What Is Cryptocurrency?
Cryptocurrency is digital money designed to be used over the internet. Like any type of money, cryptocurrencies can be used to transfer value from one person or institution to another. If you think of all the things you can currently do with the money in your bank account or the physical cash in your wallet, like buying products and receiving it as payment for work done, crypto is designed to do them and more.
Unlike other types of currencies, cryptocurrencies are not issued by the government or central bank, and you can use them without the help of a middleman like a bank or payment processor.
You can also buy, sell, invest and trade cryptocurrencies on exchanges. Crypto exchanges are like regular stock exchanges where you can buy and sell different types of assets. When you trade or invest in crypto, its value can drop or rise in correspondence with demand and supply, and you could lose all the money you put into it.
There are thousands of cryptocurrencies in the world today, but the most popular ones are Bitcoin, Ethereum, Dogecoin, XRP, Solana, and Cardano. Bitcoin was the first cryptocurrency ever created. It was launched in 2008 and remains the most popular cryptocurrency in the world.
The first part of the term, crypto, originates from the Greek word Kryptos, which translates to “hidden”. Cryptocurrency transactions are often protected through cryptography to keep them private and secure from anyone not involved in the transaction. These transactions are vetted by a technology called a blockchain.
A cryptocurrency blockchain is similar to a bank’s ledger or database. But instead of being managed by one bank, it is distributed across the different participants of the cryptocurrency’s entire network. No person, company, bank, or authority controls the blockchain, and anyone can participate.
How Does Cryptocurrency Work?
Cryptocurrency makes it possible to securely transfer value online, transfer money online and earn interest without the need for a middleman like a bank or payment processor. Imagine that you can send money to someone anywhere in the world without worrying about foreign exchange rates, transfer caps, high fees or government regulations. Cryptocurrency makes this possible.
It uses decentralised technology where transactions between peers happen directly between them instead of being run through a bank or government-appointed regulatory body, as with the traditional banking system we have become accustomed to.
Instead of government regulation or protection, the safety and security of cryptocurrencies are underpinned by something called a blockchain, which is a database of all the transactions carried out using a particular cryptocurrency.
Units of cryptocurrency are created through a process called cryptomining, in which computers solve complicated mathematical problems and equations in exchange for crypto coins. The first computer to solve each mathematical problem is rewarded with cryptocurrencies.
To own a cryptocurrency, you can either mine it or buy it from someone who owns that type of cryptocurrency. Buying or selling crypto is called a trade and can be carried out via crypto exchanges. The most common way to acquire crypto today is by buying it on a crypto exchange such as eToro or Coinbase. To buy crypto, you can use the cash in your bank account or exchange your existing crypto for another.
What Is a Blockchain?
A blockchain is a specific type of database containing a list of transactions that anyone can view and verify. In the case of Bitcoin, the Bitcoin blockchain is a record of every time someone buys or sells Bitcoin.
The blockchain stores data in units called blocks, which are chained together, forming an irreversible timeline of past transactions. When new data enters the system, it enters a block, and once that block has been filled, it is verified through a process known as cryptomining and then chained to the previous blocks.
Each cryptocurrency has its own blockchain, which is an ongoing, constantly re-verified record of every single transaction ever made using that cryptocurrency.
Cryptocurrency blockchains are used in a decentralised manner such that no single person or group has control, instead, all users collectively retain control. These decentralised blockchains are immutable, which means that the data entered is irreversible. For Bitcoin, this means that transactions are permanently recorded, and anyone can view them. No company, country or third party is in control of the blockchain, and anyone can participate.
You might ask, how private is crypto if anyone can see your transaction? That’s a valid question. Cryptocurrency payments do not require you to include your personal information, and this protects you from being hacked or having your identity stolen.
The blockchain is a secure, transparent, private, and self-reconciling chain of transactions, and its use goes far beyond cryptocurrency and Bitcoin. Blockchain is currently being used for securely sharing healthcare data, music royalties tracking, real estate processing, supply chain management, and so much more.
The theory behind blockchain and Bitcoin first appeared online in late 2007 in a white paper entitled “Bitcoin: A Peer-to-Peer Electronic Cash System”, credited to Satoshi Nakamoto.
What Is Cryptocurrency Mining?
Cryptocurrency mining (or cryptomining for short) refers to solving complex mathematical equations with the goal of earning cryptocurrency. These equations validate a block of transactions, and then the block is added to the blockchain.
The first computer to solve the complex equation or algorithm gets rewarded with some cryptocurrency, giving an incentive for cryptocurrency holders or people interested in owning cryptocurrency to use their computers to solve the mathematical problems.
Once the block of transactions has been validated, it can then be added to the blockchain, and the process repeats itself.
Anyone with a computer and internet connection can mine cryptocurrency. However, it is worth mentioning that mining is not always profitable. To mine competitively often means having to invest in expensive computing machines. The cost of these computers and electricity in your area might reduce the profit you earn from mining crypto, as mining demands a huge amount of computing power. As a result, most mining today is done by companies that specialise in it or by groups of people who come together to contribute all their computing power.
Tax on Cryptocurrencies in the UK
HM Revenue & Customs (HMRC) has provided guidance to help people determine whether they need to pay tax on their cryptoassets. In a nutshell, here are the key aspects you need to know about taxes when you receive or sell cryptocurrencies:
1. Tax When You Receive Cryptoassets
The tax rules depend on the specific transaction circ*mstances. Generally, you may need to pay Income Tax and National Insurance contributions if you receive cryptoassets as income.
You don’t pay tax when you purchase cryptocurrencies. If you acquire them through mining and aren’t trading, you might need to complete a Self-Assessment tax return, depending on the value of the assets or other untaxed income.
If your employer pays you in readily convertible cryptoassets (easily exchanged for cash), they must handle Income Tax and National Insurance through PAYE. If the assets aren’t readily convertible, you should ask your employer about your Income Tax and, if necessary, complete a Self-Assessment tax return.
Keep records of all cryptoassets you receive, including the type, date, amount, total holdings, value in pounds, bank statements, and disposal date. If in doubt, consult a professional tax adviser for guidance.
2. Tax When You Sell Cryptoassets
Tax rules for selling cryptoassets also depend on the specific transaction circ*mstances. Generally, you pay Capital Gains Tax when your gains from selling certain assets exceed the tax-free allowance.
This tax year, the Capital Gains tax-free allowance is £6,000 (£3,000 for trusts). This means you do not need to pay tax on the first £6,000 profit you make from selling cryptoassets unless you’ve already used up your allowance elsewhere, for example, on the profit from the sale of stocks and shares.
You may need to pay Capital Gains Tax when you sell cryptoassets, exchange them for a different type, use them to pay for goods or services or give them away (unless it’s a gift to your spouse or civil partner).
Donating cryptoassets to charity may require you to pay Capital Gains Tax. You don’t need to pay Capital Gains Tax on the value of cryptoassets you’ve already paid Income Tax on but will need to pay it on any gains made afterwards.
Keep accurate records of each transaction, including the disposal date, the number of cryptoassets disposed of, remaining assets, value in pounds, bank statements, wallet addresses, and pooled costs before and after disposal.
If you’re unsure about paying Capital Gains Tax on your cryptoasset sales, consult a professional tax adviser. HMRC’s guidance can help you understand your obligations, but in complex cases, professional advice may be necessary.
Risks of Investing in Cryptocurrency
Scams, hacks, cryptojacking and volatility all add risks to investing in cryptocurrency.
Scams involving cryptocurrency are becoming increasingly commonplace. According to the Financial Conduct Authority (FCA), “cryptoasset fraudsters tend to advertise on social media - often using the images of celebrities or well-known individuals to promote cryptocurrency investments. The ads then link to professional-looking websites. Consumers are then persuaded to make investments with the firm using cryptocurrencies or traditional currencies.” If you believe that you have been scammed, use the FCA’s reporting form to report the firm or scam.
Until recently, what was the biggest cryptocurrency hack occurred in 2018 and equated to US$532 million. However, on August 10, 2021, Poly Network was breached, and over US$610 million was taken by the hacker, making this the biggest cryptocurrency hack currently on record.
Another risk is cryptojacking. Cryptojacking is where someone uses malware to mine Bitcoin using an unsuspecting person’s device, and the person using this malware receives the proceeds. There is both a year-to-year variance in the frequency of reported cryptojacking as well as a significant variance across a given year. The Cyber Threat Alliance (CTA) has indicated that there was a 459% increase in the rate of cryptojacking between 2017 and 2018. However, between 2019 and 2020, Kaspersky Security found that cryptojacking attempts fell from 13 million to just under 9 million.
Finally, one obvious risk is the high degree of volatility in the value of cryptocurrencies. On a single day in May 2021, the price of Bitcoin dropped by 30%. The volatility is partly caused by the ever-changing demand for cryptocurrency. The volatility of cryptocurrency is quantified by the volatility index and can be used to compare different cryptocurrencies. A simple way to mitigate this volatility is to buy a stablecoin, which is pegged 1:1 to the value of an external factor, typically a fiat currency like the US dollar or a commodity like gold. The value of stablecoins is easier to predict as they do not shift dramatically from day to day. An example of a stablecoin is the USD Coin or USDC, which is pegged 1:1 with the US dollar.
Frequently Asked Questions
- How many cryptocurrencies are there, and what are they worth?
- Is it wise to invest in cryptocurrency?
- Are cryptocurrencies safe?
- Can the government track your cryptocurrency?
- What are the best crypto exchanges in the UK?
- Can you still buy crypto in the UK?
- How can I buy cryptocurrency in the UK?
- Where is the best place to buy cryptocurrency in the UK?
- How do beginners buy Bitcoin?
- What is the best cryptocurrency to buy now?
1. How many cryptocurrencies are there, and what are they worth?
According to CoinMarketCap, there are over 1.8 million cryptocurrencies in existence, with a total market capitalisation of US$903 billion as of October 2023. Bitcoin and Ethereum are still the two most well-known cryptocurrencies with the highest market capitalisation.
2. Is it wise to invest in cryptocurrency?
Over a short period (a few months), the value of a given cryptocurrency coin can rise and fall sharply, making any return a big gamble. However, over a long period, these peaks and troughs are averaged out, and one can sometimes make a good return depending on the overall growth of the cryptocurrency.
3. Are cryptocurrencies safe?
Cryptocurrencies are safe, provided you are careful and are aware of the risks. The most significant risks are scams since cryptocurrency is still new. Be careful when carrying out cryptocurrency transactions, and keep your private key safe and, above all, private.
4. Can the government track your cryptocurrency?
Although primers of cryptocurrency have said that Bitcoin “can be used to buy merchandise anonymously”, cryptocurrencies, despite their reputation, are not anonymous. They are pseudo-anonymous.
Even though no banks or external authorities are involved, and the transaction only happens between a buyer and seller, by linking the transaction to the fixed wallet address and maintaining a public record of every transaction made on their blockchains, financial activity can be monitored.
The USA has made matters even more complicated by proposing a rule which states that all transactions over US$10,000 involving self-hosted wallets must be reported to FinCEN. However, this rule only applies to the USA and will not affect the UK. This controversial rule is designed to deter people from making cryptocurrency using illegal schemes. However, such rules tarnish the idealised image of autonomy that cryptocurrencies are trying to bring into reality.
5. What are the best crypto exchanges in the UK?
Here are the best crypto exchanges in the UK:
- eToro - Good for beginners and experts; 70+ Cryptocurrencies
- Coinbase - Beginner friendly; Crypto card; 240+ Cryptoassets
- CoinJar - Ready-made crypto portfolios; 50+ Cryptocurrencies
- Uphold - Crypto card; 3 National currencies; 250+ Cryptoassets
- Kraken - Low cost; Staking rewards; 200+ Cryptocurrencies
6. Can you still buy crypto in the UK?
Yes, you can still buy cryptocurrencies in the UK. Crypto exchanges such as eToro, Coinbase, and Uphold are registered with the financial services watchdog, the Financial Conduct Authority (FCA), and make it easy to buy, sell and hold up to 500 cryptocurrencies and digital tokens in the UK.
7. How can I buy cryptocurrency in the UK?
To buy cryptocurrency in the UK, you need to:
- Create an account with a crypto exchange such as eToro, Coinbase, or Uphold.
- Fund your account with GBP.
- Research cryptocurrencies.
- Buy your preferred cryptocurrencies.
- Sign up for a crypto wallet, e.g. Coinbase Wallet or eToro Money Wallet.
- Store your crypto in the wallet or leave it in the exchange,
8. Where is the best place to buy cryptocurrency in the UK?
Here are the best places to buy cryptocurrencies in the UK:
- eToro - Good for beginners and experts; 70+ Cryptocurrencies
- Coinbase - Beginner friendly; Crypto card; 240+ Cryptoassets
- CoinJar - Ready-made crypto portfolios; 50+ Cryptocurrencies
- Uphold - Crypto card; 3 National currencies; 250+ Cryptoassets
- Kraken - Low cost; Staking rewards; 200+ Cryptocurrencies
9. How do beginners buy Bitcoin?
Beginners can buy Bitcoin online from a crypto exchange such as eToro, Uphold, or Coinbase. Crypto exchanges make it easy to buy and sell Bitcoin and other cryptocurrencies directly from your smartphone, tablet or computer. They also allow you to monitor the movements and performance of your crypto holdings.
10. What is the best cryptocurrency to buy now?
Here is a list of the top 10 cryptocurrencies by market capitalisation in 2023.
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Alright, buckle up, because we're diving into the fascinating world of cryptocurrency, and I've got the inside scoop. First off, let's address the basics.
Cryptocurrency is a digital form of money designed for online transactions, and it operates independently of government or central bank control. Unlike traditional currencies, cryptocurrencies use a decentralized technology called blockchain, a secure and transparent ledger of all transactions.
Now, let's break down some key concepts mentioned in the article:
-
Blockchain:
- Definition: A blockchain is a type of database that records transactions in a secure and transparent manner. Each transaction is added to a block, which is then chained to previous blocks, creating an immutable record.
- Application: Besides cryptocurrency, blockchain is being used for various purposes like healthcare data sharing, music royalties tracking, real estate processing, and supply chain management.
-
Cryptocurrency Mining:
- Definition: Cryptomining involves solving complex mathematical problems to validate transactions and add them to the blockchain. Miners are rewarded with cryptocurrencies for their computational efforts.
- Significance: While anyone with a computer and internet connection can mine, it's become a competitive field requiring substantial computing power. Many mining operations are now carried out by specialized companies or groups.
-
Taxation on Cryptocurrencies (UK):
- Income Tax: Applies when receiving cryptoassets as income. Employers paying in convertible cryptoassets must handle Income Tax.
- Capital Gains Tax: Incurred when selling, exchanging, or using cryptoassets. There's an annual tax-free allowance, and accurate record-keeping is essential.
-
Risks of Investing in Cryptocurrency:
- Scams: Common in the crypto world, with fraudsters using social media and celebrity endorsem*nts.
- Hacks: Security breaches can result in significant losses, as seen in the Poly Network hack.
- Cryptojacking: Malicious use of someone's device to mine cryptocurrencies without their knowledge.
- Volatility: Cryptocurrency values can fluctuate dramatically, posing both risks and opportunities for investors.
-
Frequently Asked Questions:
- Number of Cryptocurrencies: Over 1.8 million according to CoinMarketCap, with a total market capitalization of $903 billion.
- Wise to Invest: Short-term volatility exists, but long-term gains are possible depending on overall cryptocurrency growth.
- Safety: Cryptocurrencies are safe with caution and awareness of potential scams.
- Government Tracking: Cryptocurrencies are not entirely anonymous; transactions can be traced through blockchain analysis.
-
Best Crypto Exchanges in the UK:
- eToro, Coinbase, CoinJar, Uphold, Kraken.
-
Buying Cryptocurrency in the UK:
- Create an account on a crypto exchange, fund it with GBP, research cryptocurrencies, make your purchase, and consider using a crypto wallet for added security.
-
Best Cryptocurrency to Buy Now:
- Market dynamics change, but the top 10 cryptocurrencies by market capitalization in 2023 could be a good starting point.
And there you have it—an expert breakdown of the ins and outs of cryptocurrency. Feel free to ask if you want to delve deeper into any specific aspect!
