Is it too late (or too risky) to join the bitcoin bandwagon?

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Controversial cryptocurrency bitcoin has wildly outperformed the stock market, the dollar and even gold

Controversial cryptocurrency bitcoin has wildly outperformed the stock market, the dollar and even gold

As the old adage has it, it’s an ill wind that blows no good. While the pandemic has led to almost two million deaths globally, the loss of countless jobs and seen a terrible toll in mental health, not everyone has had such a bad year.

For a start, Silicon Valley bosses and tech enthusiasts have, in many cases, profited mightily from coronavirus and the world’s accelerated shift online. Amazon chief Jeff Bezos has become the first person in history to be worth $200 billion (£146.8 billion). 

And the world’s most famous digital currency, Bitcoin, has been no exception. 

The controversial cryptocurrency – which exists only online and whose chief attraction is its freedom from government and bank interference – started the year saddled by its reputation as a tool used by money-launderers and tax-dodgers. 

Doomsayers dismissed it as a fad and predicted its collapse, weighed down by the eye-watering volatility of its price and the fact that no government or bank was prepared to back it. 

Nonetheless, if you’d bought a bitcoin at the start of last year, you’d have paid about £5,140. Yesterday, the same coin might have cost you close to £25,000 – an all-time high.

During the past 12 months, bitcoin has wildly outperformed the stock market, the dollar and even gold. 

A senior analyst for Citibank has even predicted the cost of a bitcoin could exceed £230,000 by December 2021 – almost ten times its current price.

Tyler and Cameron Winklevoss, famous for having an ugly fight with Mark Zuckerberg over who came up with the idea for Facebook, bought £8 million worth of bitcoin in 2013. 

Just four years later, they became the world’s first ‘bitcoin billionaires’ after the currency’s value exploded. On New Year’s Day this year, Tyler estimated a single bitcoin could cost £360,000 within the decade.

Bitcoin billionaires: Tyler and Cameron Winklevoss, famous for fighting with Mark Zuckerberg over who came up with the idea for Facebook, bought £8m worth of bitcoin in 2013

Bitcoin billionaires: Tyler and Cameron Winklevoss, famous for fighting with Mark Zuckerberg over who came up with the idea for Facebook, bought £8m worth of bitcoin in 2013

No wonder bitcoin mania is back with a vengeance.

Some are now wondering whether it may have finally sailed into calm waters and permanently established itself.

We may never pay for a pint of milk with it, but could the currency work its way into the average Briton’s pension fund?

Actually, this has already started to happen. In November, the top City firm Ruffer Investment sank 2.7 per cent of its portfolio into bitcoin, £550 million.

Various hedge fund managers have recently revealed they’ve dipped their toes in it, too.

Financial giants Fidelity and Goldman Sachs are also investigating how their clients can invest and pay for goods in the currency.

How to (safely) buy it 

Even if you’re convinced by the merits of investing in bitcoin, it pays to be cautious.

Bitcoin’s wildfire popularity has been a boon to scammers.

The safest way to buy is through a licensed exchange which will ensure you are purchasing the real thing.

One of the most popular is California-based Coinbase.

It lets you purchase bitcoin, as well as other smaller cryptocurrencies, and hold them in a secure wallet. 

Users can sell at any time. The company engages with UK regulators and was the first crypto-exchange to be regulated by the UK Financial Conduct Authority.

Alternative options include Malta-based Binance, and UK digital bank Revolut, both also FCA-regulated. Of course that’s no guarantee that bitcoin, or any other cryptocurrency, will hold its value, but it does ensure you won’t be scammed.

In Britain, coffee giant Starbucks and upmarket grocer Whole Foods now accept payment in bitcoin while, in a major step forward, the online payment giant PayPal recently allowed its customers to buy and sell it.

Does this suggest bitcoin is entering the mainstream? Perhaps. But many sceptics still dismiss it. They still expect it to turn out to be one of history’s most over-hyped bubbles: a Dutch ‘tulip mania’ for the 21st century.

So why has bitcoin leapt in price so dramatically in the past year? The key reason is how the pandemic laid bare one of the cryptocurrency’s chief alleged strengths, as a hedge against inflation.

As central banks have printed vast amounts of money to pay for governments’ costly response to the virus and comatose economy, fears of galloping inflation – in which the value of the pound in your pocket lessens over time – have accelerated the hunt for investments that hold their value. 

Unlike dollars and pounds, of which the Federal Reserve and the Bank of England can respectively print as many as they like, bitcoin is designed so that there will never be more than 21 million coins. 

(There are currently just under 19 million in circulation, owned by an estimated million people.)

The chief global strategist of Morgan Stanley Investment Management has even suggested bitcoin could replace the once-unassailable greenback as a global reserve currency.

Others predict bitcoin may threaten gold (whose rising value has recently stalled) as the premier ‘safe’ investment in rocky times. Some call it ‘digital gold’.

bitcoin was launched in 2009 by someone known only by the pseudonym Satoshi Nakamoto. Who he or she is remains a mystery: not a good sign, say its sceptics.

While bitcoin can be bought using pounds and dollars, you do not own it in physical notes and coins. The currency exists only in cyberspace. And you don’t have to own an entire coin either.

‘Nakamoto’ designed bitcoin so it is created, or ‘mined’, over time by computers solving complex mathematical puzzles. This consumes vast amounts of electricity.

Researchers at Cambridge University have calculated computers ‘mining’ the currency online use as much energy as Switzerland.

Limited: Unlike dollars and pounds, of which the Federal Reserve and the Bank of England can respectively print as many as they like, there will never be more than 21m bitcoins

Limited: Unlike dollars and pounds, of which the Federal Reserve and the Bank of England can respectively print as many as they like, there will never be more than 21m bitcoins

A network of computers around the world globally tracks all bitcoin transactions, acting as a ledger. Users then hold their coins in large exchanges. While conventional banks ask their customers to confirm their identity, these online exchanges ask no questions.

One of bitcoin’s key features – a strength or weakness, depending on your view — is that the currency is, for now, free of government or central bank control. It is difficult but not impossible to trace: little wonder it so appeals to money launderers and drug dealers.

But its independence comes at a price. The first £85,000 of savings you hold in a British bank account are guaranteed by the Government should that bank go bust. But nobody is going to bail you out when your bitcoin exchange is hacked and your money is stolen.

Criminals therefore love bitcoin, including the creators of a 2017 ‘ransomware’ computer virus, WannaCry, that swept through 150 countries including Britain, where it attacked NHS computers. The victims were all told to pay their hackers in bitcoin.

Meanwhile, much of the business world remain unconvinced. The currency is too slow, they say, to use in transactions.

Credit card giant Visa processes 1,700 transactions per second. Bitcoin’s technology allows for fewer than five. 

Moreover, the more popular bitcoin becomes, the more it will attract regulation – and remove many of its supposed advantages. 

Governments are understandably keen to rope bitcoin into the tax system, as criminals can sell it for a profit without declaring it to the taxman.

Two weeks ago, the U.S. government unveiled tough new proposed regulations that would force cryptocurrency exchanges to collect the name and address of anyone involved in a transaction worth over $3,000 (£2,200), handing them over to the government on request.

The British Government is also cracking down. The Financial Conduct Authority has said cryptocurrencies such as bitcoin have no intrinsic value. Bank of England Governor Andrew Bailey has said investors in bitcoin should be prepared to ‘lose all their money’.

Celebrated economics professor Nouriel Roubini agrees: ‘We’re close to the point where the hyperbolic bubble is going to go bust.’

But people have been warning of a bitcoin collapse for years and it still hasn’t happened.

‘If bitcoin was a fad, it would have died by now,’ says financial writer and bitcoin enthusiast Dominic Frisby.

The jury is clearly still out on bitcoin, although one hoary piece of investment advice seems eminently sensible: only buy bitcoins if you can afford to lose them.

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