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Bitcoin is the talk of the town. Not only has the value of this unique kind of currency gone through the roof lately - On Monday 4th December 2017 the Treasury announced a crackdown on all types of so-called cryptocurrency.

So what is Bitcoin all about? Here’s my guide to everything you need to know about the virtual currency that everyone is talking about.

 

What is Bitcoin?

It’s an online only, virtual currency – known to the experts as a cryptocurrency. It's not like a physical currency such as the pound or the dollar which is printed by a central bank. It's created by computer code and exists electronically, so can only be bought and traded online.

Transactions are made independently of any central banking system and recorded in a public distributed ledger known as a blockchain. Although originally set up as an alternative currency it is now mostly traded as an investment. This carries with it risks as the Financial Conduct Authority stressed recently.

Equally, the governement recognises the significant benefits that virtual currencies and related technology can bring, as well as potential risks.

 

Why was Bitcoin created?

Bitcoin was launched in 2009 by a computer genius using the Japanese alias Satoshi Nakamoto. Doctor Craig Wright – an Australian computer scientist – claims to be the real person behind the pseudonym. The idea behind it was to create a currency that was transferable electronically - more or less instantly - with low transaction fees. Yet, crucially, this was independent of any central authority.

 

Why has its value grown?

The price has gone through the roof recently. Bitcoin has doubled in value in less than two months from $5,000 (£3,700) to around $9,000 (£6,700) at the time of writing - having just dropped from a new record high of over $11,700 (£8,700) on December 5th. This means that Bitcoin is now up over 1,000% for the year.

The number of Bitcoins in circulation will never exceed 21million. The limit was set by the creator of Bitcoin. This aims to ensure it will always have scarcity value.

Another factor that could explain Bitcoin’s growth in popularity is the lack of external regulation and control from big banks. 

Then there’s simple supply and demand. The rising value can in part be attributed to investors buying it because they believe the price will go up further.

However, there is much talk about the ‘Bitcoin bubble’ bursting and it could end up worthless if the current boom turns to bust.

 

What are the risks? Is my money protected?

Cryptocurrencies are currently unregulated in the UK and there is no FSCS protection for individual investors against scams, hacks and theft. It's a very volatile currency, which makes it very high risk.

Unlike conventional banking it's difficult for official authorities to prevent money-laundering, drug trading or cyber crime. 

 

The government is currently negotiating amendments to the European Anti-Money Laundering Directive to extend regulation to virtual currency exchange platforms and custodian wallet providers. It believes the lack of such regulatin is a barrier to digital currency firms setting up in the UK. This will require the companies to conduct due diligence on their customers and should help the legitimate sector to grow. 

 

European negotiations on this should conclude in late 2017 or early 2018.

While the Treasury has admitted that there is little current evidence of money laundering, the risk is only expected to grow.

 

How do I buy it?

Previously Bitcoins had to be ‘mined’ by a computer whizz who had to verify each transaction by solving a complex maths problem. But today, the Bitcoin can be purchased from specialist exchanges such as Coinbase, Kraken, Bittylicious and Bitstamp.

You can usually pay for the currency by credit or debit card or bank transfer.

It is possible to purchase as little as a one hundred millionth of a Bitcoin (0.00000001 Bitcoin) - called a Satoshi.

Remember, if you do buy and then sell - like any other investment, a profit can trigger a capital gains tax charge if profit exceeds the annual capital gains tax allowance of £11,300. [You will need to declare this on your tax return.]

 

Where can I use it?

You can't spend it in most shops, but the reach of Bitcoin is spreading. A growing number of small-scale retailers – often in the tech industry – will accept them. A full list is published on website wheretospendbitcoins.co.uk. There’s a mixture of places including vaping shops, restaurants and a plumber in Glasgow. Last month, a London property developer, The Collective, said it would allow its tenants to pay their deposits in bitcoin and accept rent payments in the cryptocurrency by the end of the year.

The first real-world transaction in the currency was by Laszlo Hanyecz, a Florida software developer who earned his place in history by buying two pizzas for 10,000 Bitcoin in 2010, when the value was just 1 cent each. If he had hung on to his Bitcoins they would now be worth more than $100million.

 

Are there any alternative cryptocurrencies?

There are now hundreds of cryptocurrencies in circulation, thousands if you include those that have gone dormant, but Bitcoin was the first and remains the most popular. Others include NEO, Litecoin, Monero, Dash and Zcash.

 

Is it the future?

Experts are dubious about a currency which fluctuates so violently. Others believe that the possible regulation will help increase the rate of growth of virtual currencies as regulation lends credibility and engenders trust in the sector.

And Andrew Bailey, chief executive of the City watchdog, the Financial Conduct Authority (FCA), recently voiced concern for individual investors dabbling in schemes relating to Bitcoin. He branded it a commodity rather than a currency.

The financial regulator issued a stern warning against such schemes, known as initial coin offerings initial coin offerings (ICOs), that use cryptocurrencies such as Bitcoin. The FCA said anyone investing in ICOs should be prepared to lose all their money, with some of the schemes floated potentially outright frauds.

12/8/2017 12:00:00 AM