Visitors to the Bank of England museum can try to lift a 13kg gold bar, see the bank’s charter from 1694 and now browse a display dedicated to crypto assets.
The Bank’s Future of Money exhibition features a gold coin emblazoned with the bitcoin logo, a device used for storing cryptocurrency, and a T-shirt from the “risk management department” of the failed crypto exchange FTX.
In the space of about 15 years, bitcoin, the world’s first cryptocurrency, has made the leap from being a fringe idea circulated in internet forums to a part of the cultural mainstream. But considerable concerns remain about the risks posed by crypto assets. Last month Sam Bankman-Fried, the 32-year-old founder of FTX, was sentenced to 25 years in prison for defrauding investors and customers out of billions of dollars.
For now though, optimism among investors remains high. The price of bitcoin topped $72,750 on Monday in anticipation of a forthcoming so-called halving event. Roughly every four years, the rate at which new bitcoins can be created is halved. This is known as a halving event and the idea is that it decreases the supply of new bitcoins, driving up the price of the asset.
“This is seen as an opportunity by crypto speculators, because it will become harder to mine bitcoin making it more scarce,” said Myron Jobson from the trading platform Interactive Investor. “Crypto is becoming increasingly mainstream, but still poses a significant level of risk.”
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What is a halving event?
Bitcoins are created through a process called “mining”, where computers compete to solve complex mathematical problems and are rewarded with new coins. These coins are added to a blockchain, a digital ledger that keeps track of who owns which coins.
The reward is 6.25 new bitcoins for every problem solved, but this is expected to drop to 3.125 bitcoins at some point next week.
Only 21 million bitcoins will ever be mined (with supply ending in about 2140) and about 19.7 million are already in circulation, according to industry estimates.
Bitcoin has undergone three halving events in its short history. After each one, its price has reached a new high within 18 months, before collapsing.
“It is simple supply and demand. If an asset is scarce and you know it is going to become more scarce then the price will go up if demand stays the same,” said Erin Friez from the data firm Digital Asset Research.
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When the first halving event took place in November 2012 the price of bitcoin was $12.35, according to the analyst CCData. Its price increased 9,956 per cent over the next year to a high of $1,242 in December 2013. But less than three months later, it had tumbled 93 per cent. The second halving event took place in July 2016 when the price of bitcoin was $652. By December 2017 the price had increased 2,948 per cent to $19,871, before collapsing 84 per cent over the next 12 months.
The third halving took place in May 2020 when the price of bitcoin was about $8,735. The price increased 705 per cent to about $68,979 within 18 months, then dropped 78 per cent over the next year.
It is though bitcoin will have 32 halving events in total, according to Digital Asset Research, with the last one likely to be in 2136. The idea is that eventually miners will no longer be rewarded with new bitcoins, but will instead get transaction fees paid by network users.
Not everyone agrees on whether bitcoin’s price will continue to rise after future halving events. Ganesh Viswanath Natraj from Warwick Business School said: “It becomes self-fulfilling. If everyone thinks the halving will lead to the bitcoin price going up, then investors will force it up by buying more of it. But it’s difficult to argue that halvings change bitcoin’s fundamental value. It’s not as if it will become easier to use it to make payments.”
• How high could bitcoin’s price go?
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Ben Laidler from the investment platform eToro said: “Every time we have a halving event it becomes less impactful. Markets are forward looking and already expecting it. About 94 per cent of bitcoins have already been mined so it matters less and less whether the supply rate slows down.”
Bitcoin’s price is up by more than 60 per cent since the start of January. Its recent surge has also been driven by the launch of the first spot bitcoin exchange traded funds (ETFs) in the US.
Cryptocurrencies are unregulated, which means that investors are unlikely to get their money back if assets are lost or stolen, or the platform you hold them with goes bust, as with FTX. These new ETFs are investment companies that hold bitcoin, giving investors a regulated way to get exposure without needing to buy and hold crypto directly themselves.
About $12.75 billion has poured into bitcoin ETFs since they started trading in early January, according to the investment firm CoinShares. They are not yet available for retail investors to buy in the UK.
The prices of many smaller cryptocurrencies are also on the rise. The price of ethereum was $3,558 on Thursday, up 51 per cent from the start of the year. Solana was trading at $165.60, up 71 per cent, and BNB up 91 per cent at $598.
How investors are preparing
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Liam Davies has a portfolio of crypto investments worth about $35,000. It includes about $3,500 of bitcoin and $3,500 of ethereum, as well as smaller cryptocurrencies such as dogecoin, litecoin and cardano.
Davies, 37, a former bar worker from Sheffield, is a full-time trader and hopes the halving event will be an opportunity to make a profit.
“I have witnessed a few of these halving events now. The price tends to increase fairly rapidly in the run-up, and afterwards will probably cool off before growing steadily. That is what I would expect this time,” Davies said.
“I will probably hold what I have through the halving and might look to buy more if there is a price correction afterwards. If the price of bitcoin gets to $100,000 then I will sell my holdings.”
• Why I’m biding my time before betting on bitcoin
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Davies started investing in bitcoin in 2013 after hearing about the cryptocurrency online. He made an initial investment of $100 through eToro.
“I spent a lot of time on the internet — I was that kind of kid. I would play video games and was constantly online so you get wind of these sorts of things,” he said.
Crypto now makes up about 30 per cent of his overall investment portfolio, which also includes company shares and commodities.
Should I invest?
Bitcoin’s price is notoriously volatile and there is no regulated way to buy it in the UK, meaning your money is not protected by the Financial Services Compensation Scheme, a safety net that covers up to £85,000 held with an authorised investment firm if it goes bust.
The Financial Conduct Authority (FCA), the City watchdog, said: “Investing in cryptoassets is high risk and remains largely unregulated in the UK. This means you are unlikely to have any protection if things go wrong. If you choose to invest you should understand the risks involved and be prepared to lose all your money.”
Ben Yearsley from the wealth manager Fairview Investing said: “I understand the logic of bitcoin’s price increasing if its supply is reduced, but that does not change all the issues I have with investing in crypto. Bitcoin still does not do anything useful.”
Yearsley said people could instead consider investing in regulated products such as the Invesco Coinshares Global Blockchain ETF, which doesn’t hold crypto directly but instead tracks the performance of companies with exposure to it, such as crypto mining companies, and trades on the London Stock Exchange. It is up by about 19.8 per cent this year.
But there are risks with these investments too. Analysts say the halving event could reduce the profitability of firms that mine crypto. “The overall reward you can get from mining will be halved. It’s definitely a tough environment for miners. Those who can’t compete may be bought or stop operating,” said Alexander Neumueller from the Cambridge Centre for Alternative Finance, an independent research institute.
Mining bitcoin is costly and requires a lot of computing power that uses up large amounts of energy — globally, bitcoin miners use more electricity than entire countries including Egypt and Poland, according to the Cambridge Bitcoin Electricity Consumption Index, which monitors bitcoin’s environmental footprint.
Analysis of 13 of the largest US mining companies by the financial services firm Cantor Fitzgerald estimated that it will cost $47,169 on average for firms to produce each bitcoin after the halving, compared with $23,585 now.
Bitcoin remains a long way from being a widely used form of payment and its future remains uncertain. The government has said it intends to introduce stablecoins, crypto assets tied to the value of real-world currencies into the payments system. The idea is that a widely used stablecoin linked to the value of the pound could make payments faster, cheaper and more efficient.
The FCA is now consulting on regulations for stablecoins and intends to consult on regulation for crypto assets more widely.
Ian Taylor from CryptoUK, a trade association for the crypto industry said: “For retail investors it’s still a bit of a wild west and people see crypto as a way to make money quickly. Regulation would be good for consumers as it could make investing easier and safer. Most financial institutions now consider crypto to be a recognisable asset class — we just need the regulation to support it.”
