Bitcoin Investment In The Uk: Worthwhile Or Not?

Bitcoin is a digital currency that has been growing in popularity as an investment opportunity. It is a decentralised cryptocurrency, meaning it is not issued or controlled by a centralised authority such as a bank or government. All transactions are completed online, and there are no brokers involved. Its supply is capped at 21 million, creating scarcity akin to precious metals and influencing its market value.

Bitcoin's investment potential depends on market volatility, technological advancements, and regulatory changes. It has shown significant growth since its inception, attracting investors seeking high returns. However, its volatile nature and regulatory uncertainties present notable risks.

If you are considering investing in Bitcoin, it is crucial to understand the market conditions and consult with financial advisors to ensure it aligns with your risk tolerance and financial goals.

Bitcoin's volatility

Bitcoin is considered a volatile asset. Volatility is a measure of how much the price of a financial asset varies over time. The more volatile an asset, the riskier it is to hold. Volatility can be caused by a sudden increase or decrease in the price of an asset, which can be influenced by speculation and bets placed by investors.

Bitcoin is more volatile than gold and other major currencies. For comparison, the volatility of gold averages around 1.2%, while other major currencies average between 0.5% and 1.0%.

Despite its volatility, Bitcoin has historically provided investors with high returns, making it a potentially attractive investment for those seeking high-risk, high-reward opportunities. However, it is important to note that Bitcoin is a speculative investment and there are no guarantees of future returns.

Regulatory uncertainty

The regulatory status of crypto assets varies across jurisdictions. In the UK, the regulatory framework for crypto assets is complex and fragmented, involving multiple regulators, such as the FCA, the Bank of England, HM Treasury, HM Revenue and Customs, and the Information Commissioner's Office, each with their own remit, objectives, and powers. The UK's regulatory regime for crypto assets is currently undergoing significant changes, as the government and regulators implement new legislation, guidance, and rules to address the emerging risks and opportunities posed by crypto assets.

The UK does not currently regulate crypto per se; instead, crypto assets and related activities may fall within existing regulatory frameworks depending on their specific characteristics. Crypto asset activities performed in the UK are regulated under two distinct regulatory frameworks:

• The first framework applies to all crypto assets and is determined by what is done with the crypto asset and whether that creates a money laundering risk. Firms that fall within this regime must register with the FCA under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (as expanded by the Money Laundering and Terrorist Financing (Amendment) Regulations 2019).
• The second framework depends on the characteristics of a crypto asset and whether it falls within the definition of a "specified investment" under the Financial Services and Markets Act 2000 (Regulated Activities) Order.

The UK's proposed approach to crypto asset regulation is based on the principle of "same risk, same regulatory outcome," aiming to achieve the same regulatory outcome regardless of the technology used. The UK government has introduced legislation to bring "qualifying cryptoassets" into the scope of the financial promotions regime, which will come into effect in October 2023. This definition covers most cryptocurrencies, and financial promotions related to these activities will be subject to restrictions.

While the UK's financial watchdog, the FCA, does not currently regulate cryptocurrencies, it displays a list of crypto exchanges registered with it, including eToro, CoinJar, and Uphold. The FCA's position on cryptocurrencies is that they are considered very high-risk, speculative investments, and individuals investing in crypto assets should be prepared to lose all their money.

The legal and regulatory uncertainty around crypto assets creates complexity and ambiguity for clients and lawyers, who need to navigate different and evolving regulatory regimes and comply with relevant obligations and requirements. The UK's regulatory framework for crypto assets is not comprehensive and exhaustive, leaving some crypto assets and associated activities unregulated or subject to new rules. This regulatory uncertainty and complexity may create challenges for investors and legal professionals, underscoring the need for continued monitoring and adaptation to the changing landscape.

Tax implications

In the UK, Bitcoin and other cryptocurrencies are taxable. Her Majesty's Revenue and Customs (HMRC) does not consider crypto assets to be money or currency. They are, however, subject to income tax and National Insurance if received as payment from an employer.

If you are an individual holding crypto assets like Bitcoin as a personal investment, you may have to pay capital gains tax when you sell them because they are not eligible to be held in an ISA (a tax-free savings and investing account).

You may need to pay Capital Gains Tax when you:

• Exchange your tokens for a different type of crypto asset
• Use your tokens to pay for goods or services
• Give away your tokens to another person (unless it is a gift to your spouse or civil partner)

If you donate tokens to charity, you may need to pay Capital Gains Tax on them if the donation is more than the acquisition cost.

You can deduct certain allowable costs when calculating your gains, including the cost of transaction fees, advertising for a buyer or seller, drawing up a contract for the transaction, and making a valuation to work out your gain for that transaction.

You can also use capital losses to reduce your gain but you must report them to HMRC first. If your total taxable gain is above the annual tax-free allowance, you must report and pay Capital Gains Tax.

Security risks

Bitcoin is a decentralised, digital currency with no physical equivalent. It is open-source, meaning its design is public, and no one owns or controls it. Transactions are recorded on a shared public ledger called the blockchain, which ensures trust in transactions.

While the blockchain is considered secure, there are still security risks associated with buying, selling, and holding Bitcoin. Here are some of the key security risks to consider:

• Exchange hacks and fraud: Cryptocurrency exchanges, where Bitcoin is bought and traded, have been targeted by hackers and fraudsters. Well-known exchanges such as Coincheck and Bithumb have suffered security breaches, resulting in the loss of millions of dollars worth of crypto assets. These exchanges often lack the same level of security and regulatory oversight as traditional banks, making them vulnerable to attacks.
• Account breaches: Your private "key" or password is essential for accessing your Bitcoin account. If hackers gain access to your key, they can steal your Bitcoin with little chance of recovery. It is crucial to keep your private key secure and not stored on your computer or online, where it can be easily accessed by hackers.
• Phishing attacks: Fraudsters may send emails disguised as legitimate sources to trick users into providing their credentials. This can result in the loss of sensitive information and Bitcoin.
• Routing attacks: Hackers can intercept data during real-time transfers to internet service providers. Blockchain participants may not detect these attacks, as everything appears normal, but confidential data or currencies are extracted.
• Sybil attacks: In this type of attack, hackers create multiple false network identities to flood the network and cause a system crash.
• 51% attacks: Mining Bitcoin requires significant computing power. If a single miner or group of miners gain control of more than 50% of the network's mining power, they can manipulate the ledger and validate fraudulent transactions.
• Regulatory uncertainty: The lack of a clear regulatory framework for cryptocurrencies creates uncertainty and potential risks for investors. For example, China has banned its citizens from mining or holding any cryptocurrency. If other countries implement similar restrictions, Bitcoin holders could face significant challenges.
• Transaction errors: Unlike traditional financial systems, Bitcoin transactions cannot be easily reversed or corrected. A simple mistake in the amount or destination can result in permanent losses.

While the decentralised nature of Bitcoin and the blockchain provides some security advantages, it is important to recognise the risks associated with this relatively new and volatile asset class. These security risks highlight the importance of thoroughly researching and understanding the potential dangers before investing in Bitcoin.

Liquidity

Bitcoin does have liquidity, but it is much less than that of the currency trading market. For example, in the first few months of 2024, Bitcoin's average 24-hour trading volume was between $9 billion and $100 billion. In comparison, the average daily turnover in the forex market was about $7.5 trillion in 2022.

The liquidity of Bitcoin has been increasing over time. The daily volume of Bitcoin was under $100 million per day in 2014 and even fell below $10 million at times. In December 2017, the daily volume surpassed $2 billion but fell to below $1 billion in January 2018. Since then, Bitcoin's volume has mostly stayed below $1 billion, with brief periods of higher volume coinciding with significant events in the cryptocurrency space.

There are several factors that influence the liquidity of Bitcoin:

• The number of trusted Bitcoin exchanges: A higher number of exchanges allows more people to trade their coins, increasing the frequency and volume of trades, which enhances liquidity.
• Acceptance at brick-and-mortar stores and online shops: The more Bitcoin is used as a medium of exchange, the more liquid it becomes. However, high speculative demand has reduced the supply available for commercial transactions.
• Negative publicity and price crashes: Bitcoin's reputation has been impacted by negative publicity related to crypto scams and price crashes in 2017, 2020, 2021, and 2022. This has deterred some retailers from accepting Bitcoin.
• Cryptocurrency ATMs: The network of crypto ATMs has grown steadily, and these machines are important for wider acceptance as they facilitate the purchase of Bitcoins. However, they often charge high fees, up to 10% per transaction.
• Debit and credit cards: The increasing use of debit and credit cards for cryptocurrency transactions makes it easier to carry out purchases and withdrawals. The launch of Bitcoin-to-cash payment cards and ATMs boosts the usability and acceptance of Bitcoin, increasing liquidity.
• Regulations: The stance of governments and financial regulators on Bitcoin varies widely. Despite the ambiguity, virtual currency use is growing, and a clear stance by authorities on consumer protection and taxation could encourage more people to use Bitcoin, positively affecting its liquidity.

In summary, while Bitcoin has liquidity, it is less liquid than other asset classes. Improving the liquidity of Bitcoin could help to reduce its risks and make it a more attractive investment.

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