The crypto currency revolution! Is it a passing craze or the next big thing for investors?

One Bitcoin valued at £540 a year ago is worth £5,997 today.

    Only 42% of UK transactions involve cash.

A couple of years ago most people had never heard of Bitcoin; but the digital currency has attracted serious attention in recent months as its value has soared – with many investors hoping it can make them a lot of money.

But is it a passing craze – with risks of a bubble followed by a bust – or is it the next big thing?

Bitcoin is a ‘cryptocurrency’ – meaning there are no notes or coins to handle as it only exists online.

The currency is capturing the imagination because there are no currency exchange charges when using it for a purchase overseas; and because central banks cannot devalue it by printing more.

The idea of a digital currency is not new as many countries are now steadily moving towards having a cashless society with the proportion of transactions carried out online or using credit and debit cards versus cash increasing each year. Only 42 per cent of UK transactions now involve cash.

But cryptocurrencies take it to another level – and the number of internet searches for Bitcoin has tripled since April.

Jeremy Gleeson, manager of the Axa Framlington Digital Economy fund, says: ‘A major driver of this trend is young people. Those aged under 35 have grown up with the internet and have always had the option to shop online – and they are now entering their peak spending years.’

Businesses are assessing whether that spending could be done in cryptocurrency.

Bitcoin is not the only digital currency – others include Litecoin and Ethereum – and being able to use them relies on complicated technology known as the Blockchain. This is essentially a massive database which stores details of where each bit of the cryptocurrency is and all transactions in it.

Guy Stephens, technical investment director at financial advice firm Rowan Dartington, says: ‘The technical detail on how the technology works is complex. What really matters is whether it is investable or is likely to become so.’ The astronomic rise in cryptocurrency has seen the price of one Bitcoin rocket from £540 a year ago to almost £5,997 today.

Game on: Graphics firm Nvidia's processors solve maths problems to unlock crypto coins 

But unless you are buying Bitcoin itself, there are no other ways of getting direct exposure to the currency. Also, buying the currency now is betting that its value will continue to climb. This is a risky punt since Bitcoin has already seen huge peaks and troughs in its short lifetime.

While demand in countries such as China has pushed the price up recently, there have also been serious concerns about the safety of using cryptocurrencies. Crucially, these currencies are not regulated by a central bank or government.

While advocates say this protects cryptocurrencies from being over-regulated or devalued, others say it makes them more likely to be used by hackers, fraudsters and for illicit activities such as money laundering.

Holders of Bitcoin have been left out of pocket more than once after hackers broke into the exchanges where the currency is stored online and stole millions.

Because the currency is not regulated, if it is stolen then you have no protection, unlike money kept in the bank which is covered by the financial services compensation scheme.

Stephens says: ‘The golden rule of investment is to understand what you are buying. We are watching closely, but currently have no plans to invest in cryptocurrency and would only seriously consider if it becomes regulated.’

But experts say investors can gain exposure to the rise of cryptocurrencies if they think laterally about where they put their money. Companies whose goods and services tap into the technology can also benefit from the Bitcoin boom.

Two such businesses are US companies Nvidia and AMD. They make graphics processors, which have historically been used in computers to enable users to play games. But the processors are good at tackling the maths problems which Bitcoin miners need to solve to unlock coins. As a result, demand for their chips has soared.

But Axa’s Gleeson is cautious on the outlook. He says: ‘Bitcoin is volatile and subject to sporadic waves of demand. I would fear that demand for these chips could fall away as quickly as it came about.’

But he does invest in chip-maker Taiwan Semiconductor which makes chips for both Nvidia and AMD, so is an indirect beneficiary of any increase in demand either company experiences.

Ethereum and Litecoin the crypto currency

Damian Barry, senior investment manager at Seven Investment Management, invests in US firm Overstock. It is an online retailer but has a subsidiary called Medici Ventures which is involved with blockchain technology. It has launched tZero, a website where investors can trade digital assets such as cryptocurrencies.

Nathan Sweeney, senior investment manager at Architas, says: ‘It is likely that large companies which can afford to invest in this technology will be the ones to reap the benefits. That includes tech businesses and financial firms.’

Investing in a US tracker fund is one way to tap into demand for cryptocurrency. Sweeney says: ‘The Dow Jones industrial average Exchange Traded Fund will give you exposure to firms such as Intel, which stands to benefit from this trend, and Goldman Sachs, which has been heavily investing in blockchain technology.’

He also likes the Robeco US Premium Equities fund, which invests in finance giants such as JP Morgan and Citigroup and the Polar Capital Technology fund which invests in technology companies including Microsoft and AMD. These two funds have returned 63 per cent and 117 per cent respectively over the past three years.

Gleeson says: ‘Maybe eventually cryptocurrencies will be the norm, but I think that is a long way off.’

For now, he is focusing on the more conventional digital currencies we already use. He invests in Apple and PayPal, for example, which have made buying and selling safely online the norm.

He also thinks Visa is a major beneficiary of the move to a cashless society as it makes money on every transaction made using one of its cards.

He adds: ‘We are only at the beginning of this digital journey and it represents a huge opportunity for investors.

‘But we only invest in something once it has been proven to be commercially successful and that can be a long road, a much longer road than people expect.’

How can you spend your Bitcoin

What is bitcoin?

Bitcoin is a ‘cryptocurrency’ that exists only online.

Created in 2008 by computer programmer Satoshi Nakamoto, it is decentralised so unlike the pound, dollar or euro, no central bank of government is responsible for it.

Other cryptocurrencies available include Litecoin and Ethereum.

How does it work?

Bitcoin is finite. Because of the computer code on which it is based, there will only ever be a maximum 21 million Bitcoins in existence.

Around 16 million ‘coins’ are in circulation.

Rather than printed like a bank note, Bitcoins are ‘mined’.

This involves a computer solving a difficult maths problem with a 64-digit solution. Individuals who solve one problem unlock one block of Bitcoin. These ‘miners’ are rewarded with Bitcoin.

How is it valued?

Because there are a limited number of Bitcoins it tends to behave more like gold than sterling: there is a set amount which exists and that rarity makes it expensive – how much depends on the current level of demand.

Increasing demand in China as well as growing awareness of the asset are two of the main reasons for its rapidly rising price.

In the past year the value of a Bitcoin has moved from a low of £540 to a record high of £5,997.

How do I get some?

Investors trade Bitcoin on an exchange in a similar way to buying and selling company shares.

There are many exchanges, including Bittylicious and Coinfloor. Bitcoin can be used to buy goods and services by setting up a so-called virtual wallet, and sent and received through mobile phone apps – the smallest denomination is one hundred millionth of a Bitcoin.

According to online directory Where To Spend Bitcoins UK, there are hundreds of places where Bitcoin is accepted as payment, including the Cosmic Flower Shop in Newcastle and Beech Road Chippy in Manchester.
Read more: http://www.thisismoney.co.uk/money
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