1.3 Decrypting Crypto

‘Crypto’ is a buzzword you might hear a lot these days – especially if you’re tuned-in to the latest in finance and technology.

Cryptocurrencies first emerged at the end of the last decade as a response and potential solution to 2008’s financial crisis – ‘the Credit Crunch’. In a nutshell, the crisis arose from the fact that several huge US banks approved loans on a massive scale that had hardly any chance of ever being paid back. When the realisation set in that these ‘subprime’ loans were essentially worthless, it caused a domino effect in the markets which threatened to dismantle the entire financial industry. Almost every area of finance was badly affected and many of the high-street  — and wall-street — names in investment and banking either collapsed or came close to the brink. Pretty scary times!

The creators of Bitcoin, the first cryptocurrency to the markets, offered a new ‘decentralised’ system of making transactions and keeping a safe record of them. Decentralised is a term that often goes hand in hand with cryptocurrency. It’s essentially based on peer-to-peer technology and at its core is a just a way of sharing a file while remaining secure and anonymous. The technology behind crypto is called ‘blockchain’, because every user that holds a part in it, is another link (or block) in the chain and contributes to the whole system. By ‘distributing’ a ledger in this way, many of a bank’s functions, that used to be essential in making and processing payments, were no longer needed.

Trading on the value of crypto can be very risky and as the Bitcoin price drop of December 2017 demonstrated, it can be extremely volatile. Cryptocurrencies are therefore considered to be riskier investments than traditional (fiat) currencies. However, with no central banks or institutions needed to print the currency, distribute it or able to deliberately affect its value – crypto has already proved itself to be a valuable asset to many people and business, creating a boom over several years, which peaked in 2017. There’s evidence that major banks are now investing literally billions of dollars into crypto-related research and development, which itself goes a long way to show how important it has already become to the established world of finance too.

In fact, the major cryptocurrencies, are now widely available to trade as CFDs to the mass market – more on these in the next chapter. This means that rather than going through the rather technical and sometimes risky process of owning crypto, it can be traded freely through established brokers with minimal process and in a fully-regulated environment. Which is the way we do it at Pipster.

This is part 3 of our intro series the full learning materials are here.

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