Invest in cryptocurrency

In essence, a blockchain is a type of database. Blockchain first rose to prominence as the technology that underpinned Bitcoin when the cryptocurrency was first discussed in a paper on peer-to-peer electronic money systems in 2008.

The article was attributed to Satoshi Nakamoto, who was allegedly the pseudonym of an individual or group of people. Part of the design of the cryptocurrency meant that there would only ever be 21 million Bitcoins created.

The blockchain is essentially a public record of every bitcoin transaction that takes place. A recording is distributed over many computers and cannot be altered or modified retrospectively. According to cryptocurrency proponents, blockchain transactions are more secure than traditional payment mechanisms.

A short Bank of England video demonstrates the blockchain process in more detail and also explains how “mining” works, the mechanism by which new monetary units such as Bitcoin are produced.

This “mining” requires huge amounts of computing power and therefore consumes significant amounts of energy. Environmentalists have warned that the proliferation of cryptocurrencies could have a significant impact on global attempts to reduce energy consumption.

How to buy cryptocurrencies?

The most common places to buy Bitcoin and other cryptocurrencies are specialized exchanges. This includes a range of trading platforms and apps that allow investors to buy cryptocurrencies using traditional currencies and/or other cryptocurrencies.

According to an FCA study, around three-quarters of Britons who had bought a cryptocurrency did so through an online exchange.

To open an account, potential traders are usually asked to provide their passport details, a phone number and an email address. Trading costs may vary from exchange to exchange. Some providers charge a flat fee per transaction, while others charge a percentage of the overall transaction amount.

How did cryptocurrencies work?

The performance of cryptocurrencies can be notoriously volatile with roller coaster peaks and troughs. In 2013, an individual bitcoin was worth just a few dollars. At the time of writing (July 2022), its price is around $22,000. A huge increase from nine years ago, but a far cry from the all-time high of nearly $68,000 it reached towards the end of 2021.

The UK’s Appetite for Cryptocurrencies

In the summer of 2020, the FCA published research on the UK’s growing appetite for cryptocurrencies.

The FCA estimated that nearly two million adults owned cryptocurrencies, although the findings suggested around three-quarters of consumers held cryptocurrencies worth £1,000 or less.

The most popular reason for holding cryptocurrencies, the FCA said, was “as a bet on who could win or lose money.”

According to the FCA, more than one million adults increased their holdings of high-risk assets such as cryptocurrencies in the first seven months of the 2020 Covid-19 pandemic.

What happens next?

Even before the pandemic upheavals of 2020, cryptocurrencies were surrounded by questions about their safety, practical use, and long-term viability. Hence the stern and repeated warnings from financial regulators that people should approach investing in this area with extreme caution.

If more traditional investment firms dip their toes in the cryptocurrency waters, we could see the value of digital assets increase, with their use normalized and more widespread.

Several central banks, including Nigeria, have already introduced their own digital currencies, although progress has been more muted in key areas of economic blocs such as the United States and the European Union.

In the uncertain times in which we live, the whole concept may prove vulnerable or unsustainable in the face of yet unforeseen challenges.

To paraphrase regulators, “buyer beware”.