Up until recently, it’s likely that the word ‘Bitcoin’ wasn’t part of your vernacular. Sure, you’d heard it in passing, it may have piqued your interest again last year when Maisie Williams said she bought some, but how much do you know about how Bitcoin works?
The cryptocurrency has seen a seismic return in recent weeks. It’s value rose to £27,000 per Bitcoin from £3,600 in March last year after Tesla owner Elon Musk told social media users that Bitcoin was ‘a good thing’.
At the time of writing, it’s value has risen again and one Bitcoin is now the equivalent to £34,648 – but what is Bitcoin and how can you invest in it?
What is Bitcoin?
“Bitcoin is a type of money which is virtual. Essentially, it’s an online version of money,” Anthony Morrow, co-founder of OpenMoney tells Glamour. “People can send Bitcoins and you can send them to other people – virtually.”
Bitcoin has been around since 2009 and you can use it to buy products and services, however many shops don’t accept Bitcoin and some countries, like Vietnam, Bolivia and Morocco, have banned the use of it altogether.
The way it works is that each Bitcoin is akin to a computer file which can be stored in a digital wallet. People can send Bitcoins to one another and transactions are recorded on a list called the blockchain.
“Bitcoin is the world’s first cryptocurrency and blockchain. You may have heard Bitcoin being called ‘digital gold’ or ‘cash for the internet,” Blair Halliday, Head of UK at Gemini, a leading platform for buying, selling and storing cryptocurrency.
“Bitcoin transactions are just like every other financial transaction you’re already familiar with: a transfer of value (think dollars, pounds, or property) from one person to another. But, instead of routing that transaction through a bank or other financial services provider, it’s validated, recorded and secured directly on the blockchain.”
Halliday explains that the blockchain is like a public database but with attributes to make it “incredibly secure and trustworthy”.
“Bitcoin and other cryptocurrencies may very well inspire a redesign of the Internet, the financial system, and money as we know it today,” he adds.
How can you buy Bitcoin?
There are three main ways to get Bitcoins: you can buy them, sell things to people and ask that they pay you in Bitcoin or they can be created on a computer.
Bitcoin mining is the way Bitcoins can be created on a computer, but this is an incredibly arduous and complicated process – plus it could be years before you get a single Bitcoin from it.
Is it a good idea to invest in Bitcoin?
This week, Tesla announced it was investing $1.5billion (£1billion) in Bitcoin and that it would start taking it as payment. This has seen Bitcoin value surge to a record high. But is it a good idea to buy Bitcoin?
“Investing in Bitcoin is high risk, and I wouldn’t recommend this route. There’s been an influx of social media influencers and football clubs promoting it to retail investors. In my opinion, it needs to be more strictly regulated,” Morrow says.
While tech giants like PayPal announced last year that they would accept Bitcoin as payment and the Bank of Singapore said that the cryptocurrency could replace gold as its store of value, in October 2020 the Bank of England warned against the unpredictability of Bitcoin.
Andrew Bailey, the head of the Bank of England, said he was “very nervous” about people using Bitcoin for payments and that investors should realise its price is extremely volatile.
“I have to be honest, it is hard to see that Bitcoin has what we tend to call intrinsic value,” Bailey said at the time. “It may have extrinsic value in the sense that people want it.”
Morrow adds that the danger of investing in Bitcoin is that you have “the potential to lose all your money”.
“It is no different to gambling with your cash and these complex, sophisticated investments have no place in people’s financial plans. The fact that cryptoassets and other high-risk investments can continue to be promoted without any restrictions is completely wrong,” Morrow says.
“Many people are unaware of the risky nature of these unregulated investments and while warning consumers of the dangers of these products is all well and good, the FCA needs to go further and tighten regulations to stop people suffering serious financial harm.”
This was the case in 2018, when Bitcoin took an unexpected tumble, falling from a value of $20,000 (£14,592) per Bitcoin to $3,000 (£2,178).
Why should I use Bitcoin?
While there’s an argument not to use Bitcoin, there’s also an argument for it. Halliday says using Bitcoin is “highly secure” because all transactions must be agreed on by multiple decentralised parties.
“Bitcoin can be used as a ‘store of value’, like gold or other assets. You can invest in Bitcoin as part of a balanced portfolio, buying some and holding it over the longer term, or you can trade Bitcoin as its value goes up or down. Bitcoin can also be used as a payment method, allowing users to send monetary value to each other through the Internet without the need for intermediaries, like banks,” Halliday explains.
“Because there are a finite number of Bitcoins, and no more can be created without widespread agreement, Bitcoin represents an alternative hedge against problems that arise in the traditional financial system, such as the effects of quantitative easing, when the value of currencies like the US dollar or British pound can be undermined.”
How can you store your Bitcoin?
“You can store your Bitcoin with a cryptocurrency exchange that offers a custody solution, which is essentially a highly secure storage account for crypto,” Halliday says. “It is also possible to hold your Bitcoin in your own personal wallet, or opt for a hybrid solution that balances these two options.”
He adds that protecting your cryptocurrency in secure storage is crucial as transactions generally can’t be reversed.
“This means that if your Bitcoin is stolen, lost, or accidentally transferred, it is extremely difficult if not impossible to recover,” Halliday adds.
Can Bitcoin scale?
Bitcoin, along with other cryptocurrencies, are edging further into the mainstream as we’ve seen with Tesla’s investment.
“It is no longer just a small group of technically savvy, male, wealthy investors living in big cities who are involved,” Halliday says. “In fact, recent Gemini research found there is much more diversity among crypto investors, for example, with women making up two in five investors.”
What can you buy with Bitcoin?
While the price of Bitcoin and other cryptocurrencies remain subject to volatility, Halliday says it’s more common to spend cash and invest in Bitcoin – although Elon Musk has said Tesla will now accept it for its cars.
“Yet, consumer demand is driving companies and governments to consider facilitating payments for goods and services in a whole range of currencies,” he continues.
“In particular, stablecoins – cryptocurrencies that are pegged to a currency like the dollar, or to an asset like gold – provide access to the benefits of digital currencies, combined with the stability of the currency or asset they are pegged to. They are therefore suited to real world transactions.”
How can you shop with Bitcoin and other cryptocurrencies?
“There are a number of ways that you can shop with crypto,” Halliday says. “This doesn’t just include using apps that allow you to pay for everyday items with cryptocurrencies like Bitcoin. It is now also possible to use credit or debit cards that enable you to pay for goods and services in your local currency, for example, pounds, and gain rewards in the form of cryptocurrency.”
If you have a bit of spare cash lying around, investing in Bitcoin could be worth it – but be sure that you’re aware of the risks first and it’s probably best not to stake your whole life savings on it.