What is cryptocurrency, how does it work and why do we use it?

Cryptocurrency is a form of digital money that is designed to be secure and, in many cases, anonymous.

It is a currency associated with the internet that uses cryptography, the process of converting legible information into an almost uncrackable code, to track purchases and transfers.

Cryptography was born out of the need for secure communication in the Second World War. It has evolved in the digital era with elements of mathematical theory and computer science to become a way to secure communications, information and money online.

The first cryptocurrency was bitcoin, which was created in 2009 and is still the best known. There has been a proliferation of cryptocurrencies in the past decade and there are now more than 900 available on the internet.

What is Bitcoin? Everything you need to know
Here's everything you need to know about cryptocurrencies.

How do cryptocurrencies work?

Cryptocurrencies use decentralised technology to let users make secure payments and store money without the need to use their name or go through a bank. They run on a distributed public ledger called blockchain, which is a record of all transactions updated and held by currency holders.

FAQ | Bitcoin

What is it?
A digital currency, used to make payments of any value without fees. It runs on the blockchain, a decentralised ledger kept running by “miners” whose powerful computers crunch transactions and are rewarded in bitcoins

Who invented it?
Satoshi Nakamoto, a secretive internet user, invented bitcoin in 2008 before it went online in 2009. Many attempts to identify Satoshi have been made without conclusive proof

What’s it for?
People see value in money free from government control and the fees banks charge; as well as the blockchain, to verify transactions. Bitcoin has been seen as a tool for private, anonymous transactions, and it’s the payment of choice for drug deals and other illegal purchases

Is it worth anything?
Yes. As of July 2017, there were around 16.5m bitcoins in circulation. In March 2017, the value of a Bitcoin, at $1,268, exceeded that of an ounce of gold ($1,233) for the first time.

What is Bitcoin Cash?
In August 2017, the blockchain forked to support another cryptocurrency, Bitcoin Cash, which is optimised slightly differently. People who held Bitcoin received an equal value of Bitcoin Cash following this ‘hard fork’.

Units of cryptocurrency are created through a process called mining, which involves using computer power to solve complicated maths problems that generate coins. Users can also buy the currencies from brokers, then store and spend them using cryptographic wallets.

How can I buy bitcoin in the UK?
Cryptocurrencies and applications of blockchain technology are still nascent in financial terms and more uses should be expected. Transactions including bonds, stocks and other financial assets could eventually be traded using the technology.

What are the most common cryptocurrencies?

Bitcoin: Bitcoin was the first and is the most commonly traded cryptocurrency to date. The currency was developed by Satoshi Nakamoto in 2009, a mysterious figure who developed its blockchain. It has a market capitalisation of around $45 billion as of July 2017.

Ethereum: Developed in 2015, ethereum is the currency token used in the ethereum blockchain, the second most popular and valuable cryptocurrency. Ethereum has a market capitalisation of around $18bn as of July 2017. However, ethereum has had a turbulent journey. After a major hack in 2016 it split into two currencies, while its value has in recent months reached as high as $400 but crashed briefly to as low as 10 cents.

Ripple: Ripple is another distributed ledger system that was founded in 2012. Ripple can be used to track more kinds of transactions, not just of the cryptocurrency. It has been used by banks including Santander and UBS and has a market capitalisation of around $6.3 billion.

Litecoin: This currency is most similar in form to bitcoin, but has moved more quickly to develop new innovations, including faster payments and processes to allow many more transactions. The total value of all Litecoin is around $2.1 billion.

Why would you use a cryptocurrency?

Cryptocurrencies are known for being secure and providing a level of anonymity. Transactions in them cannot be faked or reversed and there tend to be low fees, making it more reliable than conventional currency. Their decentralised nature means they are available to everyone, where banks can be exclusive in who they will let open accounts.

As a new form of cash, the cryptocurrency markets have been known to take off meaning a small investment can become a large sum over night.

But the same works the other way. People look to invest in cryptocurrencies should be aware of the volatility of the market and the risks they take when buying.

Because of the level of anonymity they offer, cryptocurrencies are often associated with illegal actvity, particularly on the dark web. Users should be careful about the connotations when choosing to buy the currencies.

High-profile hacks :

2017
Equifax
Credit monitoring company Equifax was hit by a data breach that exposed the social security numbers and other data of about 143 million Americans. The population of the U.S. was about 324 million as of Jan. 1, 2017, according to the U.S. Census Bureau.

2017
NHS
Hospitals across the country were hit by ransomware demanding a payment of $300 (£230) in Bitcoin. The attack was part of a worldwide attack by the WannaCry cryptoworm.

2016
MySpace
360m passwords and email addresses, believed to have been stolen several years before, were listed on a hidden internet marketplace on the dark web. The second-largest recorded data breach of all time, this was attributed to the Russian hacker “Peace”.

2015
Talk Talk
Almost 157,000 customers' personal details were accessed from TalkTalk’s website. 15,656 bank account numbers, sort codes, and obscured credit card details were stolen. A 17-year-old in Norfolk was later convicted of the attack.

2015
Ashley Madison
Hackers threatened to publish the names of up to 37m AshleyMadison.com customers - a dating website for adulterous affairs. “The Impact Team” were protesting at the business’s practice of charging users to delete their accounts.

2015
US Central Command
Hackers claiming links to Isil managed to take control of CentCom’s Twitter and YouTube accounts, changing the logo to an image of a hooded fighter. The US military command branded the attack “cyber-vandalism” and nothing more.

2014
Yahoo!
Details of 500 million user accounts were stolen by “a state-sponsored actor”, although they have yet to be made public. Russian hackers were later blamed for the theft, which was also associated with the hacker called “Peace”.

2014
Sony
A cyber attack on Sony Pictures Entertainment leaked the private details of 47,000 employees and actors. Investigators suspected the involvement of North Korean operatives.

2014
eBay
eBay asked 145m users to change passwords after hackers stole customers’ names, addresses, and dates of birth. The hackers breached the company by initially stealing employee login details.

2014
Heartbleed
A serious vulnerability was discovered in encryption technology used to protect many of the world’s major websites, leaving them vulnerable to data theft. The flaw was later traced to a minor programming error by a PhD student at an early stage in the software’s development.

2013
Yahoo!
Details of “over 1 billion” accounts were stolen in the largest data breach on record. The company discovered that the hack had taken place when investigating another attack that took place in 2014. Subsequent investigation, in 2017, revealed that the hackers had, in fact, accessed details of all 3 billion Yahoo! accounts.