The dangers of investing in cryptocurrencies

YOU won’t find a Bitcoin down the back of your sofa, here is how the cryptocurrency is created and the risks of getting involved.

Bitcoin has attracted increased interest after soaring beyond $48,000 (£34,680) this week.

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Bitcoin mining takes up a lot of energy and can’t be done at home[/caption]

Its latest surge comes after Tesla founder Elon Musk said the car company had invested $1.5 billion in Bitcoin.

You can’t just buy Bitcoins from a shop or withdraw them from the bank.

The cryptocurrency is stored virtually through an online network called the blockchain.

You can invest in Bitcoin through trading platforms such as eToro or online wallet providers including Coinbase and Blockchain.

What is Bitcoin?

BITCOIN got you baffled? Here's what you need to know:

  • Bitcoin is a virtual currency
  • It’s traded between people without the help of a bank
  • Every transaction is recorded in a public ledger, or “blockchain”
  • Bitcoin is created by mining
  • Mining involves solving difficult maths problems using computer processors
  • Bitcoin can be traded anonymously, which can make it a popular way of funding illegal activities
  • The value of Bitcoin fluctuates wildly
  • Bitcoin is one of many different cryptocurrencies, but by far the most popular

Before investing in any cryptocurrency, you should be aware of all the risks involved.

Their value is highly volatile and City watchdog the Financial Conduct Authority has warned investors should be prepared to lose all their money.

Investing in cryptocurrencies is not a guaranteed way to make money.

Computer experts could create their own Bitcoin using online software in the early days of the cryptocurrency in 2009 in a process known as mining.

This is more complex now as more computer power is needed.

How are Bitcoins created?

The cryptocurrency is created using a complex online process called mining, which uses supercomputers to create new Bitcoins using complex computer code.

Bitcoin was created by a mysterious online account which went by the name Satoshi Nakamoto.

Mr Nakamoto devised a complicated set of computer codes and maths problems that could be solved using computer processors to generate Bitcoins.

5 risks of crypto investments

THE Financial Conduct Authority (FCA) has warned people about the risks of investing in cryptocurrencies.

  • Consumer protection: Some investments advertising high returns based on cryptoassets may not be subject to regulation beyond anti-money laundering requirements. 
  • Price volatility: Significant price volatility in cryptoassets, combined with the inherent difficulties of valuing cryptoassets reliably, places consumers at a high risk of losses.
  • Product complexity: The complexity of some products and services relating to cryptoassets can make it hard for consumers to understand the risks. There is no guarantee that cryptoassets can be converted back into cash. Converting a cryptoasset back to cash depends on demand and supply existing in the market. 
  • Charges and fees: Consumers should consider the impact of fees and charges on their investment which may be more than those for regulated investment products.  
  • Marketing materials: Firms may overstate the returns of products or understate the risks involved.

Each solution generates a block that can record Bitcoin transactions.

Miners are rewarded for creating these blocks with an amount of Bitcoin or BTC and the transaction fees each time their portion of code is used to record a sale made with the cryptocurrency.

The Bitcoin reward changes after every 210,000 blocks are mined, which works out at around four years.

Miners currently get 6.25BTC compared with 50BTC back in 2009.

There are only 21 million Bitcoins that can be mined and 18.5 million have been found so far.

The equations get tougher as there are fewer Bitcoins to source, making mining more expensive and energy-intensive.

How risky is Bitcoin mining?

Crypto website CoinMarketCap said miners used to be able to source Bitcoins on a laptop at home but now more power is required to solve the equations.

Bitcoins can no longer be mined on a standard PC or laptop.

You will need powerful graphics cards that can cost around $3,000 and a supercomputer known as a mining rig, that can cost $10,000 or more.

Bitcoin mining also requires a lot of computer power, which would push up your energy bill.

The blockchain uses 68.13 terawatt hours of power every year, CoinMarketCap said, which is the equivalent of the amount used by the Czech Republic’s 10.7 million people.

A single blockchain transaction is the equivalent to the electricity that a typical US household would use in 20 days, according to figures from the Digiconomist.

Bitcoin miners tend to choose areas with low energy costs.

Russian Bitcoin mining company Bitcluster setup a base in the Arctic Circle at the end of last year where electricity prices cost just $0.03 per kilowatt-hour.

See what you can buy with Bitcoins.

People considering investing in Bitcoin or shares and stocks have been warned over “risky” tips being shared on TikTok.

How risky is Ripple’s XRP? The dangers of buying the cryptocurrency explained.

 

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