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Bitcoin – a phoenix from the ashes or a flash in the pan?

You may have noticed in the headlines last week, buried amongst news of vaccinations and Christmas rules, that the value of Bitcoin reached an all time high. The flagship of cryptocurrency peaked at £14,821 per bitcoin, not a bad pay out for anybody holding bitcoin since their creation in 2009 when they were essentially worthless, and you could buy 10 bitcoins for under a pound.

Before the lockdown in March, the price of bitcoin was fairly stable at around £6,000, dropping to £4,000 in the middle of March. So, what has caused the resurgence in value, and what causes volatility in the bitcoin market?

Firstly, let me explain a bit about my background. I am, by trade, a chartered accountant and tax adviser. I am not qualified to give investment advice, and if you are looking to make millions in cryptocurrency, I’m afraid this blog and my future endeavours will not help you achieve this. If this was a skill I had mastered, I would likely be writing this from a beach in the Maldives, casually sipping a Margarita whilst amassing my wealth. Instead, I am writing this from my now-appropriated work-from-home office in the dark, wondering where the long sunny days have gone and when the central heating will kick in.

I am however deeply interested in technology, and more specifically any technology that has the power to disrupt our everyday life. You only need to look at a company such as Uber, or cloud software implementation in the accountancy world to see how quickly the landscape of what we know and understand can change. This is where my fascination in cryptocurrency lies.

What just happened to Bitcoin?

Well to understand this we need to look at what, in general, affects the value of cryptocurrency. Stock prices change everyday by market forces, demand and supply, and the perception of what investors feel a company is worth. Cryptocurrency is affected by similar consumer trends. Negative media statements, reports of hacking, and the use of digital currency by early adopters causes hesitance in investors. It can also be swayed by perception of value against fiat currency. Cryptocurrency is governed by a design decision by the developers to limit production, unlike fiat currencies that are managed by governments to balance the economy. In this way, cryptocurrency actually has more in common with gold.

Conversely, the value of cryptocurrency rises with consumer confidence. As institutions start adopting or investing in cryptocurrency, so the value increases. In October, Paypal launched a new service to its US customers, allowing them buy, hold and sell cryptocurrency. Last Tuesday MicroStrategy, a US based software company purchased a further 2,574 bitcoins for $50m.

Around 18.5 million of the total 21 million bitcoins have been mined to date. Once the 21 million bitcoins have been mined, the supply is exhausted. In a recent interview with CNBC investor Mike Novogratz described investors seeing Bitcoin as a store of value, rather than a speculative vehicle, and that young investors on social media see Bitcoin as ‘social money’, while baby boomers see Bitcoin as a hedge against paper money. With the recent pandemic, investors are growing less trustworthy of flat money as governments simply print more of it.

So where does this leave us?

In 2017, Bitcoin saw a dramatic price surge and reached a record high, but fell by 65% within the first month of 2018, and by September 2018 cryptocurrencies had lost 80% of their value from the peak. There is speculation that the market is due another correction, but advocates of the currency claim this is just the beginning of bitcoins rise. However, from what we’ve just read, the more positive information that exists surrounding cryptocurrencies and the more it is adopted, the greater the value becomes, so it is possible those praising its current value are acting on their own self-interest.

Most of us have wished for a crystal ball this year to see past the uncertainty ahead, and if I were personally in possession of one, my eyes would be fixed on the future of bitcoin.

If you don’t know your forks from your airdrops, or like me have an interest in cryptocurrency then stay tuned; in future blogs I will look to explore the technology underlying cryptocurrency, the tax implications of investing in cryptocurrency as well as HMRC’s reaction to cryptoassets.

Ben joined PKF Francis Clark in May 2018 from a local practice, having previously relocated in 2016 from a mid-tier firm in London. Ben is… read more
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