How is cryptocurrency created?
Cryptoassets are generally held as investments by people who expect their value to rise.
What are cryptoassets?
There are thousands of different types of cryptoassets out there â or as you might know them, cryptocurrencies. Youâve probably heard of a few â Bitcoin, Ripple, Litecoin and Ethereum have all been mentioned in the news recently. But what exactly is it?
Well, letâs start by breaking down the word âcryptocurrencyâ. The first part of the word, âcryptoâ, means âhiddenâ or âsecretâ reflecting the secure technology used to record who owns what, and for making payments between users.
The second part of the word, âcurrency,â tells us the reason cryptocurrencies were designed in the first place: a type of electronic cash.
But cryptocurrencies arenât like the cash we carry. They exist electronically and use a peer-to-peer system. There is no central bank or government to manage the system or step in if something goes wrong.
Some people find this appealing because they think they have more control over their funds but in reality, there are significant risks. With no banks or central authority protecting you, if your funds are stolen, no one is responsible for helping you get your money back.
What can you buy with cryptocurrency?
Put it this way, you wouldnât use cryptocurrency to pay for your food shop. In the UK, no major high street shop accepts cryptocurrency as payment.
Itâs generally slower and more expensive to pay with cryptocurrency than a recognised currency like sterling.
Development is underway to make cryptocurrency easier to use, but for now it isnât very âmoney-likeâ. This is why central banks now refer to them as âcryptoassetsâ instead of âcryptocurrenciesâ.
Today cryptocurrencies are generally held as investments by people who expect their value to rise.
Some cryptocurrencies have risen in value but many have dropped considerably. As the graph below shows, they are extremely unpredictable. Even if you compare them to other unstable assets such as oil.
How unpredictable is the value of cryptocurrency?
The answer is, very. Letâs use Bitcoin as an example.
From 2014 to the beginning of 2018, oil prices didnât change by more than 10% in one day unlike the value of Bitcoin which changed significantly â rising by 65% in one day and falling by 25% on another.
Huge changes like these show how volatile cryptocurrencies are (and Bitcoin is one of the more stable ones). Theyâre a very risky investment.
If youâre thinking of investing in one you need to be prepared for your investment to go up or down. Itâs even possible its value could fall to zero⌠making it worthless.
