What The Tech? December 2017
12th December 2017
We kick off this month by asking: What the Tech is cryptocurrency?
[Given that there are roughly 3 dozen different forms of cryptocurrency, including one inspired by a dog meme (seriously), I’ll be referring mostly to Bitcoin, the first and most widely used cryptocurrency.]
Cryptocurrencies are a form of digital currency, existing solely in electronic form. They are not controlled by banks or companies and therefore are completely decentralised, from which arises most of the benefits and risks of using them.
Because they aren’t controlled by banks, it’s not possible for them to just print more (thus devaluing the currency), or control how it is withdrawn, bought and sold. They are held digitally either on a hard drive or in the cloud. This brings the inherent risk that the balance held by an individual can’t be insured. There have been many cases of these cloud accounts being hacked and, in one case, the owner forgetting about the hard drive and throwing £4m in a land fill.
So why use Bitcoin?
As mentioned, it’s completely decentralised: this means that instead of one central authority, it’s controlled by a global community – meaning it can’t go belly up the same way a number of banks did in 2008.
It’s easy and cheap to set up and use: an account can be set up in seconds, rather than the usual rigmarole of a conventional bank and, as it has no ties to traditional currency, there are no exchange rates or transaction fees.
It’s anonymous: this is perhaps Bitcoin’s most famous (and infamous) quality. Bitcoin accounts aren’t linked to names, addresses, etc. and is therefore very popular with those involved in criminal activities, such as buying drugs online and money laundering. This, however, leads us to our next section:
What are the risks?
Although anonymity is one of the biggest selling points of Bitcoin, it’s not as black and white as people think. Every transaction ever made is stored in a huge general ledger called the blockchain – and although it doesn’t link to the users’ personal information, it does link to their bitcoin account, showing exactly how many Bitcoins are held in that account. This then opens targets for hackers and those cracking down on the criminal use of Bitcoins.
Because of the way bitcoin is ‘mined’ by the community (more on that in a moment), should one group ever reach 51% of the mining power, they could potentially completely tank the value of Bitcoin and render it worthless. In January 2014, a group called Ghash.io reached 45% mining power, therefore proving this is at least possible.
Despite many believing to the contrary, gains on Bitcoin transactions are fully taxable in the UK.
How do I get my hands on some?
There are two main ways to acquire Bitcoin. The first is good old fashioned trading for existing currency. This brings in its own risks as Bitcoin are completely non-repudiable and (as mentioned) uninsured, so trading can go wrong.
The second, more technical way is to ‘mine’ Bitcoins. This is achieved by essentially running very elaborate and extensive computer programming – which provides the computing power to the network. This however, requires very expensive computing equipment and an enormous amount of electricity – currently a little more than Ecuador.
But what does all this mean?
In short, Bitcoin and cryptocurrencies can be a very smart investment for lots of people and could make them millions (and has done) – however, there is a lot that can go wrong and there are huge risks involved, so it’s not something that is right for the majority of small time investors. It is still a very new and rapidly developing market, so the safest option is to take the appropriate financial advice.
Author: James Potton, Accounts & Audit Assistant, Plus Accounting