In the most basic way to understand it, cryptocurrencies are money that is generated by computer code. Think of it like how people send money over the internet with Bitcoin, the most well-known form of cryptocurrency.
In order to use cryptocurrencies, users either buy them through one of the many existing exchanges that exist, or they mine them with a computer.
Put simply, mining involves using a computer to solve a complex mathematical problem in order to “mine” a block, which results in a certain amount of cryptocurrency being released into a person’s account. This allows for the creation of more cryptocurrencies that can then be traded.
What is a cryptocurrency exchange?
When you purchase something using Bitcoin, you don’t actually own the digital currency itself. Rather, you are “owning” the right to receive Bitcoins as payment.
You then have a bank account, which you can deposit and then transfer Bitcoin into. Because you own the right to transfer Bitcoin, you have the ability to sell your currency if you wish to.
How much Bitcoin is there?
As of 24 July 2021, the Bitcoin value has increased from $11,720.01 USD to $32,198.60 USD.
Bitcoin’s price reached its peak in December 2017, when the value of one coin reached $19,783.70 USD. However, Bitcoin values have since seen a decline, with a few fluctuations.
The value of one Bitcoin is derived from how much work is required to generate them. They are created when someone performs a mathematical calculation called mining, which takes a certain amount of time and energy.
However, Bitcoin mining isn’t cheap. In fact, it can cost more than $150,000 (£109,859.75) in mining fees per coin, or about $961,564.66 (£697,284.36) a year in fees, according to Coindesk.
The UK? Bitcoin is for real, and the Royal Mint is looking to introduce its own cryptocurrency.
Where can I buy bitcoin?
But there’s one problem: cryptocurrency exchanges can be incredibly volatile. If your Bitcoin or other cryptocurrency is bought at a low price, you could lose a large amount of money if it drops in value.
How much money is in bitcoin?
According to the BBC, there are approximately 15 million Bitcoins in existence, worth about $170bn. Bitcoin has steadily increased in value since its launch in 2009, but it still has a long way to go before it overtakes the value of the world’s most valuable currency, the US dollar.
What are the benefits of cryptocurrency?
Since cryptocurrencies are designed to be almost impossible to counterfeit or tamper with, they can make the global financial system a lot more efficient.
They can also be used to pay for goods and services on platforms such as eBay, Worldpay, and Overstock.
Cryptocurrency isn’t a replacement for the US dollar or the Euro, but it can offer consumers more security and privacy. It means you’re unable to be monitored when sending or receiving your payment.
In terms of its potential for real-world use, there are a number of businesses that are already offering products and services which use the technology.
It’s now relatively simple to use cryptocurrency for a range of transactions – including buying travel and holidays, paying your dentist, finding somewhere to stay when on holiday, buying a music track, or even organizing your tax returns.
Is bitcoin a scam?
Well, in a sense, there’s not really much a buyer can do to protect themselves from losing money.
When you trade-in cryptocurrencies for fiat currency, you are effectively sending money out of the system.
That’s because cryptocurrencies are effectively digital assets with no material existence.
Bitcoins may be “banked” by the software that runs Bitcoin. But that isn’t the same as being “banked” by a financial institution such as the Royal Bank of Scotland or Barclays.
“The fact that Bitcoin and other virtual currencies are not backed by any kind of assets, such as a government, the US dollar, or gold, means that they have no intrinsic value and their value can be argued from moment to moment,” says Joshua Lawrence Chamberlain, MD of Credply, a financial services technology company.
“In fact, this volatility is one of the reasons people may want to buy a cryptocurrency and store it on an online wallet as it offers the prospect of making a profit, even if prices fall.”
What are the risks of cryptocurrency?
When you trade-in cryptocurrency for fiat currency, you’re effectively sending money out of the system.
Because cryptocurrencies are effectively digital assets with no material existence, there is nothing to keep the blockchain database updated with an accurate record of all transactions, which means that you are, in effect, trusting it with your money.
Bitcoin and other virtual currencies are designed to be almost impossible to counterfeit or tamper with, so the fear of hackers stealing them is high.
MtGox, once the largest exchange for Bitcoins, collapsed in 2014, leaving 850,000 Bitcoins, worth £1.8bn at the time, in the hands of the hackers who stole them.
How do I get hold of bitcoin?
If you’re hoping to buy Bitcoin, you will need to go online to set up an account.
You can choose to use a service such as Coinbase, which will enable you to buy and sell cryptocurrencies using traditional fiat currency, or one of the other leading services, such as Blockchain or Localbitcoins, which trade in cryptocurrency for cash.
Depending on the service you use, it will ask you to provide a bank account or credit card number, and then transfer funds to your account from your bank or credit card.
Once your account has been set up, you can download the appropriate app.
Will this affect me when I retire?
For many older people, the immediate concern will be what effect, if any, this might have on their pensions.
The idea that retirees might suddenly have so much extra money on their hands might be a huge leap, but some pension providers are allowing holders of crypto assets to invest up to 25pc of their pension pot in cryptocurrencies, subject to their financial adviser’s approval.
Some providers will allow you to buy cryptocurrencies with money from their drawdown or defined contribution pension accounts.
Others, however, will only allow you to buy crypto assets with money that you have already contributed to your pension.
This means that, while your contributions may have been used to buy Bitcoin or other cryptocurrencies, you won’t actually get them in your pension pot, which may be a big disappointment for savers.
There are also new entrants into the market who are creating new cryptocurrencies for retail investors to trade in, called coins.
The launch of Bitcoin Cash, for example, caused Bitcoin prices to jump in September.
So, it could be that the value of Bitcoin does go up in the years ahead.
If you buy Bitcoin now, and it suddenly skyrockets in price, you will almost certainly make a fortune.
If it falls, however, you could have lost a fortune, and that is something no one can be sure of.
Are all cryptocurrencies the same?
Not all cryptocurrencies are the same, and not all are created equal.
To earn Bitcoin, you need to have a computer that can run its smart contracts or blockchain-based applications.
Bitcoin is unique among cryptocurrencies in that its blockchain – the system that keeps track of all transactions on the network – can be used to transact in a wide range of different virtual currencies.
Virtual currencies with similar blockchain-based features are also available, although they vary in the number of coins that are in circulation, their technological features, and the level of popularity they enjoy.
Some are used to pay for goods online while others are just toys, used by cyber-criminals.
Recently, digital currencies have been around for a very short period of time.
For example, there were at least 600 different virtual currencies available in 2010. Today, there are more than 3,000, but many have disappeared altogether.
Could the value of Bitcoin crash again?
While the blockchain-based currencies mentioned above are based on the technology underpinning Bitcoin, they have a very different market value and are therefore not directly comparable.
Because Bitcoin is considered to be the first mainstream, globally accepted virtual currency, it commands a high level of investor trust, and that has underpinned its strong performance over the last 10 years.
On Sunday, the price of Bitcoin dropped by more than $1,000 in a single day, a drop that wiped out a fifth of its market value.
Even if the price remains high, however, investors should not expect it to keep rising in the long run.
The cryptocurrency market is currently estimated to be worth a jaw-dropping $700 billion – the same amount as New Zealand’s annual gross domestic product – although, as a minority, there is no way to value the market precisely.
There is also a massive margin of error for analysts trying to get a grip on the market.
Since the supply of digital currencies is fixed, it is impossible to predict how many there will be in the future.
Even Bitcoin – a currency that is already predicted to be ‘decentralized’, meaning there is no single person or organization in control – is not free from the possibility of collapse.
If the majority of the market loses faith in it, or a major incident impacts its network, it could start to be more difficult and expensive for people to transfer funds to one another.
Why is the Government getting involved?
At present, the currency is not regulated, which is precisely why the Government wants to crack down on digital currencies and the criminals who use them.
Under current laws, the Government can only regulate physical money – the cash in our wallets and bank accounts.
Digital currencies are completely unregulated and are sometimes used for illegal purposes such as money laundering.
To help ensure that they are not being used for illegal activity, legislation to crack down on the use of digital currencies is being drafted by the Government.
Specifically, the bill would ban virtual currencies that enable criminal activities, such as drug dealing, money laundering, and tax evasion.
These laws are currently being drafted, with the Bill expected to be finalized by the end of this year.
New Zealand could be the first country to ban digital currencies outright, in a move that could make it harder for cyber-criminals to use them.
What do consumers think?
Consumer watchdog ACC has warned that consumers need to do their research before parting with their cash.
“Although Bitcoins may appear to be an alternative way to make payments, you can only buy Bitcoins with real money,” said ACC’s senior investigator Matthew Culkin-Smith.
Mr. Culkin-Smith said the law must protect consumers.
“The growing use of Bitcoin or other virtual currencies will inevitably bring regulatory challenges. As more people get involved in the trading of virtual currencies, there is a greater chance that they will suffer financial losses,” he said.
“When investing, individuals need to be aware that there is a real risk of loss.
“If someone invests money into a Bitcoin investment they could lose all or a portion of the money invested. Virtual currency may also be exchanged for a real currency, but without any safeguards that are in place, there is no way of knowing what the value of the real currency is.
” More than 80 percent of Bitcoin transactions are anonymous, which means the identity of the people behind the transaction is not known to anyone else.
The anonymous nature of Bitcoin means it is popular among criminals and, at the same time, has made it appealing to some investors.
Earlier this year, Bitcoin’s value fell sharply after reports that Chinese investors were betting the currency would fall.
There are even stories of hoarders of Bitcoins trying to sell their holdings at a loss to cover their losses.
Given that, it may be difficult to determine whether the money you have invested in Bitcoins has gone up or down.
Some analysts think Bitcoins are unlikely to survive much longer, as more digital currencies appear.