Wednesday 27 November 2013

Bitcoins and Tulips

Bitcoin, the online digital currency, has been a topic of great media furore. Since trading began in 2009 the value of one bitcoin has gone up exponentially from a measly $0.0007 to over $900 in recent weeks (i.e. one dollar invested in '09 would now be worth close to $1.3m). Many reputable businesses are signing up to accept them, one of the latest being Richard Branson's Virgin Galactic - the space travel company. This adoption by business is obviously a sign of success/popularity, but is the currency truly sustainable?

The Bitcoin website promises it's users instant peer to peer transactions, worldwide payments and zero or low transaction fees. However due to it's huge volatility against regional currencies, vendors routinely hedge transactions, which must negate ( I assume) some, if not all of the transactional savings. Other problems linked to the currency have been it's usage in illegal trade such as drugs and weapons due to the fact that bitcoin transactions are hard to trace, and also people hacking bitcoin 'wallets' and stealing them. 

The exponential growth in the value of bitcoin can be largely attributed to its relative scarcity. There are currently around 12m bitcoins in circulation and their supply is growing at an ever decreasing rate that is pre designed to cap at 21m bitcoins in a few decades. If the rate of bitcoin adoption continues to outstrip supply it's value is almost certain to increase.

Speculators & Investors have cottoned on to the deflationary properties of bitcoin and have almost certainly exacerbated its volatility. But does their bet/investment make any sense? Currencies do fluctuate in value against one another but these movements are usually nowhere near the scale we are seeing between dollar/bitcoin. For a currency to be a successful medium of trade surely it must be less volatile, and probably mildly inflationary in character. Also expected returns for a currency should be relatively low as it is essentially a non productive asset. A currency that is designed to appreciate in value against all others seems destined for problems and potentially may have been deliberately designed as a Ponzi scheme. If this is the case it is little wonder that its pseudonymous creator, Satoshi Nakamoto, kept his/her real name a secret.

I see some faint parallels between the exponential growth of bitcoin and the tulip mania experienced in Holland in the 1630s. In that scenario the newly introduced tulip took Holland by storm due to its vibrant colours, and because of its relative value and scarcity it quickly became a status symbol.
As a tulip takes around 7-12 years to grow from seed to flowering bulb the stock of them (like bitcoin) was essentially fixed. Speculators entered the market and traded futures contracts which drove the finite stock of tulips to extraordinarily high prices. At the peak of the mania single tulip bulbs sold for more than 10 times the annual income of a skilled craftsman. Of course the bubble eventually imploded and many of the speculators involved towards the end met financial ruin.

What does fate hold for bitcoin? Nobody can say for sure, but currencies don't last forever, the world has seen thousands come and go. Speculating on it might be fun and potentially profitable but punters should be wary that the intrinsic value of bitcoin is significantly less than a tulip bulb. They won't produce a nice flower for you to gaze at when you're skint ;)

Sources: Wikipedia &

Thursday 21 November 2013

Pension Vs ISA (UK)

This post is to highlight the pros and cons of these two popular tax free savings vehicles, not to single out which one is better, as that would depend on individual circumstance & preference.


  • Investments within an ISA will grow free of income & capital gains tax (aside from the 10% tax credit on dividends within stocks & share ISAs).
  • ISA funds are usually readily accessible: there may be exit charges and short waiting periods but in most cases you can get your hands on your money fairly quickly. This makes them a much more flexible method of saving than a pension, especially to meet pre retirement savings goals.
  • This accessibility means that ISA funds could be easily drawn upon in times of emergency. Cash ISAs would be especially useful for emergency fund purposes.
  • Any money taken from an ISA is received tax free, unlike pension proceeds which are subject to income tax at the recipients prevailing rate.


  • Unlike pensions, ISAs do not receive income tax relief on contributions.
  • ISAs have fairly low yearly contribution limits (£5,760 - Cash, £11,520 - Stocks & Shares 2013/14), this could pose a problem for those trying to save a large sum for retirement purposes.
  • The flexibility of withdrawal could also be a hindrance to long term savings goals if the temptation is there to draw on savings for other purposes.
  • ISA savings could affect entitlement to certain means-tested state benefits.
  • On death ISA savings will form part of an estate; if this exceeds the nil rate band of the deceased any beneficiaries would be liable to inheritance tax, although with good tax planning this scenario can be largely avoided.


  • Perhaps the biggest pro exclusive to pensions is that contributions receive income tax relief e.g. for a basic rate tax payer, every £80 you pay in is topped up to £100. Higher rate taxpayers would also be able to claim a further £20 back via self assessment.
  • Pensions like ISAs also grow free of income & capital gains tax (aside from the 10% tax credit on dividends).
  • New pension auto-enrolment laws require employers to contribute to employees' pension plans subject to employee status. These contributory requirements are currently being phased in by order of company size.
  •  Pension savings will not affect entitlement to state benefits if you are unemployed or made redundant.
  • When you crystallise your pension you are currently allowed to take up to 25% out as a tax free lump sum. 


  •  Pension proceeds are taxed as income at the recipients prevailing rate. Thus the tax relief given at contribution stage is more of a tax deferral. However pension savers do benefit from gross roll up of the boosted contribution, and are usually in a lower tax bracket when drawing their pension funds than when they were contributing.
  •    You cannot access your pension savings until you are 55; in this regard they are far less flexible than ISAs which give savers greater control over their funds.
  •  The government has frequently meddled with pension rules, sometimes drastically changing the goalposts for pension savers. Changes in recent past have included: increasing the minimum pension age from 50 to 55; scrapping of the 20% dividend tax credit on pensions; reducing maximum yearly contributions from £255,000 to just £50,000 and also capping maximum pension size to £1.5m (2013/14 tax year).
  • On death if you have purchased a single life annuity your pension savings are kept by the provider. If you opt for drawdown any remaining proceeds will be taxed at 55% before reaching beneficiaries.

For both of these savings options, the tax relief positives largely outweigh the negative points. As pensions offer the possibility of larger amounts of tax relief, they should be more attractive to the majority of people saving for retirement. However ISAs also have a place too, especially if the savings goal is before age 55. Ideally both tax free wrappers should be fully utilized.


Wednesday 20 November 2013

Warren Buffett: stocks in 'zone of reasonableness'.

Check out this link to a Warren Buffett interview on the CNBC website. He voices his opinion that equities are currently in a 'zone of reasonableness' despite headline indices like the Dow Jones hitting all time highs of over 16,000 points.

You must scroll down the page and click the video window to view.