What is Cryptocurrency? You might have heard a lot about Bitcoin over the past few years, but do you know what it is? Well, Bitcoin is a type of cryptocurrency and there is increasing amount of interest around how this relatively new type of ‘money’ could become a bigger part of our lives.
Bitcoin is the original and most popular kind of cryptocurrency but there are other highly traded types like Dogecoin, Ethereum and Litecoin. Bitcoin first appeared in 2009 and was invented by someone who went by the name of Satoshi Nakamoto but has never been identified.
What is Cryptocurrency?
Simply put, cryptocurrencies are digital currencies or digital money. They don’t physically exist like coins or cash we use all around the world now, but instead they are completely virtual.
Although you can’t see or touch cryptocurrencies, they do have value. Cryptocurrencies can be stored in a ‘digital wallet’ on a smart phone, computer or device and their owners can send them to people to buy things.
But why would someone want cryptocurrency over ‘normal’ money? The physical money we use daily is actually quite unusual in comparison to historic money, in that it is not precious itself (unlike gold coins for example). If you look closely at a £10 note, you will see that it says in very small letters: “I promise to pay the bearer on demand the sum of ten pounds”. This means if you were go to the backing authority (like the Bank of Scotland) all they have to do is print another piece of paper money to fulfil that promise.
As more and more money is created, it lowers the value of the existing money in circulation. People don’t necessarily notice this as it happens because the amount of their money remains the same, however they might notice that the things they buy regularly, like the weekly shop, cinema tickets or bus fares begin to cost more and more.
Cryptocurrency like Bitcoin is different. The supply is carefully controlled and limited and no one can create or issue more bitcoin at will. There will never be more than 21 million bitcoins and each bitcoin can be divided into 100 million units, known as Satoshis. This stops the kind of devaluing that we see in ‘normal’ currency.
Node - A machine that takes part in the global network by running the bitcoin software.
Blockchain – A database of financial transactions which constantly grows as new transactions or ‘blocks’ are added to it, forming a continuous public chain of data.
Cryptocurrency Mining - the process of adding new groups of transactions known as ‘blocks’ to the blockchain.
Cryptography – the science of coding and decoding messages and data so as to keep them secure, for example - by using encryption.
How does it work?
Its likely that we have all used a debit card to make purchases. When you buy an item in a shop using a bank card, a chain of processes begins. You share your bank details with the shop, the shop shares those details with the bank which checks its records to see whether you have enough money in your account to pay for the item. Once this has been verified the bank will tell the shop the transaction is good to go and updates it's records.
Cryptocurrencies work in a very different way.
They are exchanged in ‘peer-to-peer’ transactions, which means there are no banks or third parties involved. Instead, every transaction ever made is recorded in a huge database (a blockchain) – sort of like a massive spreadsheet.
Each transaction made is represented by a block which is added to the larger chain, which is where the name 'blockchain' comes from, and all the transactions remain in the blockchain forever.
A blockchain isn’t based in a set location but is distributed among a large network of computers and is kept secure by complex systems. These systems make it virtually impossible for anyone to tamper with a blockchain and ensures all transactions and users are protected.
Can it be trusted?
As a relatively new and fast-growing technology it is inevitable that there will be higher quality cryptocurrencies and lower quality ones.
Due to how they are marketed, many people find it confusing to tell which cryptocurrencies have real potential and which are copycats of existing currencies or are scams.
You may have heard about the cryptocurrency scam linked to the popular Netflix show, Squid Game, in the news recently.
‘Squid’ marketed itself as a ‘play-to-earn’ cryptocurrency, which means people can buy tokens to use in online games and can earn more tokens which can be exchanged for other cryptocurrencies or national currencies. Squid began trading at 1 cent (less than 1 pence) but in less than a week it had risen to over $2,856 (£2,134). Its value then dropped by 99.99%.
This kind of scam is often called a ‘rug pull’ by crypto investors. This means the promoter of the Squid token brought buyers in then stopped trading activity, making off with the money raised from sales.
Cryptocurrency experts had previously warned over some signs that Squid was likely to be a scam. One of the clear signs was that people who had bought Squid tokens were unable to sell them on. It was also reported that the website contained a number of spelling mistakes and grammatical errors, although the website is no longer online and any related social media accounts have been deleted. It is claimed that Squid developers made an estimated £2.48 million through the scam.
Scammers will advertise schemes promising high returns through cryptocurrency investing or mining. These are often advertised on social media as a way for criminals to lure people in with the offer of easy money that can be made quickly in order to get your money or personal information.
Data from Action Fraud, the national reporting centre for fraud and cyber-crime, shows that £146,222,332 has been lost to cryptocurrency fraud since the start of this year – which is almost 30% more than was lost throughout the whole of 2020. They also reported that 18–25-year-olds accounted for the highest percentage of reports, (11%) and over half (52%) of the victims were aged between 18-45 years old.
One of the more common ways criminals scam victims is the use of celebrity endorsements. This is where criminals will have professional and credible looking online adverts, send emails, and create websites to advertise fake investment opportunities, including cryptocurrency. They will often use pictures of well-known public figures to make the opportunity seem real. Between April 2020 and March 2021 Action Fraud received 558 investment fraud reports linked to fake celebrity endorsements, with 79% of them mentioning cryptocurrency as part of the investment.
How to protect yourself
- Think critically about the adverts you see online and on social media that promise high returns on investments related to cryptocurrency. Be suspicious if you are contacted unexpectedly about investment opportunities, this could be a cold-call, email or someone approaching you on social media.
- Don’t let someone rush you into making an investment. No legitimate person or organisation will pressure you into making an investment or to commit to something on the spot. Take time to do your own research.
- Most companies who deal with ‘cryptoassets’ (assets related to cryptocurrency) are not authorised by the Financial Conduct Authority (FCA). This means that if you invest you will not have access to specific services and schemes if things go wrong. You can check the FCA register to make sure you’re dealing with an authorised company and can check the FCA Warning List of firms to avoid.
- You can always seek advice from friends, family, trusted adult or use independent professional advice services before you make any big decisions. Even a genuine investment opportunity can be high risk.
- Only use the telephone number and email address on the FCA Register, not the contact details the firm gives you and look out for subtle differences.
- Don’t be misled by a company that has a glossy website and glowing reviews from investors. This does not mean it is genuine - criminals will go to great lengths to cover up the scam.
- Remember, if something sounds too good to be true, it probably is.
If you think you’ve been a victim of an investment fraud, report it to Action Fraud online at www.actionfraud.police.uk or by calling 0300 123 2040. For more information about investment fraud, visit www.fca.org.uk/scamsmart.
Find out more about staying safe online at the Digi Know page.