We’re all well aware of the need to look after our valuables, whether it’s making sure our bags are shut tight on public transport or keeping our goods out of plain sight. But when it comes to digital transactions, keeping secure can be more complicated. Cryptocurrencies are the much-hyped solution, but is this supposedly hack-proof option really all it’s cracked up to be?

What is a cryptocurrency? 

Cryptocurrencies work by using cryptography to secure payments, produce new coins, and verify contracts. It is a decentralised system, meaning computers around the world store the information and record updates by making entries only when specific criteria are filled, such as solving a cryptographic puzzle using a known key. The responsibility for checking the coins, contracts, and payments are genuine lies in each of these machines, rather than a central organisation, such as a national bank, meaning there’s no single point which can be targeted by criminals.

Bitcoin was the first currency to be built to this design, originating in 2009 through an enigmatic individual – or perhaps group – known as Satoshi Nakamoto. Since then, other cryptocurrencies including Etherium, Litecoin and Dogecoin have appeared, growing the market, and even inspiring the line up of a Japanese cryptocurrency themed band (J-Pop fans can click here).

Why should I use cryptocurrencies?

As a result of the attention they have gained, use of cryptocurrencies is growing. Major online retailers, such as Etsy and Microsoft, now take payment in this robust format, alongside an increasing number of smaller retailers, such as shops and restaurants.

As with offline currencies, people are choosing to invest in this medium too, in part spurred on by the stories of people becoming overnight millionaires on the crypto market. The stats are indeed impressive: in January 2015 Bitcoin was worth as little as $170 USD per coin but is now worth more than $8,500 USD at the time of writing, meaning those who invested at the right time have made a shrewd choice.

Sounds great, how do I invest?

It’s undoubtedly true that cryptocurrencies have driven phenomenal growth in the world of digital transactions. But as their usage increases, it will be worth keeping an eye on how they continue to evolve – at least before investing vast sums.

First of all, while the market has been characterised by growth, it has also taken some pretty steep falls. Across the board, many cryptocurrencies fell in value in May 2018 as police raided UpBit, the largest cryptocurrency exchange in South Korea.

While increased competition in the cryptocurrency market breeds innovation, It can also lead to uncertainty. Last year, for example, Bitcoin went from owning 90% of the market to just 40%. It’s therefore important to realise that not all coins are equal and can pay to consider their stability as well as their value before purchasing.

Ethical investors should also act cautiously, as it remains to be seen what the social implications of cryptocurrencies are. It’s estimated that 40% of the world’s Bitcoins are owned by just 1,000 people, raising important questions about the distribution of wealth and the creation of a new cryptocurrency elite. The decentralized nature of the cryptocurrency is the key to its strength, but at the same time poses problems for law enforcement agencies and governments that face the challenge of taxing transactions and purging nefarious activities.

As currencies such as Monero and Dash can be used almost entirely anonymously, they’re a preferred method for those engaging in illegal trades, money laundering, and the charging of ransom through cyber threats. And in a move not entirely devoid of irony, while cryptocurrencies are powering the dark web, the currency NEM recently found that it had fallen victim to hackers, leading to the stolen coins being traded for a reduced rate on this platform.

Deciphering cryptocurrencies 

Cryptocurrencies are similar to many technological startups; they show extraordinary potential for growth, a huge amount of potential, and boast a loyal early adopter population who are able to ride the growth curve. But like any investment, purchasing cryptocurrencies doesn’t come without risk. Those who want to explore this opportunity would be wise to do their research, test the market, and bear their objectives in mind before taking the plunge.

For more information on the technology powering cryptocurrencies, check out our 10 unexpected blockchain facts post.

Rebecca Morgan data article  By Rebecca Morgan, Account Manager