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A Guide to Cryptocurrency

Bitcoin attracted a large following during the last few years and captured significant investor and media attention in early 2013. But will cryptocurrency eventually replace traditional currencies and become as global as dollars and euros? Or is it a passing trend?

Our attention has been drawn to cryptocurrency this month with the looming release of Libra – Facebook’s solution to cryptocurrency. Facebook also owns Instagram and WhatsApp so has a very large potential audience to promote its currency and use it as a transaction base between users.

Whilst there is little information on Libra itself at the moment, we thought it would be useful to run through the basics of cryptocurrency to refresh our minds on what the fuss is all about.

Understanding Cryptocurrency

Cryptocurrency is a digital currency that is created and managed by using encryption techniques known as cryptography. It came to life in 2009 with the creation of Bitcoin and is completely virtual – it is similar to an online version of cash.

Bitcoin, like Libra, Litecoin and Ripple, are brands of Cryptocurrency.

How it works

‘It is a decentralised digital currency without a central bank or single administrator that can be sent from user to user on the peer-to-peer bitcoin network without the need for intermediaries.’ – Wikipedia

Being free from government administration and management also means that there is no authority to ensure the smooth running of things or to verify the value of your Cryptocurrency.

It is created digitally through an “extracting” process that requires powerful computers to solve complex algorithms.

The Future of Cryptocurrency

Some economists are predicting that Cryptocurrency will boom as it attracts institutional money. Even the possibility of it being added to the Nasdaq, which would add further credibility to its use as an alternative currency, is being predicted. For this to happen, all that is required is a verified exchange traded fund (EFT) which would enable people to invest in Bitcoin.

Cryptocurrency has no intrinsic value apart from what a buyer is willing to pay for it at a point in time – kind of like tokens. This makes it very susceptible to huge price swings, which in turn increases the risk of loss for an investor. Bitcoin, for example, plunged from $260 to about $130 within a six-hour period on April 11, 2013. Many can’t stomach that kind of volatility and look elsewhere for investments that are less risky.

It is thought that as time progresses, and with the right investment into the cryptocurrency for security and ease of use, the risk could be reduced and the worldwide “People’s currency” could rise.

 

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