Bitcoin: 7 questions answered

Last month the price of Bitcoin, the world’s most important cryptocurrency, hit a new record high. The surge was driven by the approval of digital currency ETFs or exchange-traded funds. This has enabled investors to get easy exposure to Bitcoin.

Another important event that could influence the price of Bitcoin is the latest ‘halving’. No idea what that means? The following Q&A aims to tell you all you need to know about Bitcoin.

1. What is Bitcoin?

Bitcoin is a currency that exists only in digital form, so there are no banknotes or coins. Instead, ownership of Bitcoin is recorded electronically, rather as a bank account is, with some key differences: there is no bank or other organisation involved; instead the information about who owns what is recorded in numerous places online. This massively duplicated repository of data is called the ‘blockchain’.

Although Bitcoin is described as a digital currency, and some people do indeed use it to buy things, its primary use is as a financial asset or a store of value.

2. How does Bitcoin work?

When someone buys Bitcoin, proof of ownership is recorded on the blockchain. The information is public, which aims to ensure transparency and security, although ownership is anonymous.

Each cryptocurrency transaction is individually recorded on to the blockchain by a huge network of participants who verify its authenticity using complex computer programs that determine everything about how Bitcoin functions. One of these participants is rewarded in Bitcoin for the validation. This process of creating new Bitcoin is known as ‘mining’ by analogy with the extraction of gold.

3. Why was Bitcoin created?

Bitcoin was created by Satoshi Nakamoto, a pseudonym for a person or group whose true identity remains unknown.

Nakamoto’s intention was to create a ‘new electronic cash system that’s fully peer-to-peer, with no trusted third party’, such as a bank. The first Bitcoin block, also known as the ‘genesis block’, was mined on 3 January 2009.

Bitcoin was created in such a way that there is a limit on how much can ever be created: around 21 million Bitcoins. Making an asset scarce should, according to conventional economics, support its value.

Some argue that this makes Bitcoin similar to gold, another asset whose supply is finite. Traditional currencies such as the pound or dollar, by contrast, can be created in unlimited amounts at will: if a central bank chooses to, it can print more money, as we saw when ‘quantitative easing’ was used to counter the effects of the global financial crisis and the pandemic.  

4. What is the Bitcoin halving?

The highly anticipated Bitcoin halving happened on Friday 19 April 2024.

As mentioned above, the validation of cryptocurrency transactions is rewarded with new Bitcoin. After a halving, the reward for each validation is cut by 50%. Regular halvings are the way in which the supply of Bitcoin is limited.

A halving means that the supply of Bitcoin increases more slowly. All else being equal, this would be expected to support the price.

Before a halving Bitcoin has historically tended to fall, whereas following a halving it has typically risen. As with all financial assets, however, past performance is no guide to the future.

5. What risks are associated with Bitcoin?

Volatility is a key risk associated with Bitcoin: in its brief existence, the price has fluctuated wildly, as you can see from this chart.

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Please be aware that past performance is not a reliable guide indicator of future returns. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.