be viewed as a high-risk investment. Bitcoin.org goes so far as to explicitly state that “keeping your savings with Bitcoin is not recommended at this point.”