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Dec 07

What is Bitcoin (and other cryptocurrencies)?

Reading Time: 6 mins

Bitcoin and other cryptocurrencies have become popular again. Bitcoin acts rather like gold for investors in that, when things are volatile and uncertain in the world generally, people rush to safe havens. Gold (and to some extent, silver) has been one of those safe havens for centuries. Now Bitcoin has started to be seen in the same way.

At the end of November 2020, the price of Bitcoin nearly reached the heights it achieved in the glory days of 2017. On 30th November one Bitcoin was worth $19,850.11 (or £14,880)  according to CoinDesk, a Bitcoin price index. It gradually slipped down after that and could drop significantly again (in fact it probably will) but the fact that it got as high as it did brought it back into the media once again.

So what’s all the fuss about? What is Bitcoin and what about other cryptocurrencies like Ethereum, Bitcoin Cash and XRP? What is this cryptocurrency thing? Read on to find out!

Find out how to invest in cryptocurrencies safely and easily at one of Jasmine’s webinars here

 

 

What is Bitcoin?

Bitcoin is a cryptocurrency - but not the only one available

Bitcoin is a cryptocurrency – in fact the original cryptocurrency – which works in an opposite way to how normal or ‘fiat’ currencies work.

With pounds sterling, for example, we have a central authority – the Bank of England – that produces and ratifies all the notes and coins we use. That goes for pounds sterling in digital form too.

With bitcoin, though, there is no central authority that says how much a bitcoin is or where the bitcoins are in the world. It is all done via millions of computers around the world – decentralising the whole process. Every bitcoin transaction is recorded on every computer taking part in the project and it means that no one can rub out or reverse a transaction as it would have to be done on millions of computers around the world at the same time.

In fact, bitcoin are nothing that you can hold in your hand, or even see on screen really. They’re just numbers. You keep them in a virtual ‘wallet’ on your computer or on a USB device, and you can buy and sell things with them online.

Bitcoin and other cryptocurrencies have ‘crypto’ in the name because of the complicated cryptography that keeps all the transactions safe from prying eyes and stealing fingers. Instead of a central bank or government creating the ‘money’, cryptocurrencies are developed as code by groups of IT people who build in ways that the money can be produced. With bitcoin, for example, people around the world can ‘mine’ for them (online). This is done by using your computer – or several computers – to unlock the cryptography to enable transactions to happen.

it runs on the ‘blockchain’

Blockchain is the decentralised technology on which cryptocurrencies like bitcoin run, but it is also the platform for all sorts of transactions. Blockchain can be used in various areas of life such as voting, art ownership, health, education, property transactions and much more.

The blockchain is a decentralised online ledger, storing information across millions of personal computers across the world, recording transactions in real-time. With the blockchain you can’t rub out or reverse any transactions, you can only add new ones. So if you want to reverse a transaction you have to do it again but in reverse. It’s all totally transparent (which is what makes it so good for voting systems, for example). Everyone can see what is being done so it’s impossible to commit fraud on it (at least that’s the theory).

 

What other cryptocurrencies are there?

Currently there are well over 2,000 cryptocurrencies (!). As you can imagine, most of them are tiny and very obscure. Some are actively fraudulent and just created by people wanting to steal from the unsuspecting so be very careful before you buy into any of the smaller cryptocurrencies. Best to stick with the most popular ones and only buy them through a reputable cryptocurrency exchange.

Signing up for a cryptocurrency exchange will allow you to buy, sell, and hold cryptocurrency. Trading Bitcoins is getting easier, as is the security of exchanges and wallets. It is also possible to buy Bitcoin through PayPal payment. You can either use your PayPal account or use your PayPal account balance to buy cryptocurrencies from a third-party provider.

The currencies modelled after bitcoin are collectively called altcoins and have often tried to present themselves as modified or improved versions of bitcoin. While some of these currencies are easier to mine than bitcoin, none are currently as valuable as bitcoin and most have their detractors as well as their supporters.

Here’s a list of the most popular ones at the moment:

ethereum

Ethereum is the next biggest cryptocurrency platform after Bitcoin. The coin that works on this platform is known as Ether. Although Ether is the second biggest decentralised currency it’s a long way behind Bitcoin at roughly one tenth of the value. However it is used a lot within the ‘alt-coin’ sphere so it’s useful to have some of these to hand.

ripple (xrp)

Ripple is often poo-pooed by crypto enthusiasts. They say it’s not a proper cryptocurrency as it isn’t fully decentralised. However, it is popular and has real-world application, primarily because it acts like SWIFT, helping money to be transferred across the world.

litecoin

Litecoin is the one that is closest to Bitcoin in the way it works and is often known as ‘silver’ to Bitcoin’s ‘gold’.

tether

Tether is known as a ‘stable coin’ in that it has ‘tethered’ itself to the dollar. The reason for doing this is to make it less volatile than the other cryptocurrencies and therefore make it more attractive to possible investors and users.

Bitcoin cash

Bitcoin Cash is the product of what is called a ‘hard fork’ in development circles. Essentially a group of developers didn’t like the direction of Bitcoin and came up with a different plan for it. That meant they sort of broke away from the other developers and created something a little different from the original.

libra

Set up by Facebook, Libra hasn’t actually even launched yet but it has been talked about so much it seems as if it has already been around for years!

monero

Monero is a secure, private and untraceable currency that is being produced by a community of developers. It is donation-based and doesn’t seem to have a particularly commercial bias at the moment.

 

Cryptocurrency exchanges

You can buy and sell cryptocurrencies through specialist exchanges. Like cryptocurrency itself, the exchanges have had a checkered history already. Some have folded without warning, taking people’s money with them.

However there are some that have survived and improved their security levels.

The most well-known one is Coinbase. It isn’t the cheapest one. However, it is pretty secure and has been around long enough to trust it.

Another well-known one that is secure is Binance (Please note that Binance has been told by the FCA that it can’t carry out any regulated activity in the UK, but Binance have said it won’t have a direct impact on the services it currently provides.)

 

should i get into bitcoin mining?

Bitcoin mining is one way to make extra money

Once you have got your head around bitcoin – and some of the other cryptocurrencies – and have invested in a few of them, you could consider becoming a bitcoin ‘miner’ and making money by ‘digging up’ bitcoin.

However, it’s not an easy thing to do in this country as it takes a lot of computing power to mine for bitcoin and our energy prices are higher than those in many other parts of the world. Also, as the price of bitcoin is very volatile, the value of the ‘coins’ you manage to get could sometimes be worth a lot less than it cost you to mine them.

We have a detailed article about bitcoin mining and what the pros and cons (and costs) are here so take a look to see if it could be for you.

 

Can I buy things with cryptocurrencies?

Yes you can. In fact, just over a year after bitcoin first started, an IT guy named Laszlo Hanyecz bought two pizzas with bitcoin.  He bought them for10,000 bitcoin, which, right now equates to about £480,000,000. Seriously expensive pizzas!

And that is part of the problem with using bitcoin as currency right now. A lot of people – myself included – don’t want to use the bitcoin (or parts of bitcoin) that they own because their value could go up over the next few years. Why waste appreciating assets on everyday purchases?

However, there are various companies across the world that accept bitcoin. Places like Starbucks and WholeFoods will take them, for example. I have also come across a florist in South Africa and a number of art dealers who take them.

On the whole, ether is only used to buy other alt-coins and services in the cryptocurrency sphere but a growing number of online retailers are now taking them.

 

Should I invest in Bitcoin or other cryptocurrencies?

You could do. I have!

However, i wouldn’t do put any money in until you have some decent investments in more secure products like pensions, and stock market funds. Cryptocurrencies are very new and very volatile. One day they’re up and the next day they’re down, so you must make sure you have solid investments elsewhere to fall back on.

If you would like to invest in them I suggest you put only a very small percentage of your spare cash there. Make sure it’s money you’re prepared to lose…because there’s a decent possibility that you will lose it!

Jasmine Birtles owns a small amount of Bitcoin, Litecoin, XRP and Ethereum.

*This is not financial or investment advice. Remember to do your own research and speak to a professional advisor before parting with any money.

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Joanne
Joanne
10 months ago

Very informative article.

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