What everyone ought to know about cryptocurrency: the basics
What is cryptocurrency?
Crypto is similar to regular money, the main difference however, is that crypto is digital. It is secured by cryptography making it difficult to counterfeit. Cryptocurrencies are decentralised, meaning that it isn’t one single entity controlling it. It uses a blockchain technology where all transactions and or information is recorded on a number of computers which makes it difficult to hack data because all computers have the same data so if one computer is hacked it won’t match the data of the rest of the computers. Therefore, if one was to hack the system than it must be hacked on more than half of the computers using it, which is almost impossible with currencies like Bitcoin.
Coins vs tokens
In crypto coins are made from scratch, they take a long time and effort to be made through creating codes etc. such as, Bitcoin. Tokens on the other hand are easy and fast to make eg. NFTs. Tokens are more likely to be scams because they can be made very rapidly.
What makes crypto valuable?
One of the major factors determining the value of a cryptocurrency is supply and demand, these coins usually have a limited supply so the higher the demand for a coin the higher its perceived value. Usually coins with a smaller market cap are more valuable because there is space for more potential growth and less money is required to increase its value. Many of these coins are also valuable because of the things they do and their utility.
Security and regulation
Cryptocurrencies usually rely on a blockchain which makes it difficult to hack, as said previously. However, it doesn’t mean that they are unhackable so there are still risks to it, but online banking also has its risks, so whether you are willing to invest in crypto will mainly come down to your risk tolerance. Trading cryptocurrency is not directly regulated in Britain however, trading services such as exchanges are usually registered with the FCA but they might not be regulated by them, so always check with your exchange.
Growth
The cryptocurrency market is growing as there are always new coins and tokens entering the market, there are also more and more exchanges available as demand for crypto is generally growing. A growth trend can be seen as about 1.5 million people in the UK owned some cryptocurrency in 2018, which increased to 9.8 million by February 2021 (source: Cybercrew).
Risks and criticisms
- They are a high risk investment
- Can be very volatile and affected by gapping, can be too volatile to act as a store of value
- Charges and fees can be high on exchanges
- You could lose your money
- Can’t really be used as a means of payment
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