All you need to know about cryptocurrency: How do you use it? Why is it popular? What is Bitcoin mining? And why are digital values plunging in value now?
- Bitcoin has lost more than 50 per cent of its value since its November 2021 peak
- Ethereum is now worth less than half of what it was at the start of this year
- A cryptocurrency is a digital currency that can be used for transactions online
- Cryptocurrencies can be bought on exchanges, such as Coinbase and Bitfinex
They are the digital forms of money that have taken the world by storm in the past decade, with some making billions from their rise.
But cryptocurrencies have taken a hammering in recent days as fears for the stability of the global economy spread and panicky investors sell of assets deemed to be risky.
Bitcoin – the most well-known cryptocurrency – has lost more than 50 per cent of its value since it reached a peak of nearly £50,000 per coin in November last year.
Its main rival, Ethereum, is now worth less than half of what it was at the start of this year, while another crypto – Luna – saw 98 per cent of its value wiped out overnight.
Amid their instability, many ordinary people continue to be confused about what cryptocurrencies are and how they work.
Whilst Bitcoin and Ethereum are the most popular version, there are more than 5,000 different cryptocurrencies in circulation.
Below, MailOnline answers key questions about cryptos.
What is cryptocurrency?
A cryptocurrency is a decentralised digital currency that can be used for transactions online.
It is the internet’s version of money – unique pieces of digital code that can be transferred from one person to another.
Unlike centralised currencies such as the Pound Sterling or the U.S. dollar, there is no governmental authority that manages cryptocurrencies or how much they are worth.
All crytocurrencies use what is known as blockchain technology – an open ledger that records transactions in code.
Explaining the blockchain, crypto expert Buchi Okoro told Forbes: ‘Imagine a book where you write down everything you spend money on each day.
‘Each page is similar to a block, and the entire book, a group of pages, is a blockchain.’
The blockchain allows all records of transactions to be recorded and checked to prevent fraud.
Bitcoin is the most popular cryptocurrency. It was created in 2009 by a person or group of people going by the name of Satoshi Nakamoto.
Nakamoto has never been identified, although Australian businessman Craig White claims to be the man behind the pseudonym.
The supply of bitcoins is carefully controlled – no one will ever be able to create or issue new coins at will.
There will also never be more than 21million bitcoins, whilst each coin is itself divisible into 100million units that known as Satoshis .
This stops the erosion of value – inflation – that plagues national currencies.
They are the digital forms of money that have taken the world by storm in the past decade, with some making billions from their rise. But cryptocurrencies have taken a hammering in recent days as fears for the stability of the global economy spread and panicky investors sell of assets deemed to be risky
Ethereum, like Bitcoin, is a digital token used on a digital database called a blockchain. It has gained prominence as a popular method to pay for NFTs (Non Fungible Tokens)
How do you buy them?
Cryptocurrencies can be bought on what are known as exchanges, with Coinbase and Bitfinex being among the most popular.
Exchanges allow ordinary people with little knowledge of the technical aspects of cryptos to buy them simply.
The exchanges allow traders to buy fractions of coins rather than whole ones.
It means they can spend as little as much as they like – rather than forking out what could be tens of thousands of pounds if they were to buy a whole coin.
In the first quarter of 2022, Coinbase posted a loss of $430 million amid a 19% drop in monthly users. The company has said that trading is likely to keep going down in the second quarter
However, most exchanges charge a fee to invest.
Generally, this is a small percentage of the amount of crypto purchased, along with a flat fee depending on the size of the transaction.
In the UK, Coinbase charges a 3.9 per cent fee for orders over £200 that are bought using a debit card.
Purchases through a UK bank transfer incur a smaller 1.4 per cent commission.
What can you use cryptocurrencies for?
Cryptocurrencies can be used to make purchases and to send money abroad easily.
However, at present, most retailers do not accept the likes of bitcoin as a form of currency.
One way to get around this is to exchanging cryptocurrencies for gift cards that can then be used at ordinary retailers.
Crypto debit cards can also be used to make purchases. The cards are preloaded with a cryptocurrency of your choice.
Whilst the user spends their cryptocurrency, the retailer will receive ordinary money as payment.
Cryptocurrencies are also increasingly regarded as a form of investment, although experts caution about their volatility.
Bitcoin has long been referred to as ‘digital gold’ because of the fact that, like the precious metal, it is regarded by some as a good store of value.
Why are cryptocurrencies popular?
Cryptocurrencies are popular in part because they remove the role of central banks and governments from the supply of money.
With cryptos such as bitcoin, there is a fixed number of coins that ever be produced, which supporters claim makes them invulnerable to inflation.
There is no central authority that suddenly devalue the currency by producing many more coins.
Another reason for their popularity is the fact that whilst governments can freeze bank accounts or even confiscate money from individuals, cryptocurrencies generally remain out of their reach.
This has however made cryptos such as bitcoin also popular with criminals wishing to hide assets from authorities.
Cryptocurrencies are also popular because there is no need to open a bank account to start trading them.
A final aspect contributing to their popularity is of course the ability to make large amounts of money investing in cryptocurrencies.
As an example, despite its recent plummet, bitcoin has still risen in value by nearly 11,000 per cent since its 2009 creation.
Can you make money from cryptocurrencies?
In short, the answer is yes. But the same is also true in the reverse.
As has been proven by their recent plummets in value, cryptocurrencies such as bitcoin and Ethereum are very volatile.
As an example, whilst bitcoin was trading at around $1 per coin in its very early days, it went on to peak at more than $60,000 in November last year.
Over the course of 2020, bitcoin nearly quadrupled in value. It then plummeted in the summer of 2021 before reaching its peak.
But since the turn of the year, it has lost more than half of its value once again.
As a result, many experts advise ordinary investors to stay away from cryptos in favour of more stable investments.
Are there any crypto billionaires?
According to Forbes, there are 19 individuals in the world who have become billionaires through cryptocurrencies.
The richest is Canadian citizen Changpeng Zhao, is said to be worth $65billion.
He is the founder of Binance, which is the largest cryptocurrency exchange in the world when measured by daily trading volume.
Zaho also owns a relatively small amount of bitcoin himself.
Other crypto billionaires include Sam Bankman-Fried, the founder of FTX, which is another cryptocurrency exchange.
According to Forbes, there are 19 individuals in the world who have become billionaires through cryptocurrencies. The richest is Canadian citizen Changpeng Zhao (pictured), is said to be worth $65billion
He is believed to be worth an estimated $24billion. As well as owning half of FTX, he also owns $7billion of FTT, FTX’s native cryptocurrency.
Coinbase founder Brian Armstrong has also become a billionaire, with a net worth of $6.6billion.
A third individual to have made money from the world of crypto is Gary Wang, who is the co-founder of FTX.
Before his foray into cryptocurrencies, Wang was an engineer at Google. He is worth around $5.9billion.
What is Bitcoin mining?
People create bitcoins and other cryptocurrencies through what is known as mining.
Mining is the process of solving complex math problems using computers running bitcoin software.
These mining puzzles get increasingly harder as more bitcoins enter circulation.
Each time a puzzle is solved, a new groups of transactions – known as blocks – are added to the blockchain (the shared transaction record).
Miners are rewarded by being issued with bitcoin.
However, mining is now out of reach of most ordinary people because of the immense cost involved.
People create bitcoins and other cryptocurrencies through what is known as mining. Above: Technicians at a bitcoin farm in Quebec
Spencer Montgomery, founder of Uinta Crypto Consulting, told Forbes: ‘As the Bitcoin network grows, it gets more complicated, and more processing power is required.
‘The average consumer used to be able to do this, but now it’s just too expensive.’
Bitcoin mining also uses an enormous amount of energy, estimated to be around 0.21 per cent of all the world’s electricity.
This is similar to the amount of energy used by Switzerland each year.
Why are cryptocurrencies crashing, and is this linked to the wider economy?
Many fans of bitcoin had argued that because it has no central authority and is not controlled by central banks, it would hold its value through economic dips, global conflicts or policy changes.
However, this has proven not to be the case. In recent years, bitcoin’s volatility has followed similar rises and falls in stock markets.
As an example, when the coronavirus pandemic struck in March 2020 and global markets plummeted, so too did bitcoin.
But both stock markets and cryptocurrencies then recovered more or less in parallel.
Bitcoin’s fall in recent weeks has again mirrored declines in the Dow, Nasdaq and S&P 500.
Part of the volatility is being caused by Russia’s invasion of Ukraine and the effect this has had on supply chains and oil prices.
Whilst some crypto fans hope that bitcoin’s price will at some point decouple from the stock market as it previously had been, this has so far not been the case.
Bitcoin’s value also fell when China cracked down on bitcoin mining in mid-2021 and plummeted again when Tesla founder Elon Musk said last year that his firm would no longer accept bitcoin for payments due to environmental concerns.
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