In essence, a blockchain is a type of database. Blockchain first came to prominence as the technology that underpinned Bitcoin when the cryptocurrency was originally mooted in a paper on peer-to-peer electronic cash systems in 2008.
The paper was credited to Satoshi Nakamoto, thought to have been a pseudonym for either an individual or group of people. Part of the cryptocurrency’s design meant that there would only ever be 21 million Bitcoins created.
The blockchain is essentially a public ledger of every Bitcoin transaction that takes place. A record gets distributed across numerous computers and cannot be tampered with or changed retrospectively. According to supporters of cryptocurrencies, blockchain transactions are more secure than traditional payment mechanisms.
A short Bank of England video demonstrates the blockchain process in more detail and also explains how ‘mining’ works, the mechanism through which new units of currency such as Bitcoin are produced.
This ‘mining’ requires huge volumes of computing power and thus uses significant amounts of energy. Environmentalists have warned that the proliferation of cryptocurrencies could have a significant impact on global attempts to reduce energy consumption.
How does one buy cryptocurrencies?
The most common places to buy Bitcoin and other cryptocurrencies are specialist exchanges. This includes a range of trading platforms and apps that allow investors to buy cryptocurrencies using either traditional currencies and/or other cryptocurrencies.
According to research by the FCA, about three-quarters of Brits who had bought a cryptocurrency did so through an online exchange.
To open an account, would-be traders are typically asked to provide passport details, a phone number and an email address. The costs of trading can vary from one exchange to another. Some providers impose a flat fee per trade, while others will charge a percentage of the overall transaction amount.
How have cryptocurrencies performed?
The performance of cryptocurrencies can be notoriously volatile with roller coaster peaks and troughs. In 2013, an individual Bitcoin was worth just a few dollars. At the time of writing (July 2022) its price stood around the $22,000 mark. A huge increase on nine years ago, but some way off the all-time high of nearly $68,000 it achieved towards the end of 2021 .
UK appetite for cryptocurrencies
In the summer of 2020, the FCA published research into the UK’s growing appetite for cryptocurrencies.
The FCA estimated that nearly two million adults owned cryptocurrencies, although the findings suggested that about three-quarters of consumers held cryptocurrencies to the value of £1,000 or less.
The most popular reason for holding cryptocurrencies, said the FCA was ‘as a gamble that could make or lose money’.
According to the FCA, more than one million adults increased their holdings in high-risk assets such as cryptocurrencies during the first seven months of the Covid-19 pandemic of 2020.
What happens next?
Even before the pandemic upheavals of 2020, cryptocurrencies were surrounded with questions about their security, practical use and long-term viability. Hence the stark and repeated warnings from financial regulators that people should approach investments in this area with extreme caution.
If more mainstream investment houses dip their toes in the cryptocurrency waters, we may see digital assets improve in value, with their usage normalised and more widespread.
Several central banks, including Nigeria, have already introduced their own digital currencies, although progress has been more stifled in key economic bloc areas such as those of the US and the European Union.
In the uncertain times in which we live, it is possible that the entire concept may prove vulnerable or unsustainable in the face of as yet unforeseen challenges.
To paraphrase the regulators, “buyer beware”.
Cryptocurrency is unregulated in the UK. The UK regulator, the Financial Conduct Authority, has repeatedly warned investors that they risk losing all their money if they buy cryptocurrency, with no possibility of compensation.
