What is cryptocurrency? Where to start and possible threats
Dec 17, 2017 at 00:00
The topic of cryptocurrency has been dominating the headlines recently and their popularity seems to be on the rise. You should be aware of the risks relating to virtual currency including the risk of losing your money. Currently the law does not offer any protection measures to safeguard you against possible losses in cases of disrupted or discontinued operations of virtual exchanges where you convert or keep your virtual currency.
What is virtual currency?
Virtual currency is a type of unregulated, digital money, which can be used as a means of payment. However, they are not issued nor are they controlled by the Central Bank. Various forms of virtual currency are available: from currency used in the online computer gaming environment and social networks, to a billing tool that could be used online or in real life.
Nowadays, we have more and more chances to use virtual currency to pay for goods and services purchased from retailers, restaurants and entertainment venues. Typically, such transactions are not subject to tolls or fees as well as any type of bank interference. More recently, Bitcoin, a type of virtual currency, laid the foundation for a new generation of decentralised peer-to-peer model for the use of virtual currencies, which are often referred to as cryptocurrency. Following Bitcoin’s popularity, dozens of cryptocurrencies have been created.
How does virtual currency work?
Virtual currency like Bitcoin can be bought at virtual currency exchanges using conventional fiat currencies. Then it is transferred to a personal Bitcoin account, also referred to as a digital wallet.
The wallet enables users to send Bitcoin on the Internet to anyone who can accept it, or re-convert it to the conventional fiat currency (for example, Euro, GB pounds or US dollars).
New Bitcoins created on the Internet using computer software are also known as Bitcoin Mining. This software uses special computer algorithms enabling the “mining” of small amounts of this currency, but it should be noted that the increase in Bitcoin is fixed (21 million in total) and, therefore, only a small amount is released into circulation within a certain period of time.
What dangers should you be aware of?
There are a number of factors and possible threats that everyone should pay attention to when buying, disposing or trading in virtual currency.
You can lose your money in a virtual currency exchange
You can buy virtual currency directly from another person or through a virtual currency exchange. Operations of the majority of such exchanges remain unregulated. In the past, there were few cases where the activities of virtual currency exchanges were interrupted and even stopped altogether. One of the reasons was hacking attacks. Some users lost large sums of money that were kept in exchanges. You must understand that virtual currency exchanges do not operate as banks that could store virtual currency like a deposit. If operations of a virtual currency exchange are affected or it loses money, there are no concrete legal protection measures that could be taken (for example, those that apply to the deposit guarantee system) that would guarantee the compensation of losses incurred due to the loss of funds held in the virtual currency exchange office, even if the exchange was registered with the national supervisory authority.
Money can be stolen from a digital wallet
Having purchased virtual currency, you can store it in a digital wallet including a computer, a laptop or a smart phone. Digital wallets have a public key and a private key or a password that you can use to access your money, but still it does not protect the digital money from potential hacking attacks. Your money can be stolen from a digital wallet just like it can be stolen from a regular wallet. There have been cases where customers lost virtual currency in the amount of 1 million USD with very little opportunity to regain it. In addition, having forgotten your digital wallet key or password, you risk losing your virtual currency forever. There isn’t a single body registering or issuing substitute passwords.
You are not protected when you use virtual currency to pay for things
When you pay for goods and services using virtual currency, you do not fall under protection of the guaranteed compensation rights, for example, like you would if you made a money transfer from a conventional bank or a different payment account. Most often, it isn’t possible to recover incorrect debit transfers from a digital wallet. The ability to pay retailers using virtual currency is not guaranteed at all times. It is done at the discretion of retailers and / or contracts that can be terminated at any time and without prior notice.
The value of your virtual currency may change rapidly and even fall to zero
The value of Bitcoin and other virtual currencies has risen sharply, which encouraged some consumers to invest in them. You should know that the value of virtual currencies varies greatly and can easily increase or decrease. With the fall of popularity of a certain virtual currency, for example, when a different virtual currency rises in popularity, its value can drop very quickly and never bounce back. Changes in the value of virtual currency can negatively affect you if you purchase it in order to pay for goods and services. In contrast to the money paid into a bank or transferred to a payment account in a conventional currency, it isn’t possible to ensure the stable value of your funds held in a virtual currency.
Virtual currency transactions can be used in criminal activities including money laundering
Transfers made in a virtual currency are public, but the senders and recipients are not. Such transactions are virtually impossible to trace as they provide a high level of anonymity for virtual currency users. Virtual currency networks can be used for transactions involving criminal activities including money laundering. Virtual currency misuse could harm you, since law enforcement authorities may decide to close the virtual currency exchange and prevent everyone from taking out or using the funds available on the platform.
You may need to comply with certain tax obligations
You should be aware that using virtual currency might make you subject to taxes such as added value tax or capital gains. You should clarify whether virtual currency users are subject to tax obligations in your country.
How to protect yourself from potential risks?
We recommend investing your time into studying and understanding the features of virtual currencies, before purchasing any. Choose your investment amounts based on what you are ready to lose. Be as cautious with your digital wallet as you are with your conventional one. Avoid keeping large amounts of money in it for a long time. Additionally, ensure its safety and security. Also, find out more about virtual exchange offices you are planning to use, their business model, transparency and how they are valued in society.
What are the best sites to follow cryptocurrency news?
The main source to follow cryptocurrency information is myblockinfo.com. We aim to provide major news and updates on cryptocurrencies from reliable sources 24/7.
What are the most popular cryptocurrency wallets?
Hardware wallets are considered the safest. Ledger wallet is one of the most popular and offers a range of products to choose from. A more modern wallet would cost around EUR 270 while the price of a regular one would be close to EUR 70. Ledger is especially recommended for storing large amounts of money.
Online cryptocurrency wallets and Bitcoin wallets are not as safe, but very popular. If you are operating only small amounts of currency they are a good choice and worth a try. They can be managed through computers or mobile phones, while encrypted data is stored on servers. Wallets are available for the following mobile phone OS: Android, iOS, Blackberry and Windows Phone as well as computer OS including Windows, MacOS and Linux. Some wallets have apps for both mobile phones and computers allowing you to sync and manage money on both devices.
We cannot recommend a single best online wallet, so please make your own choice based on the following: https://bitcoin.org/en/choose-your-wallet
Where to start and what to buy?
If you want to start, i.e. purchase cryptocurrency, then you will have to study a lot of information to make sure you really want and need to buy cryptocurrency, choose a cryptocurrency wallet and buy your first cryptocurrency.
Important! If you decide to trade and use these cryptocurrency exchanges, make sure to use personal identification and 2FA login confirmation. Problems with unauthorised accounts are often encountered. A great variety of exchanges is available on the market, but it’s always best to choose the biggest and most renowned ones. Everything and anything could happen in an unregulated market, so please be cautious.
Please remember that cryptocurrency operations are still not regulated and are not entirely safe. They offer very promising opportunities, but just like in any other area the bubble could burst at any time. It is worth reading and learning more about this topic as it is very likely that it will change our lives in the nearest future.