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BITCOIN is arguably the most well-known cryptocurrency – but what is it and is it safe to buy?
Before investing in any cryptocurrency, you should be aware of all the risks involved.
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The digital currency was created in 2008Credit: Getty – Contributor
Cryptocurrencies are highly volatile, which means your cash can go down as well as up.
This means you’ll need to be prepared to lose any cash you invest.
Investing in cryptocurrencies or stocks and shares is not a guaranteed way to make money.
What is Bitcoin?
Unlike physical currencies such as pounds, dollars or euros, which come in notes and coins, Bitcoin isn’t printed or minted.
Instead, Bitcoin tokens are a digital-only form of payment and are created by a computer code.
If you have invested in Bitcoin, you can set up a virtual wallet website like Blockchain to store, keep track and spend your digital money.
You are also able to purchase Bitcoin through an online exchange or Bitcoin ATM – but not all businesses accept Bitcoin as a form of payment.
To find merchants that accept Bitcoin in the UK on the Where To Spend Bitcoin UK website.
The value of Bitcoin has seen a meteoric rise in value since its creationCredit: Reuters
How does Bitcoin work?
To process Bitcoin transactions, a procedure called “mining” must take place, which involves a computer solving a difficult mathematical problem with a 64-digit solution.
For each problem solved, one block of Bitcoin is processed. In addition, the miner is rewarded with new Bitcoin.
To compensate for the growing power of computer chips, the difficulty of the puzzles is adjusted to ensure a steady stream of new Bitcoins are produced each day.
There are currently about 21 million in existence.
To receive a Bitcoin, a user must have a Bitcoin address – a string of 27-34 letters and numbers – which acts as a kind of virtual postbox.
These addresses are in turn stored in Bitcoin wallets, which are used to manage savings.
The bulk of Bitcoin “mining” is done in China, where energy costs are cheaper than in places like the UK or US.
5 risks of crypto investments
THE Financial Conduct Authority (FCA) which creates the rules for the banking industry has warned people about the risks of investing in cryptocurrencies.
- Consumer protection: Some investments advertising high returns based on cryptoassets may not be subject to regulation beyond anti-money laundering requirements.
- Price volatility: Significant price volatility in cryptoassets, combined with the inherent difficulties of valuing cryptoassets reliably, places consumers at a high risk of losses.
- Product complexity: The complexity of some products and services relating to cryptoassets can make it hard for consumers to understand the risks. There is no guarantee that cryptoassets can be converted back into cash. Converting a cryptoasset back to cash depends on demand and supply existing in the market.
- Charges and fees: Consumers should consider the impact of fees and charges on their investment which may be more than those for regulated investment products.
- Marketing materials: Firms may overstate the returns of products or understate the risks involved.
Is Bitcoin safe?
Anyone thinking of investing in Bitcoin or another cryptocurrency should be very careful.
Their values are incredibly unpredictable, with the ability to plummet as quickly as they shoot up.
Like with all cryptocurrencies, this means if you choose to invest in Bitcoin, you can lose your money if the value of it drops.
For example, on January 9, 2018, Bitcoin and other major currencies crashed by £120billion after major monitoring platform Coinmarketcap decided to leave out the trading prices from South Korea.
Cryptocurrencies themselves are also not regulated because no one is responsible for issuing them.
But firms offering cryptoassets must now be registered with the Financial Conduct Authority (FCA) and anyone who does invest in cryptocurrencies should check before investing.
Bitcoin is now used around the world as a digital currencyCredit: Getty Images – Getty
In a warning last month, the FCA said Brits risk losing their money if the price of Bitcoin plummets.
There is also generally a lack of protection and consumers are unlikely to be covered by the Financial Services Compensation Scheme (FSCS).
The FSCS scheme covers up to £85,000 of your savings if a firm goes bust.
You’re unlikely to take your complaint to the Financial Ombudsman Service (FOS) either, which typically only covers traditional savings and investments if something goes wrong.
The FCA said: “If consumers invest in these types of product, they should be prepared to lose all their money.”
Meanwhile, in October 2020, the FCA banned Brits from buying a “harmful” type of cryptocurrency-related investment in the UK known as an Exchange Traded Note.
Exchange Traded Notes are an investment product that tracks the price of cryptocurrencies in the same way that others track the price of gold or other investments.
Investors in these products make or lose money based on a cryptocurrency’s current or future price.
But people can still continue to buy cryptocurrencies directly and invest them or use them as currency.
How do I buy Bitcoin and why has the price gone up?
Several marketplaces called “Bitcoin exchanges” allow people to buy or sell Bitcoins using different currencies.
People can also send Bitcoins to each other using mobile apps or their computers in the same way people send cash digitally.
The value of Bitcoin, like all currencies, is determined by how much people are willing to exchange it for.
The value of Bitcoin has fluctuated wildly since they were introduced.
Yesterday evening (February 8) the cryptocurrency soared to more than $48,000 on the cyptocurrency markets after Elon Musk revealed Tesla invested $1.5 billion in the cryptocurrency.
However, this has since dropped down to $46,273.39 at the time of writing, according to CoinDesk. Just one week ago, Bitcoin was worth around $34,000 on February 2.
This time three months ago, on November 9, Bitcoin was worth $15,000.
People considering investing in Bitcoin or shares and stocks have been warned over “risky” tips being shared on TikTok.
How risky is Ripple’s XRP? The dangers of buying the cryptocurrency explained.
The price of Dogecoin has also surged recently but again, you should be aware of the dangers.