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What are the specifics of cryptocurrency? Should you invest in cryptocurrency?
If the definition and purposes of cryptocurrency seem unclear to you, read our cryptocurrency exclusive to learn more about fees, currencies, different platforms and a lot more.
Table of Contents
What are cryptocurrencies?
Cryptocurrency is a digital currency: it does not exist in the form of bills or coins and is only virtual. It operates using the cryptography and blockchain principles.
Cryptocurrency is issued on a peer-to-peer basis, i.e. with no intermediates (e.g. banks) and thus differs from traditional currencies. Cryptocurrency does not depend on a central bank or any other financial institution: it has no legal value and is not regulated.
Cryptocurrencies are issued on decentralized networks to protect them from being duplicated or falsified. Transactions with cryptocurrencies are done very quickly and are anonymous.
What is the purpose of cryptocurrency?
Cryptocurrencies can be used in different ways for different purposes. With cryptocurrency you can either:
- Use cryptocurrency as a form of payment: it can be used to purchase goods or services.
- Exchange cryptocurrency for cash.
- Exchange cryptocurrency for another cryptocurrency.
- Sell your cryptocurrency.
- Invest your cryptocurrency and store it to increase its value.
To do so, many cryptocurrency exchange platforms are available.
How does cryptocurrencies work in the UK?
Cryptocurrency works through cryptography, which is an encoding system: a protected and encrypted writing with keys (passwords, fingerprint, etc.).
Blockchain regulates the transactions as well as the issuance of crypto-currencies. This so-called blockchain is a database that stores all the transactions made with a crypto-currency. It therefore acts as a decentralized record of all transactions that have been made with a cryptocurrency.
Blockchain allows those who want to exchange cryptocurrencies not to have an intermediary to transfer their amount of cryptos. Thanks to blockchain you can be aware of the available amounts of cryptocurrencies of the other users without knowing their identity: the anonymity of cryptocurrencies is thus protected.
Blockchain uses cryptography safely to transfer ownership of cryptocurrencies from one person to another. As the data is anonymous and the transactions are untraceable, the directory contains only this information:
- transaction amounts
- cryptographic keys
- the addresses of the issuers
Once the cryptocurrencies transactions are registered in the blockchain, they are sealed with a special key after verification and validation of the block by the different computers of the network.
The blockchain concept secures the cryptocurrency, making it non-duplicable and impossible to fake.
What is a cryptocurrency mining farm?
Cryptocurrency mining is the verification of transaction blocks in the blockchain and the creation of cryptos. The mining generates a blockchain writing through a computer system. This action will secure the cryptocurrency and make the blockchain impossible to counterfeit.
The more popular and used the cryptocurrency is, the more complex the blockchain will become and the more powerful the computer system will need to be.
The mining of cryptocurrencies thus allows the issuance of new crypto coins on the market. Miners are paid to use the power of their computer system to support the blockchain: they receive a mining fee for doing so.
Mining requires sophisticated and powerful computer systems. A mining farm is therefore a location where many computers are grouped together and are primarily used to mine cryptocurrencies.
What are the fees on a cryptocurrency platform?
The largest cryptocurrency trading platforms offer fees that are generally in the low to mid-range. The largest cryptocurrency trading platforms offer fees that are generally in the low to mid-range.
What are the fees you should expect on a cryptocurrency platform?
- The first are the transaction fees: for every transaction made on your cryptos, the platform will take you a small percentage. This percentage usually ranges from 0.1% to 3% depending on the platform. For people who trade cryptos at high volumes, cryptocurrency platforms offer low fees, far below the standard transaction fees.
- You may also face withdrawal fees when you decide to transfer your assets off of the platform. They can range from 0.1% to 0.2%, be around 0.001 bitcoin or be free depending on the platform. These fees are used to secure transactions and pay crypto-currency miners.
- Other fees can be added to the transaction fees and withdrawal fees:
- inactivity fees
- currency conversion fees
- fund storage fees
What are the different types of cryptocurrencies?
There are currently about 2,000 cryptocurrencies. However, not all of them are used and some seem to be more promising than others.
Here are some promising crypto currencies with high values:
- Bitcoin (BTC)
- Ethereum (ETH)
- USD Tether (USDT)
- Ripple (XRP)
- Litecoin (LTC)
- Bitcoin Cash (BCH)
- Polkadot (DOT)
- Dogecoin (DOGE)
Each cryptocurrency has its own features that are designed for a certain use. Therefore, there are several types of cryptocurrencies:
- Cryptocurrencies used as a payment method such as Bitcoin or Litecoin
- Cryptocurrencies created to overcome the limitations of the old ones, such as Bitcoin Cash, to increase the speed of Bitcoin transactions
- Cryptocurrencies used in the development of decentralized blockchain applications (dApps) such as Ether or EOS
What is the stock price of cryptocurrency?
The market price of cryptocurrencies depends on the change in supply and demand, which in turn relies on the characteristics of each crypto.
Some cryptocurrencies have a relatively small amount of coins in trading, so they will be worth more than a cryptocurrency with a large amount of coins in trading. Rarity can drive up the price of cryptocurrencies.
As previously seen, mining cryptocurrencies makes it possible to issue a larger quantity of cryptocurrencies. Depending on the crypto, mining will be more or less complex and will therefore require more time which also influences the supply of cryptocurrencies and their value.
The popularity of use of a cryptocurrency also influences its demand and price. This popularity depends a lot on the reputation of the cryptocurrency as with Bitcoin for example which has a very high value and is often heard about.
If a cryptocurrency suffers a bad reputation due to an incident, its price will drop. The use popularity of a cryptocurrency also depends on its security and transaction speed.
Which cryptocurrency to buy in 2021?
In order to know which cryptocurrency to invest in for 2021, all the elements that can positively or negatively impact the cryptocurrency's price are worth watching.
Here's a quick rundown of the characteristics of a crypto-currency to take into account:
- the volume of cryptos in circulation
- its speed of transaction and mining
- its popularity of use and its reputation.
With that in mind, many cryptocurrencies have a solid grounding or look promising. Here is a list of cryptocurrencies to buy in 2021:
- Bitcoin (BTC)
- Ethereum (ETH)
- Ripple (XRP)
- Bitcoin Cash (BCH)
- Litecoin (LTC)
- Cardano (ADA)
- Stellar Lumens (XLM).
What are the tax effects of cryptocurrency?
In the UK, cryptocurrencies are not regarded as currencies but are rather considered as goods. When a cryptocurrency is used as a payment method, the action is considered as barter by the UK authorities.
Crypto-currencies can generate income and will thus be subject to taxes. For the authorities, cryptocurrencies have tax consequences in several cases:
- if the cryptocurrencies are used to purchase goods or services.
- if the cryptocurrencies are converted into currency.
- if the cryptocurrencies are traded in for other cryptocurrencies.
- if the cryptocurrencies are sold.
- if you mine cryptocurrencies.
Businesses that accept certain cryptocurrencies as payment must report the taxes accordingly, like any other good or service.
In the UK, the authorities regulate cryptocurrency platforms in order for them to be authorized or not to operate in the territory.
What are the risks of trading cryptocurrencies?
With cryptocurrencies, the volatility risk remains very strong especially because the price of cryptocurrencies fluctuates, depending as it does on supply and demand.
With cryptocurrencies, there is also a high risk of fraud, money laundering or other criminal activities. This risk is due to the anonymous nature of cryptocurrency transactions and the poor regulation that currently surrounds them.
Because cryptocurrencies are unregulated, there is a certain legal risk for the consumer who uses them. One must be careful about the cryptocurrency exchange platforms used as well as their regulation.
Although cryptocurrencies are protected, there is no such thing as zero risk. Like any other digital activity, cryptocurrencies can be subject to hacking during transactions, on platforms, and so on.
Facing these many risks, some countries have decided to ban or restrict the use of cryptocurrencies like in China or India for example.