Cryptocurrency is a type of digital asset that relies on cryptography for security.
The first cryptocurrency, Bitcoin, appeared in 2008 — the brainchild of an anonymous creator with the pseudonym Satoshi Nakamoto. In the years that followed, an estimated 5,000 competing cryptocurrencies were issued.
What began as a niche form of currency has become a popular option for a growing number of retail investors. However, the UK’s financial regulator, the Financial Conduct Authority (FCA), has warned that cryptocurrencies need to be approached with caution. Cryptocurrencies can fluctuate greatly in value, and you may lose some or all of your invested money.
digital assets
Cryptocurrencies such as Bitcoin are digital assets. They exist purely online and have no physical equivalent. The value of each digital “coin” is determined by market forces generated when they are bought and sold.
Like physical assets, many cryptocurrencies have caps on the number of coins that can be minted. For example, the number of Bitcoins that can be created is limited to 21 million.
Cryptocurrencies can be purchased with traditional currencies such as dollars and sterling. Each coin has the same value in all countries, which helps you avoid exchange rate problems and send money abroad.
The use of cryptocurrencies for daily spending is also increasing, with some retailers accepting Bitcoin alongside traditional currencies.
How do cryptocurrencies work?
The majority of cryptocurrencies operate without support from authorities such as central banks and governments.
Instead, cryptocurrencies are underpinned by blockchain technology. In essence, a blockchain is a digital public ledger that contains a record of every cryptocurrency transaction that takes place.
Blockchain is distributed across multiple computers, making it very difficult to tamper with or change. Every time a new transaction is added to the ledger, it must be validated on multiple computers in the network.
This distributed system often uses a “proof of work” mechanism to validate transactions. Computers in the network must compete to solve a mathematical puzzle before a new transaction can be added to the blockchain. Computers that solve puzzles are the first to add new blocks once their solutions have been validated by other users.
Solving these puzzles requires considerable computing power, but is rewarded with coins as the machines in the network manage the task. This is how new coins are created in a process called “mining”.
A major problem with proof-of-work systems is that they consume enormous amounts of energy. Bitcoin alone consumes 150 terawatt hours of electricity each year, according to estimates by the Columbia Climate School, part of Columbia University. This is more than the entire population of Argentina.
Due to this intense use of energy, many altcoins, including Bitcoin’s main rival Ethereum, have switched from proof-of-work to alternative systems.
Rather than having all machines in the network compete to validate new transactions, a “proof of stake” system randomly selects a small number of machines to complete the task.
As transactions are added to the blockchain, the cryptocurrency is given to the machine that validated them.
This system is called Proof of Stake because network users must “stake” their coins to be considered validators. These coins will be returned once the verification process for new transactions is complete.
Is cryptocurrency a good investment?
Cryptocurrencies often fluctuate in value and experience roller coasters of ups and downs.
In 2013, 1 Bitcoin was worth just a few dollars. In 2021, it will rise to over $60,000, and after a few months he will drop to $30,000.
The FCA advises investors to approach these assets with caution, as other cryptocurrencies experience dramatic price volatility as well.
Certain cryptocurrencies, known as “stablecoins,” try to avoid these extreme highs and lows by pegging their value to another asset, such as the US dollar. When functioning properly, USD-pegged stablecoins are always valued at $1.
However, even stablecoins can go up or down in value if something goes wrong.
How to buy cryptocurrency
You can start investing in cryptocurrencies using the following steps, but always be aware that your capital is at risk and you could lose some or all of your money.
To buy cryptocurrencies, you need to sign up with a broker or crypto exchange.
These are online platforms where buyers and sellers can exchange cryptocurrencies. The features offered and the ease of use of the purchasing process vary by platform. Prices are the same.
For this reason, it’s worth weighing several options before making a decision.
When choosing an exchange or broker, check if the platform allows you to move your crypto assets elsewhere.
Once you have opened an account with an exchange, you will need to raise funds before you can start buying cryptocurrencies.
This usually means making a bank transfer from your checking or savings account. Some exchanges also allow you to pay by credit card or PayPal.
Once your account is funded, you can order the cryptocurrencies you want to buy. To do this, go to the cryptocurrency you want to buy and enter the amount you want to invest.
Once the transaction is completed and exchange fees are incurred, the coins will be transferred to the exchange’s wallet.
It is possible to buy fractions of crypto tokens as some popular coins are worth tens of thousands of dollars.
Many cryptocurrency exchanges offer a built-in crypto wallet, a virtual “wallet” in which cryptocurrency tokens are stored.
These wallets are usually connected to the internet, so coins can be easily stolen by hackers.
Most major cryptocurrency exchanges have private insurance so they can issue refunds to users should this happen, but it is still recommended to move assets for extra security. To do.
The safest place to store cryptocurrency is a “cold” wallet that is not connected to the internet. These wallets can also take the form of physical hard drives. While this option is very secure, losing your access code can result in a permanent ban from your cryptocurrency.
Crypto assets are highly volatile and unregulated in the UK. There is no consumer protection and taxes on profits may apply.
