Blogs/Vlogs

Cryptocurrencies. What you need to know (part three)

11 February 2020

In my previous two blogs, I looked at the theoretical advantages that cryptocurrencies have over traditional currencies, and delved a little into the way that they are organised. In this blog, I am looking at the practicalities of using cryptocurrencies for trade.

It’s in your wallet

Having taken the decision to do business in a cryptocurrency, whether buying or selling, the first step is to acquire the appropriate software. I am using Bitcoin as the example, as it is still the most widely used cryptocurrency. Firstly, you need a user account, which is usually referred to as a personal wallet. Your wallet is a program to store, send, and receive Bitcoins, to monitor balances and to interface with the blockchain. Wallets come in four types, and it is possible to have more than one wallet:

  1. Mobile wallets
  2. Desktop wallets
  3. Web wallets
  4. Hardware wallets

Mobile wallets are best for storing small amounts of bitcoins and using on the move. Hardware wallets are the most secure way of storing large amounts of Bitcoin. To find out the pros and cons of each type visit the Bitcoin site. As you would expect, there is a trade-off between security and convenience.

When you acquire a wallet, you automatically generate a Bitcoin address and receive a ‘private key’ to give you secure access. You then need to acquire some Bitcoins to put into your wallet. You can go straight onto a trading platform, but this is complicated and best left to the professionals. The easiest way is to use a Bitcoin exchange. These are easy to find on the Internet, but finding the right one is probably a matter of recommendation. Factors you should take into account are:

  • Reputation and support
  • Payment methods
  • Fees for deposits, transactions and withdrawals
  • Exchange rates
  • Buying limits

An important point to bear in mind is that keeping your Bitcoins in your wallet is almost always safer than leaving them in an account in the Bitcoin exchange, where they may be hacked or lost if the exchange experiences business failure. So, once the transaction is complete, you should always transfer the currency into your wallet.

Caution!

Unless you are tempted into currency speculation, it is probably not a good idea to acquire or to hold a lot of any cryptocurrency. Small amounts are safer, just enough to facilitate the occasional transaction. Bitcoins can be bought and transacted in fractions as they are denominated in amounts down to eight decimal places. The reason for caution is the volatility and unpredictability of exchange rates. In December 2017, one Bitcoin would have cost you £14,380; if you had sold it again on 7 January 2020 you would  have only made £5,982.

One criticism often levelled at cryptocurrencies is that they provide anonymity for criminal activities. Evidence of this is that in ransomware attacks (where a criminal infects the victim’s computer with malware that denies them access to their own data) payment of the ransom is invariably demanded in a cryptocurrency. The reason for this is that although there is much more transparency in cryptocurrency transactions than in those done through a bank account, it is nevertheless impossible to identify the parties involved. So, if you decide to buy or sell Bitcoin, it is your responsibility to verify the credentials and trustworthiness of the other party; there is no bank or credit card company to fall back on.

If you now feel ready to try out cryptocurrencies and need more information, contact me at a.hulse@uhy-uk.com , or use our contact form.

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