What is cryptocurrency?

Cryptocurrency is a digital form of money. It’s not controlled or backed up by a central bank; rather, it relies on cryptography and a decentralised network of currency users to prevent forgery and fraud.

Is cryptocurrency the same as Bitcoin?

Bitcoin was the first cryptocurrency, having been established in 2008, and it’s still the most popular. However, there are numerous alternatives, including Ethereum, Litecoin and Dogecoin. While these currencies all work in the same basic way, their networks are unconnected and their values can rise and fall independently.

Where does cryptocurrency come from?

Most cryptocurrencies are generated by mining. This is where users race to solve complex mathematical problems, with the first contributor to share a valid solution receiving a certain amount of currency as a reward.

The solutions to the problems are unpredictable, so successful mining depends on luck. However, dedicated miners invest in custom hardware (with a focus on graphics cards) that can search for solutions more quickly than a regular computer, giving them a greater chance of success.

How is cryptocurrency used?

To receive and hold cryptocurrency, a person needs a digital wallet. There are free applications for all popular platforms that can be used to create and manage wallets.

Each wallet in a cryptocurrency network has a unique alphanumeric address, and you can transfer currency to any other user by simply entering the amount and their wallet address. Public key cryptography is used to confirm that you are authorised to transfer funds from the originating wallet; the transfer is then recorded in a public ledger, called the blockchain.

To ensure that individuals can’t insert fraudulent exchanges into the blockchain, transactions are validated via the mining process. Thus, when thousands or millions of computers worldwide are working to mine cryptocurrency, they’re simultaneously maintaining and protecting the blockchain.

What are the advantages of cryptocurrency?

Cryptocurrency is largely unregulated. Individuals and organisations can hold unlimited amounts of cryptocurrency, and can transfer it to any other wallet in the world with no fees or restrictions.

What’s more, since anyone can create a wallet (or multiple wallets) with no link to their personal identity, cryptocurrency can be completely anonymous. This is why ransomware attackers typically demand payment in cryptocurrency: it’s impossible to identify the owner of the destination wallet.

What are the disadvantages?

Some cryptocurrencies (called “stablecoins”) are pegged to real-world assets: for example, the value of a Tether token will always be one US dollar. However, with most cryptocurrencies – including Bitcoin – the value is determined solely by the market. Since many investors use cryptocurrencies as speculative investment vehicles, the value of cryptocurrency holdings can be very unstable.

Cryptocurrency mining is also extremely environmentally unfriendly. It’s estimated that worldwide mining activity consumes around 130TWh a year – about as much as the entire nation of Norway. The Ethereum currency recently slashed its power consumption by switching to a new system that bases trust on financial investment instead of mathematical problem-solving, but there’s no immediate prospect of Bitcoin doing the same.

Should businesses use cryptocurrency?

The volatile nature of most cryptocurrencies presents a major risk for any business that chooses to accept them. However, many customers welcome the opportunity to pay in anonymous, fee-free digital currency.

The solution chosen by many organisations is to partner with a currency exchange provider, such as Coinbase or CoinGate. These services process cryptocurrency transactions on your behalf, and credit your account in traditional fiat currency – minus a transaction fee.

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