“Cryptocurrency” : you may have been hearing the word a lot recently and it is hardly surprising. Cryptocurrencies such as Bitcoin have been one of the major news stories of the past 12 months due to their rapid rise in value…
What is a cryptocurrency?
So, you may be wondering, what is a cryptocurrency? In essence, a cryptocurrency is a form of payment that is similar to cash but is purely stored online. These currencies are generally created by “mining” the coins. Cryptocurrency “miners” are rewarded with the coins by providing the processing power that contributes to the verification of transactions. It is this verification process that ensures that fraud is minimised and that transactions can proceed.
What are the major cryptocurrencies?
There are two major cryptocurrencies in existence, Bitcoin and Ethereum (also known as Ether). Bitcoin is by far the most popular cryptocurrency in existence and certainly the most well known in the public domain. Bitcoin and Ethereum differ in the way they were intended to be used. Bitcoin was created to be a currency for exchanging, whereas Ethereum has always been much more about the technology on which it is based (though it is also used as a currency).
Other cryptocurrencies include Litecoin, Ripple and a new version of Bitcoin that is known as Bitcoin Cash. These smaller currencies are nowhere near as well known as the major players and are generally only bought by those in the US and Europe. Bitcoin Cash has been created to deal with the potential limitations that Bitcoin faces due to its design and many speculators are now choosing to back the new version.
How can I get my hands on cryptocurrency?
The main way investors get their hands on cryptocurrency is by buying it on a currency exchange platform. Some well known currency exchange platforms include Kraken, Bitstamp and Cex.io.
After purchasing cryptocurrency with regular currency such as $USD or £GBP, investors then need to store their coins safely. This is done in one of two different ways: hardware storage (a specific piece of computer hardware where they are stored) or using a digital wallet service (think PayPal) such as “Coinbase”. Most people use a digital wallet.
Some digital wallet providers (including Coinbase) actually offer a way of buying and selling cryptocurrencies from within their own online environment too, meaning you don’t need to send your money to and from another exchange platform.
When you open a digital wallet, you get a unique identifying address that allows you to send and receive the currency. Crucially, a digital wallet also protects the user’s anonymity. This is what makes cryptocurrency so appealing to many people, while causing major concern for governments and law enforcement agencies.
You can also “mine” cryptocurrency yourself. However, for this to be effective you need specialist computer hardware that can handle the intense computational needs of verifying transactions. Sometimes would-be “miners”, who don’t quite have the hardcore hardware needed, team up and share processing power in a group. This means they can share profits within the group and save on the investment in equipment.
What countries are involved in cryptocurrency?
As a global decentralised system, theoretically, you can buy cryptocurrency anywhere. In reality, many countries have strong internet filtering and buying currency is impractical. The main hives of activity are the US, Europe and Asia. There was the possibility recently of South Korea banning the exchanges. This has since been cancelled, but does show a real possibility for governments to try and prevent the spread.
The ability for cryptocurrencies to be used across borders is one of their biggest positives. The lack of needing to exchange currencies and then send via a middleman means a huge saving on fees for cross-border exchanges.
Are cryptocurrencies safe?
You must take into account that a huge store of wealth is now held in these online wallets, and this makes them incredibly attractive to fraudsters. Just last month $400m (about £282 million) was stolen from a Japanese cryptocurrency exchange. There is also a lack of accountability for theft; even the best wallets have pretty vague guarantees on security and they are permanently trying to keep one step ahead of would-be fraudsters.
What’s more, there is the issue of volatility in the currencies themselves. In the last few weeks, Bitcoin has had a meteoric rise and then fall costing investors huge sums. If you are going to get into buying cryptocurrency, you must prepare to face the possibility for significant losses.
What is the future of cryptocurrency?
The future of cryptocurrency is unclear. The volatility and some of the fees involved are going to put off a lot of would-be investors. For instance, if it is a very busy trading day, you will have to pay large fees for miners to verify your transaction. For investors with small holdings, it may be more expensive to process the transaction than their entire holding is worth!
In the UK, Lloyds bank has become the first to ban its account holders from purchasing cryptocurrencies from their accounts. The ramifications of this are huge and show that the banks are becoming worried about the future and potential lack of security that comes with cryptocurrency trading. Depending on how you look at it, Lloyds is either trying to protect its customers or, as the more cynical may think, make a move to try and stamp out the rise in people moving their money out of traditional banking. Either way it’s not good news for speculators and a sharp tumble in prices will only knock confidence further.
What will undoubtedly stick around is the new technology that has been developed for cryptocurrencies. The decentralised database that is constantly verified by millions of computers means that information can be held securely and verified.
In the Developing World, there is the potential for homeowners to be on a database that proves they own their home. In cases of global emergency, cryptocurrency offers an opportunity for a countries to easily send and receive assistance funds from all over the world. The technology offers endless possibilities, and whatever happens with the currencies themselves, it is certain that the technology at least is here to stay.