What is crypto? Have you been hearing about “Bitcoin” and wondering what it is?
Maybe your friends are already investing in Ethereum or Litecoin or one of the other weird-sounding ‘coins’.
It might sound a bit space age and worrying, but it’s actually just another way of paying for things.
Some economists and investors think it’s all a lot of nonsense and just a big bubble.
Others say it’s the future of money.
Here’s our guide to cryptocurrencies, what they are and how you can get involved if you want to.
How do cryptocurrencies work?
You know when you make payments through your bank or you get money in from someone, you see those transactions on your bank statement either online or on paper?
It’s a list, a ledger, showing the money that comes in and the money you spend each day.
But what if you didn’t feel like doing these transactions through a bank? Is there a way of doing that so that you can be sure your transactions are safe and secure – as you would expect them to be when done through a bank.
That’s what prompted some technology boffins to create a way of making transactions without the banks. They were angry at the banking system during the 2008 financial crash and decided to come up with a way that we could make transactions without bothering with the banks and even Governments.
That’s how cryptocurrencies were started.
What are cryptocurrencies and why should I care?
There are hundreds of cryptocurrencies around right now.
Some of the main ones are:
…to mention some of the top few of the thousand-odd that now exist in the ‘crypto-sphere’.
They work on what is called ‘Distributed Ledger Technology’ (DLT). This is also known as ‘blockchain’.
The blockchain is like lots of connected parcels of information where that bank ledger I’ve mentioned above is repeated on thousands of computers around the world.
They can’t take information off these ledgers once it’s on them. Only more information can be added. This means that if a transaction is made, no one can change it.
The point of having it over lots of different computers is that it makes it safer because you have loads of unconnected individuals dealing with it rather than one central authority that could take the law into its own hands and mess with your money. This should make transactions fraud-proof.
The fact that you can’t remove transactions is also to counter fraud: no one can make a transaction and then say they didn’t do it.
Why are they called cryptocurrencies?
This is because the transactions are made secure by cryptography: very, very difficult computer puzzles that can only be solved by computers working very hard.
With Bitcoin it takes a lot of energy to decipher these puzzles The people who run these computers around the world, solving the puzzles, are called ‘miners’ and they earn Bitcoin for doing the work.
- Different cryptocurrencies work in different ways – for example, Bitcoin, the most well-known of them, has a finite number of coins in existence, is very inflexible and takes a lot of energy to ‘mine’.
- Others such as Ether (Ethereum) are more flexible and cost less to ‘produce’.
- Ripple (XRP) is not as decentralized as other currencies and many crypto-fans don’t like it because they say it shouldn’t be counted as a proper cryptocurrency.
What is the blockchain and how does it work?
Blockchain is talked about in the news primarily in relation to cryptocurrencies (as mentioned above).
It’s Distributed Ledger Technology (DLT) and there are actually a few different versions of DLT but people tend to talk of them generally as ‘Blockchain’ so so will we!
In fact, blockchain has many more potential applications than just currency and financial transactions.
As it is de-centralised and not subject to the whims of, say, a corrupt government it can be a more trustworthy way of recording transactions and social actions in areas such as:
- Voting. No one person, party or organization can mess with the number of votes cast or where they’re cast if they are recorded on blockchain
- Births, marriages, deaths. These could be done more efficiently, accurately and honestly using distributed ledger technology
- Property sales. Blockchain would make both estate agents and conveyancers redundant
- Education. Educational establishments could record classes taken and exams passed on blockchain and they could enable students to customize their learning on blockchain
- Medical applications. If medical procedures are recorded on blockchain, wherever you are in the world, medical professionals can pull out your records and see what can and can’t be done
This potential is why a lot of investors are more interested in putting money into blockchain than they are into cryptocurrencies.
Be warned: all of the products mentioned above are very risky.
I don’t recommend that anyone invests in them unless they really know what they’re doing. In fact, many of those that really know what they’re doing won’t touch cryptocurrencies.
Only people who already have a decent chunk of cash in traditional investments, such as pensions, equities and property, should even consider dabbling in crypto.
You should only put in money that you can bear to lose. Apart from anything else, it’s very easy for you, or the currency you have invested in, to be hacked and drained of money.
In 2014, fraudsters hacked into the Tokyo-based Mt. Gox cryptocurrency exchange and helped themselves to $473 million in Bitcoin. The hack eventually led to the bankruptcy of Mt. Gox later that year.
This is why individual investors tend to be very cagey about what cryptocurrencies they have invested in – and where they are storing them – because it’s too easy for hackers to relieve them of their tokens.
They often keep them in what is called ‘hardware wallets’ – i.e. a USB key which they often keep in a bank vault or a lawyer’s office.
Do cryptocurrencies have a future?
I think so. In fact I would say that it is the future of money.
Tech-savvy millennials are already buying into crypto as the currency of their futures.
However, we are in a cryptocurrency bubble at the moment, similar to the dot com bubble in the early nineties.
But as with the internet bubble where some companies like Google, Amazon and Apple went on to rule the world, so there will be cryptocurrencies that rule the waves later on.
The task for us is to pick the long-term winners and not just to try to make a quick buck this year.