Everyone’s talking about... bitcoin

Brokers offering the currency are rife, but is it really an investment, asks James Connington

Bitcoin – a currency run by a peer-to-peer online network, rather than any single organisation – has powered its way into the public consciousness. Adverts for brokers appear on London Underground; major investment shops such as IG and Hargreaves Lansdown now offer ways to buy, and a deluge of emails encouraging people to invest is flooding the nation’s inboxes.

Some believe it is a new order of finance that will turn traditional banking and economic control upside-down. Others invest simply for fear of missing huge returns. Many more use bitcoin and other “cryptocurrencies” for criminal gain.

In a major step toward making bitcoin mainstream, on Tuesday Chicago-based CME, the world’s largest exchange operator, announced it was preparing to offer bitcoin “futures contracts”. These enable currency owners to hedge the risk they take. The move may encourage traditional money managers to take more of an interest, and it drove the price of bitcoin to a record high of more than $7,000.

The currency is highly volatile, in part due to a succession of hostile announcements by governments and regulators. China, a major cryptocurrency market, has banned its citizens from trading in them.

Other nations have been more supportive. Japan passed legislation recognising bitcoin as a legal payment method earlier this year. In Russia, where the initial reaction was mixed, orders have now been issued for a legal framework. In the UK, the City watchdog recently warned investors about the risks of“Initial Coin Offerings” (ICOs), used to raise funds for new cryptocurrencies.

Many senior financial figures have been dismissive. Jamie Dimon, JP Morgan’s chief executive, described the cryptocurrency as “a fraud”. Larry Fink, founder of fund group BlackRock, called it an “index of money laundering”. But there are anecdotal reports that “family offices” – firms set up to manage the assets of super-rich dynasties – are now buying, alongside other private banks and wealth managers. Goldman Sachs is reportedly exploring how it can help clients trade in digital currencies.

The idea that “bitcoin is the new gold” is a stretch – although comparisons are increasingly made. Gold has been used as a store of wealth since ancient times. It is also a physical commodity. Bitcoin is young, non-physical and hard to understand. But there are similarities.

Both gold and bitcoin are used by those who have an inherent distrust of the established financial system. Both are, technically, portable and borderless. Both attract near-hysterical adherents who attach an almost religious significance to ownership.

Neither gold nor bitcoin’s prices move in line with stock markets, and neither provides an income. In the very short term, gold and bitcoin have reacted in similar ways by jumping, for example, in response to news of a political or economic crisis.

Both still require trust. With a cryptocurrency, you don’t have to put your trust in any one individual or company, but you do have to trust the software works, and that it can survive regulation or anything else thrown at it. You also need to trust your “wallet” provider to keep your currency secure. Wallets can and have been stolen.

With gold, unless you buy and store it, you trust your service to hold the gold it says it does, and keep a secure ownership record. You also trust that the supply is as limited as it appears.

But they are not like-for-like. Aside from the ideological buyer, bitcoin and other cryptocurrencies are largely being invested in in the hope that they will grow in value enormously. Gold is still largely bought due to fear.

HOW TO BUY BITCOIN

Buying bitcoin used to be complicated, with intimidating websites and big fees. Now, there are a number of consumerfriendly options for trading a whole range of cryptocurrencies – if you are ready for the risks involved.

The first step is to set up a bitcoin wallet. (You could also download the entire bitcoin programme, but there is no real advantage for the average investor.)

There are lots of wallets out there, but Blockchain. info is one of the biggest and most popular. It has been backed by millions in funding, and has an easy-to-use app and website.

Sign up online or download the app, then secure your account. Note down your wallet ID, which you will need, verify your email, and set up two-step authentication.

Then, you’re ready to buy. To add bitcoin to your wallet, you need to find a broker. In effect, your wallet is your bank account, and the broker helps you buys things to put in it.

You send a broker your cash via card or transfer, and they send bitcoin to your account – often after strict identity checks. Some banks, including HSBC and Barclays, said card payments to Bitcoin providers could be declined, so you may need to transfer instead. Fees, service and payment methods all vary. Bittybot is a website that lets you compare brokers, but it might be simpler to stick with something more straightforward to start. Coinify is a broker service integrated into Blockchain.info itself, so you can do everything in one place. Avoid options requiring international bank transfers.

A crucial piece of information is a bitcoin address – which identifies your account on the bitcoin network. You will find it in the “Request” tab of Blockchain.info. Every bitcoin broker will ask for it. Then, it’s simply a case of buying.

It can take seconds or hours for a transaction to go through. To sell, use the same broker you bought with. You could also spend your bitcoin, as a number of companies now accept it as payment.

Pension savers have been handed a “staggering” £262m in refunds from the taxman after being overcharged. Official figures show £37m of refunds from the pensions “super tax” were made in just three months between July and September.

Telegraph Money first revealed in April this year that hundreds of thousands of savers were paying too much tax when using the “pension freedoms”. The problem is caused by HM Revenue & Customs systems that tax one-off withdrawals as if they were the first of 12 regular payments.

A £10,000 one-off withdrawal is therefore taxed as if annual income will be £120,000. As a result, people are being over-taxed by thousands of pounds. The taxman promises to repay within 30 days of receiving one of three complicated forms.

Last month, experts used an inquiry into the pension freedom reforms to call for the Government to intervene. The most recent figures show the value of refunds is at its highest level since the reforms were introduced in April 2015. In all, £262m of refunds have been made.

Tom Selby, of AJ Bell, the fund shop, branded the figure as “staggering” and said it was “manifestly unfair to lumber savers, who are using the freedoms in the way the Government intended, with whopping great tax bills”.

Mr Selby added: “Many of those affected – particularly basic-rate taxpayers and people who don’t take advice – will have little or no experience dealing with tax matters and might not even know the reclaim forms exist.”

If you think you’ve been overtaxed on your pension you need to fill out one of three HMRC forms: P55, P53Z or P50Z. The correct form depends on your circumstances.

P55 should be used if the withdrawal has not entirely emptied your pension pot; use P50Z if the withdrawal emptied your pot and you have stopped working; and use P53Z if you have emptied your pot and are still working. Have you been stung by the pensions “super tax”? We want to hear from you: sam.brodbeck@telegraph.co.uk