A cryptocurrency is a digital currency which uses encryption and other computer techniques to keep it safe. Unlike sterling, which is backed by the Bank of England, the dollar or euro, cryptocurrencies don’t exist as notes or coins, just as numbers on a computer. There is no central agency which guarantees or underwrites the currency. Pieces of cryptocurrency – known as tokens – can only be created using a very strict set of rules. There is no central bank like the Bank of England underwriting the currency, no bank branches, no credit cards and none of the other elements we would traditionally think of being associated with currency.
Even if you don’t follow the financial press and news closely, you’ll have heard of cryptocurrency. Or perhaps one of the main cryptocurrency products, such as Bitcoin. Many of us though have a very vague idea of what cryptocurrencies are, how they are bought and sold, and what benefit they have over traditional currency or assets such as property or gold. Cryptocurrency can be really complicated, and this puts a lot of people off finding out more about it, and trying to understand what it’s asll about.
Here’s our simple guide to everything cryptocurrency related. It’s designed to run through the basics of what cryptocurrency is, and give you enough information and understanding to know where to research more should you wish to do so. We’d always advise doing your homework before making any sort of investment, and cryptocurrency is no different.
History of Cryptocurrency
Cryptocurrencies have been all over the press and media in the last five years, so it might come as a bit of a shock to realise that the first idea of this digital currency, traded between computers, was dreamed up by American computer scientist Nick Szabo in 1998. His idea was for a digital currency which he named Bit Gold. Bit Gold never got off the drawing board but the development work done by Szabo inspired other programmers to try to come up with a more workable cryptocurrency.
How it all works – What is a cryptocurrency wallet?
Cryptocurrency is managed through a distributed ledger – a way of keeping track of who owns which pieces of cryptocurrency, and how much they own. The code which is used to keep track of cryptocurrency is called blockchain. Blockchain holds all of the details about purchases and sales and is timestamped. Each sale or purchase is posted to the main blockchain ledger, where it can be viewed by other users, but is impossible to alter. People pay a small commission percentage when trading cryptocurrency to pay for the management and security of the system.
For example. John wants to send a small amount of Bitcoin to his sister Anna. John goes into his Bitcoin account, also known as his Bitcoin wallet, and requests a transfer of Bitcoin from his wallet to Anna’s wallet, and pays the small transaction fee. John’s transaction is grouped with other transactions happening at the same time, to make a “block” on the blockchain. The transactions are checked, and almost immediately posted into the blockchain ledger to complete the deal.
Cryptocurrency can be sent anywhere in the world, very quickly. There’s nothing stopping you sending large sums to friends or family overseas, and they will have the cryptocurrency in their wallet within minutes. The other major benefit is that the transaction fees are often a lot less than the fees and exchange rates you would usually expect to pay to send money by standard bank transfer or through a money transfer service.
Uses of cryptocurrency
In the early days, the main selling point of cryptocurrency is that it was seen as a way to move your wealth around in private, without banks or government agencies knowing about it. Bur cryptocurrency can be used for many more transactions, such as paying bills, or using as an asset when applying for a loan. Other crypto owners use their Bitcoin or other currency to invest in businesses. You can use Bitcoin to buy a Tesla car, or Microsoft products. Several large travel companies will also accept payment in cryptocurrency, or allow you to buy gift cards using crypto which you can then use to purchase services. You can also use your cryptocurrency to send to friends and family in other countries, without having to pay bank transaction fees, or worry about exchange rates
