6/2/2021 What is Cryptocurrency and how to use it: Everything you need to know

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What is cryptocurrency, how does it work and why
do we use it?

Cryptocurrency is used online and as secure digital currency

By Telegraph Reporters
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11 MARCH 2021 • 1:31PM

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6/2/2021 What is Cryptocurrency and how to use it: Everything you need to know

ryptocurrency is a kind of digital money that is designed to be

C secure and, in many cases, anonymous. 

It is a currency associated with the internet that uses cryptography,

the process of converting legible information into an almost
uncrackable code, to track purchases and transfers.

Cryptography was born out of the need for secure communication,

but it has evolved in the digital era with elements of mathematical
theory and computer science to become a way to secure
communications, information and money online. 

The first cryptocurrency was Bitcoin

(https://www.telegraph.co.uk/technology/0/bitcoin-everything-need-know/),
which was created in 2009 and is still the best known. There has
been a proliferation of cryptocurrencies in the past decade and there
are now thousands available on the internet, but Bitcoin remains the
most well known. 

Here is everything you need to know about cryptocurrencies. 

How do cryptocurrencies work?

Cryptocurrencies use decentralised technology to let users make
secure payments and store money without the need to use their
name or go through a bank. They run on a distributed public ledger
called blockchain, which is a record of all transactions updated and
held by currency holders.

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6/2/2021 What is Cryptocurrency and how to use it: Everything you need to know

Units of cryptocurrency are created through a process called mining

(https://www.telegraph.co.uk/technology/0/bitcoin-mining-does-work-can-do-
home/), which involves using computer power to solve complicated
maths problems that generate coins. Users can also buy the
currencies from brokers, then store and spend them using
cryptographic wallets.

Cryptocurrencies and applications of blockchain technology are still

nascent in financial terms and more uses should be expected.
Transactions including bonds, stocks and other financial
assets could eventually be traded using the technology.  

From 1 Feb '17 to 1 Feb 15:51:24

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2018 2019 2020 2021

⬤ Bitcoin: (https://www.telegraph.co.uk/markets-hub/currency/Y31/Bitcoin)976.7 →
33452.1 3325.1%

More share information on (https://www.telegraph.co.uk/markets-

hub/)

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6/2/2021 What is Cryptocurrency and how to use it: Everything you need to know

What are the most common cryptocurrencies?

Bitcoin: Bitcoin (https://www.telegraph.co.uk/technology/0/bitcoin-
everything-need-know/)was the first and is the most commonly
traded cryptocurrency to date.  The currency was developed by
Satoshi Nakamoto in 2009, a mysterious figure who developed
its blockchain. The digital coin has surged in value over the past
year, reaching a high of $42,000 in January 2021. Proponents say
this is because institutional investors are buying into the coin as
a store of value, similar to gold, however critics say the coin is in
a bubble and fundamentally worthless.
Ethereum: (https://www.telegraph.co.uk/investing/gold/what-ethereum-
rising-faster-bitcoin-why-good-investment/) Developed in 2015, ether is
the currency token used in the ethereum blockchain
(https://www.telegraph.co.uk/technology/0/ethereum/), the second most
popular and valuable cryptocurrency. Ether has had a turbulent
journey. After a major hack in 2016 it split into two currencies.
It has proved hugely popular as a launch pad for other
cryptocurrencies, with other digital coins using Ethereum's
blockchain to build apps and payments services.
Ripple: Ripple (https://www.telegraph.co.uk/technology/0/ripple-2017s-
hottest-cryptocurrency-legitimate-rival-bitcoin/)is another distributed
ledger system that was founded in 2012. Ripple can be used to
track more kinds of transactions, not just of the cryptocurrency.
The company behind it has worked with banks and financial
institutions, including Santander. However, the company behind
the digital coin, Ripple Labs, has been hit by a complaint by the
US Securities and Exchange Regulator over claims it raised
$1.3bn in unregistered securities. Ripple is contesting the claims.

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6/2/2021 What is Cryptocurrency and how to use it: Everything you need to know

Litecoin: This currency is most similar in form to bitcoin, but

has moved more quickly to develop new innovations, including
faster payments and processes to allow many more transactions. 

Read More: Is Bitcoin a good investment?

(https://www.telegraph.co.uk/investing/shares/bitcoin-price-should-you-invest-
buy-cryptocurrency/)

Why would you use a cryptocurrency?

Cryptocurrencies are known for being secure and providing a level
of anonymity. Transactions in them cannot be faked or reversed and
there tend to be low fees. Their decentralised nature means they are
available to everyone, although they can be complicated to set up
and few stores accept them for spending.

Perhaps the most popular use of cryptocurrency is as a speculative

investment, with users buying up the coins in the hope they will go
up in value, or that one day might be useful as an alternative to
traditional currencies.

Bitcoin's volatile price has led to sudden peaks in interest as its value
goes up. This has surge in professional and amateur speculators
(https://www.telegraph.co.uk/investing/shares/made-100k-meet-bitcoin-investors-
cashing-profits/) (https://www.telegraph.co.uk/investing/news/meet-real-life-
everyday-bitcoin-investors/)investing in bitcoin and other
cryptocurrencies, seeing them either as a quick way to make returns
(https://www.telegraph.co.uk/luxury/technology/bitcoin-investment-multiplied-ten-
just-two-years-one-catch/) or as part of an investment portfolio.

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6/2/2021 What is Cryptocurrency and how to use it: Everything you need to know

(https://www.telegraph.co.uk/investing/shares/made-100k-meet-bitcoin-investors-
cashing-profits/)

How to safely buy Bitcoin

Prospective Bitcoin investors need to know a few things before taking
the plunge.

First, there is generally no Financial Services Compensation Scheme

protection. If a Bitcoin broker is hacked and coins kept in its site are
stolen, then there is no government payout as there would be with a
bank. The best way to protect against this is for buyers to transfer their
Bitcoin into a separate wallet. Bitcoin.org has a list of recommended
ones.

Second, scams are common. The City watchdog, the Financial Conduct

Authority, issued a fresh warning this year. Action Fraud, the
government fraud call centre, advised buyers to never respond to cold
calls or targetted adverts. Buyers should stick to the biggest exchanges,
these include eToro, Coinbase and CoinCorner. 

Bitcoin profits are subject to capital gains tax at the normal 10pc or 20pc
rates, depending on income. However, there are ways to get it into your
Isa and avoid a CGT bill, such as by buying Bitcoin mining companies.

Are there concerns about cryptocurrency?

There are big concerns about digital coins as a source of fraud. They
are also entirely unregulated and some are open to market
manipulation. Speculators who buy digital coins should be aware
they could lose all their money, according to UK regulators
(https://www.telegraph.co.uk/technology/2021/01/05/bitcoins-wild-ride-34000-
fuels-fresh-warnings-impending-crackdown/).

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6/2/2021 What is Cryptocurrency and how to use it: Everything you need to know

While Bitcoin is decentralised, it is highly volatile and has bee

known to move when popular individuals, such as Tesla chief
executive Elon Musk, so much as mention the names of digital coins.
(https://www.telegraph.co.uk/technology/2021/01/05/bitcoins-wild-ride-34000-
fuels-fresh-warnings-impending-crackdown/)

Other smaller coins can be more volatile still. Some have been
accused of being outright fraudulent. Others have seen investors
spend their money being digital coins only for the developers to
make off with the cash themselves. Hackers have taken advantage of
digital coins and can target exchanges and accounts, in one case
crashing (https://www.telegraph.co.uk/business/2018/09/16/flood-payouts-could-
crash-bitcoin-market/)one of the world's largest cryptocurrency
exchanges. 

One of the most common practical uses of cryptocurrency is to

finance illegal activities, such as buying illegal goods on the dark
web. Many black market internet stores accept payments in
cryptocurrency because they can be highly anonymous and do not
require cash to change hands.

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