Understanding cryptocurrency: what it is and how it works
- Cryptocurrency, particularly Bitcoin, has transformed the financial landscape since its creation in 2008, boasting a global value of over £1.8 trillion.
- Despite its potential for decentralized transactions, the crypto market has suffered from significant volatility and regulatory challenges, leading to substantial financial losses for investors.
- High-profile fraud cases, like the 2022 FTX collapse, reveal the risks inherent in the industry and the need for increased oversight to protect consumers.
Cryptocurrency, which has been a significant part of the financial landscape for more than 15 years, is valued at over £1.8 trillion globally. Bitcoin, the oldest and most recognized cryptocurrency, emerged in 2008 as a unique digital format stored on applications acting as digital wallets. Unlike traditional currencies managed by banks or governments, Bitcoin operates on a decentralized framework, making it appealing for those seeking alternatives to conventional financial systems. This decentralized nature allows users to transact without intermediaries, providing a potential solution for quick cross-border transactions, especially important in areas where traditional banking methods may be cumbersome or costly. However, the attraction to cryptocurrencies is marred by volatility; significant crashes in 2018 and 2022 have devastated numerous investors who poured their life savings into these digital assets, believing in their potential for wealth accumulation. The 2022 fallout from the collapse of FTX, a major cryptocurrency exchange founded by Sam Bankman-Fried, highlighted the risks and lack of regulation in the space. This incident resulted in bankruptcy for many customers who lost billions. Moreover, Bankman-Fried's subsequent sentencing to 25 years in prison for fraud underscores the potential for scams in the crypto market, leaving a cloud of uncertainty and distrust. Despite the challenges, there remains a small but growing number of establishments accepting cryptocurrencies as payment, though the majority still face difficulties utilizing digital currencies for everyday purchases, particularly in the UK. This situation creates an ongoing discussion about the future role of cryptocurrencies in the global economy.