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You'd be forgiven for thinking that Bitcoin was the overnight success story of 2017. You can't open a newspaper, or check out the business section on breakfast TV without hearing about it. Well I hate to burst the bubble, but Bitcoin has actually been around for quite a while now.

In fact it was created way back in 2009 by ‘Satoshi Nakamoto’. The first noticeable spike in interest came in November 2013 when it traded at $1,000 for the first time. But since January 2017, the cryptocurrency* – the generic name for digital currencies (there are more than 1,000 of them in existence now) – has exploded. A single bitcoin was trading for $19,499 just before Christmas, with more than 16 million Bitcoins now in circulation.

Source: blockchain.info
* Cryptocurrency – think PayPal or Google Wallet, but more complex and anonymous.

But what is Bitcoin? Why has it become so popular? And should you be jumping on the Bitcoin bandwagon?

What is Bitcoin?

Bitcoin is a decentralised digital currency. It can be bought from exchange sites using your credit card, with several online vendors already accepting Bitcoin as a method of payment for their goods and services. Bitcoin operates on an online network called a Blockchain (more on this later). The network is owned collectively by all Bitcoin holders, meaning no single institution – including banks or government departments – have control over it.

If you own Bitcoin, it will appear in the digital wallet of your mobile phone, and can be used to pay for things as easily as sending an email. With contactless payments and push-purchasing, Bitcoin it simply an extension of the on-going digitalisation of money. It’s an online currency, and it’s coming for the pound, the euro and the dollar.

It all sounds quite impressive, doesn’t it? Whether it has legs or not, of course, only time will tell. Still, that hasn’t stopped investors getting involved from a speculative perspective too. The price of Bitcoin has fluctuated pretty drastically in recent weeks, moving from $19,499 on 16 December 2017 to $13,949 on 24 December 2017 – a 30% drop in just eight days.

How does it work?

The origins of – and reasons for – Bitcoin are intriguing. Firstly nobody knows its creator, Satoshi Nakamoto, or whether he or she is an individual, or the name of the collective. Secondly, Bitcoin is the currency and that’s what’s making the headlines. But Nakamoto also created the Blockchain infrastructure on which Bitcoin is traded and recorded.

In some respects this Blockchain infrastructure is even more important than Bitcoin itself. There are 1,000 cryptocurrencies in the world today, but Blockchain is the infrastructure on which they all operate, with companies like IBM investing heavily in its development.

Through the Blockchain infrastructure, anonymous users complete transactions with each other, with the Blockchain both transferring the Bitcoin when the transaction is complete, and acting as a ledger to record the change in ownership of the goods being sold. And because it’s all online, records are updated in real time.

Let’s walk through an example. Imagine you’re selling your car, and want to receive Bitcoin from the buyer. You would list the car on Autotrader (other car auction sites are also available) as normal, but once you’ve agreed a fee, you would request settlement in Bitcoin. Using the Blockchain infrastructure, you would enter the sale transaction. The person purchasing the car would then agree to the deal, the ownership of the car transferring from you to them, the Bitcoin travelling in the opposite direction. Done Deal - Noel Edmonds would be proud.

The key here is Blockchain acting as both an online ledger, and the payment agent, rendering the banks and government departments usually involved in such transfers (DVLA, Land Registry, etc), completely irrelevant. Just as Nakamoto wanted. Imagine a time when you don’t have to let DVLA know you’ve brought a car, because the online transaction you’ve completed has taken care of that part for you? Thanks Blockchain.

What are the risks?

Remember the dot.com bubble? How about the property bubble that preceded the financial crisis in 2008?

Bitcoin is most certainly in the middle of a bubble right now. Over the last 12 months, the cost of one Bitcoin has risen from roughly $1,000, to over $19,000 at one stage, and if that doesn’t say bubble, then I'm not sure what does…

And the thing about bubbles, sadly, is they always burst.

‘I feel we’re in a crypto-currency bubble,’ Erik Voorhees, ShapeShift CEO and Bitcoin investor, said in 2017. ‘I don't know how high the bubble will go or how far it will crash, but they're definitely in a bubble. I think Bitcoin will trade lower than it is today, some time in 2018.’ There’s also the view that, because Bitcoin doesn’t actually pay an income, it doesn't have an intrinsic value. I don’t necessarily subscribe to that. You wouldn’t necessarily say a piece of art is worthless just because it doesn’t pay a dividend. But like art, Bitcoin is only worth what somebody else is prepared to pay for it – this is the “greater fool theory”; you need to find someone to pay more for the bitcoin than you did to make a profit.

Trouble is, Bitcoin’s price is fluctuating on an almost daily basis.

Bitcoin Volatility

Source: coinbase.com/charts

Should I invest?

There are around 1,000 crypto-currencies in the world today. Bitcoin was the first to market, but perhaps the biggest, smartest innovation of the whole piece is the infrastructure on which it operates: Blockchain.

Blockchain could seriously change the way we record contracts and transact in the future. It’s an innovative technology: “Blockchain will do for trusted transactions what the internet did for information’, IBM CEO, Ginny Rometty has said of the software.

And that’s the key. Blockchain is new, it’s evolving. But mistakes will be made. Issues will occur – hacks have already taken place. But this is an exciting technology, and one I believe will revolutionise financial services, and payments, in the future.

As a Magus Private Wealth client, you will already be investing in companies like IBM who, in turn, are investing in Blockchain. So, while I would suggest a note of caution when it comes to investing directly into the Bitcoin bubble, continuing to follow your long-term investment strategy with Magus will ensure you’re on board the Blockchain bandwagon.

Interestingly as this article goes lives a new article 'South Korea plans to ban bitcoin trading' has just been published on the BBC news website.

The justice minister said virtual currencies were causing the government "great concern".

Meanwhile, several Seoul cryptocurrency exchanges have been raided this week in a probe into alleged tax evasion.

Read the full BBC article here.


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