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Beginner’s guide to cryptocurrency including how it works and why your own research is crucial

There are up to 7,000 cryptocurrencies in existence, but not all of them are still around The virtual world of cryptocurrency still mystifies millions of people, even though Bitcoin, widely regarded by investors around the globe as the original, was introduced more than a decade ago in 2009.

Despite its high profile, especially on social media platforms and online forums, many people are still confused by the fact that cryptocurrency, or crypto, isn’t connected to anything tangible in the real world. Unlike the pounds and pence of the UK’s monetary system, the units of crypto are simply computer-generated files.

However, even though it’s not legal tender in the UK, it is a form of currency and was created to be a new kind of money that could one day be as commonly used as cash or credit.

Although it was the first, and is still hugely popular, crypto goes beyond Bitcoin and depending on whether you include failed ones or not, there are around 5,000 to 7,000 cryptocurrencies in existence right now, according to research by Nerdwallet.com .

However, Bitcoin is the largest cryptocurrency, with a market cap of around $600billion (£507.5billion), followed by Ethereum.

Other popular cryptocurrencies include XRP, Tether, Dogecoin and Litecoin with the top five cryptocurrencies currently accounting for more than 80 per cent of the market.

As more people explore different ways to invest their money away from traditional financial channels such as savings accounts, stocks or ISAs, many may be considering cryptocurrency.

To help more people understand the ever-evolving world of virtual currency, below is our beginner’s guide to understanding cryptocurrency. What is cryptocurrency and how does it work?

Cryptoassets or cryptocurrencies are “cryptographically secured digital representations of value or contractual rights that can be transferred, stored and traded electronically”, according to HM Revenue and Customs (HMRC) definition.

This means a cryptocurrency is a digital asset that can be traded and used to pay for things, however, this is where it can get a bit tricky as it’s not based on any actual asset, so there’s no intrinsic value – the value is determined by supply and demand, which means it’s only worth what a buyer is willing to pay.

This makes cryptocurrencies speculative, unpredictable and hard to accurately value. How do cryptocurrency transactions work?

What’s different about cryptocurrencies is that they are not overseen or controlled centrally, and they operate on an open network – transactions are conducted peer-to-peer rather than being run by a bank or other financial authority.

They use ‘distributed ledger technology’, the best-known type is blockchain, to keep a public record of all transactions. It’s a way of synchronising and sharing data globally through a decentralised database, and is meant to prevent double-spending of cryptocurrencies.Cryptocurrencies are legal, but they’re not legal tender and in the UK, you may have to pay tax on them because they are not eligible to be held in tax-free accounts such as ISAs. How to buy, spend and trade cryptocurrencies To buy cryptocurrency, you need to buy and sell via an exchange.This means you […]

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