What is cryptocurrency? – Forbes Advisor UK

Cryptocurrencies are a digital medium of exchange that uses cryptography as a means of security.

With a track record stretching back over a decade, cryptocurrencies are clearly more than just a fad. But they are still largely misunderstood by many people, with doubts lingering about their true value and practical use.

It is possible to use cryptocurrency to make purchases – Elon Musk has reportedly announced that his Tesla cars will be available for purchase using Bitcoin, perhaps the most well-known cryptocurrency.

Payments giant PayPal has announced a service that allows its U.S. customers to buy, hold, and sell cryptocurrencies through their accounts. A Facebook-backed digital currency called Libra is expected to launch in 2021.

Traditional investors are also interested in more than a passing interest in cryptocurrencies.

In what it called a “currency and market risk hedge”, investment firm Ruffer recently spent around £ 550million (or 2.5% of the £ 20bn it manages ) to buy Bitcoin.

Concerns about the safety of cryptocurrencies as an investment class prompted the UK’s financial watchdog, the Financial conduct authority, to qualify them as “very high risk speculative investments”.

“If you invest in crypto-assets,” he warns, “you should be prepared to lose all your money.”

How are cryptocurrencies regulated?

The simple answer is that they are not, outside of the confines of blockchain technology, which we will get to later.

More fundamentally still, the current legal status of cryptocurrencies varies considerably from country to country. While the use of cryptocurrencies is free within the European Union, some countries, such as Algeria and Morocco, prohibit their operation.

The FCA is the UK’s financial regulatory watchdog. Her position is clear when she warns investors that “if you buy … crypto-assets, you are unlikely to have access to the Financial Ombudsman Service or the Financial Services Compensation Scheme.”

The FSCS is a rescue device that comes to the rescue of consumers in the event of financial calamity such as supplier bankruptcy.

In December 2020, the FCA also advised clients of crypto-asset companies to check the status of their suppliers and ensure that they were allowed to continue operating in accordance with the revised watchdog rules for recording.

For providers who cannot confirm they are operating under the new rules, the watchdog has advised customers to withdraw their holdings.

How do cryptocurrencies work?

Most cryptocurrencies operate without the support of an authority, such as a central bank or a government. This fundamentally differentiates them from traditional currencies, like the British pound or the dollar.

Instead of government guarantees, how cryptocurrencies work is underpinned by something called blockchain technology (see below).

Rather than existing as a physical stack of bills or coins, cryptocurrencies are confined to the internet. Think of them as virtual tokens, the value of which is determined by market forces generated by people who want to buy or sell them.

Nowadays, there are around five thousand cryptocurrencies. Bitcoin is by far the largest, with a market cap of around $ 400 billion, according to platform provider Coindesk.

The market capitalization of a cryptocurrency is equivalent to the unit price of a currency, multiplied by the number of existing units. Other major cryptocurrencies include Ethereum and Ripple, with market caps of around $ 73 billion and $ 55 billion respectively.

Cryptocurrencies can be purchased with traditional cash such as the British Pound and can then be used on their own to purchase a growing array of everyday goods and services. Cryptocurrencies have the same value in every country, making it easier to transfer person-to-person around the world, while negating the exchange rate problem.

Only a limited number of Bitcoins actually exist – cryptocurrencies are compared to a digital form of an asset such as gold, where a perceived store of value is then subject to the laws of supply and demand.

Currently, this is the main attraction of cryptocurrencies: that they can be traded on exchanges similar to the way stock investors buy and sell stocks and other commodities.

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What is blockchain technology?

In essence, a blockchain is a type of database. Blockchain first established itself as the technology behind Bitcoin when cryptocurrency was first discussed in a paper on peer-to-peer electronic money systems in 2008.

The document was attributed to Satoshi Nakamoto, who was said to have been a pseudonym for an individual or a group of people. Part of the design of the cryptocurrency meant that there would never have been more than 21 million Bitcoins created.

The blockchain is essentially a public ledger of every Bitcoin transaction that takes place. A recording is distributed over many computers and cannot be tampered with or modified in retrospect. According to proponents of cryptocurrencies, blockchain transactions are more secure than traditional payment mechanisms.

A short Bank of England Video shows the blockchain process in more detail and also explains how “mining” works, the mechanism by which new monetary units such as Bitcoin are produced.

This “mining” requires huge volumes of computing power and therefore uses significant amounts of energy. Environmentalists have warned that the proliferation of cryptocurrencies could have a significant impact on global attempts to reduce energy use.

How to buy cryptocurrencies?

The most common places to buy Bitcoin and other cryptocurrencies are specialist exchanges. This includes a range of trading platforms and applications that allow investors to purchase cryptocurrencies using either traditional currencies and / or other cryptocurrencies.

According to FCA research, around three-quarters of Britons who bought cryptocurrency did so through an online exchange.

To open an account, future traders are usually asked to provide their passport details, a phone number, and an email address. Trading costs may vary from exchange to exchange. Some providers charge a fixed fee per transaction, while others will charge a percentage of the overall transaction amount.

How did cryptocurrencies work?

The performance of cryptocurrencies can be notoriously volatile with roller coaster peaks and troughs. Currently, however, Bitcoin is experiencing some sort of purple patch. In 2013, an individual Bitcoin was only worth a few dollars. In December 2020, its price crossed the $ 20,000 mark for the first time.

In the past year alone, the price of Bitcoin has risen again and now stands at around $ 40,000 at the time of writing. His all-time high is over $ 50,000.

UK appetite for cryptocurrencies

In the summer of 2020, the FCA published research on the UK’s growing appetite for cryptocurrencies.

The FCA has estimated that nearly two million adults own cryptocurrency, although the results suggest that around three-quarters of consumers hold cryptocurrencies worth £ 1,000 or less.

The most popular reason for holding cryptocurrencies said the FCA was “a bet that could win or lose money.”

What happens next?

Even before the pandemic upheavals of 2020, cryptocurrencies were surrounded by questions about their security, practical use, and long-term viability. Hence the stern and repeated warnings from financial regulators that people should approach investments in this area with extreme caution.

If more traditional investment firms dip their toes in the waters of cryptocurrency, we could see the value of digital assets rise as their use is standardized and more widespread. But in the uncertain times we live in, it is also possible that the whole concept will prove to be vulnerable or unsustainable in the face of as yet unforeseen challenges.

To paraphrase regulators, “buyer beware”.

Buy and sell cryptocurrency with Coinbase

The biggest and easiest place in the world to buy cryptocurrency

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