What is Bitcoin and why did the price drop?

BITCOIN’s value has crashed in recent weeks after hitting record highs.

The cryptocurrency rose quickly in value at the start of the year, but it has since taken a dramatic tumble following a crackdown in China and announcements made by Tesla boss Elon Musk. We explain what you need to know.

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What is Bitcoin?

Bitcoin is a virtual currency that was created in 2009 by an unknown computer whizz using the alias Satoshi Nakamoto.

Unlike physical currencies such as pounds, dollars or euros, which come in physical notes and coins, Bitcoin isn’t printed or minted.

Instead, Bitcoin tokens are a digital-only form of payment and are created by a computer code.

If you have invested in Bitcoin, you can set up a virtual wallet to store, keep track and spend your digital money.

You are also able to purchase Bitcoin through an online exchange or Bitcoin ATM –  but not all businesses accept Bitcoin as a form of payment.

You can use the Where To Spend Bitcoin UK website to find merchants that accept the currency.

How does Bitcoin work?

To process Bitcoin transactions, a procedure called “mining” must take place, which involves a computer solving a difficult mathematical problem with a 64-digit solution.

For each problem solved, one block of Bitcoin is processed. In addition, the miner is rewarded with new Bitcoin.

To compensate for the growing power of computer chips, the difficulty of the puzzles is adjusted to ensure a steady stream of new Bitcoins are produced each day.

There are currently about 21million Bitcoin tokens in existence.

To receive a Bitcoin, a user must have a Bitcoin address – a string of 27-34 letters and numbers – which acts as a kind of virtual postbox.

These addresses are in turn stored in Bitcoin wallets, which are used to manage savings.

The bulk of Bitcoin “mining” is done in China, where energy costs are cheaper than in places like the UK or US.

Is Bitcoin safe?

Anyone thinking of investing in Bitcoin or any other cryptocurrency should be very careful.

Their values are incredibly unpredictable, with the ability to plummet as quickly as they shoot up.

Like with all cryptocurrencies, this means if you choose to invest in Bitcoin, you can lose your money if the value of it drops.

For example, on January 9, 2018, Bitcoin and other major currencies crashed by £120billion after major monitoring platform CoinmarketCap decided to leave out the trading prices from South Korea.

Cryptocurrencies themselves are only regulated in the UK for anti-money laundering and counter-terrorist financing.

If you decide to invest, your money won’t be covered by the Financial Services Compensation Scheme (FSCS) which protects up to £85,000 of your savings if a firm goes bust.

You also won’t be able to go to the Financial Ombudsman Service if something goes wrong. 

But firms offering cryptoassets must now be registered with the Financial Conduct Authority (FCA) and anyone who does invest in cryptocurrencies should check before investing.

In a warning in January, the FCA said Brits risk losing their money if the price of Bitcoin plummets.

Meanwhile, in October 2020, the FCA banned Brits from buying a “harmful” type of cryptocurrency-related investment in the UK known as an Exchange Traded Note.

Exchange Traded Notes are an investment product that tracks the price of cryptocurrencies in the same way that others track the price of gold or other investments.

Investors in these products make or lose money based on a cryptocurrency’s current or future price.

But people can still continue to buy cryptocurrencies directly and invest them or use them as currency.

How do I buy Bitcoin and why did the price go down?

Several marketplaces called “Bitcoin exchanges” allow people to buy or sell Bitcoins using different currencies.

People can also send Bitcoins to each other using mobile apps or their computers in the same way people send cash digitally.

The value of Bitcoin, like all currencies, is determined by how much people are willing to exchange it for.

The value of Bitcoin has fluctuated wildly since it was introduced.

Last year, the currency was around the $23,000 mark before it moved up to around $36,000 in January.

Then in February the cryptocurrency soared to a new high of $50,000.

In March, the currency climbed up further to $61,742. It then soared above $62,000 at the beginning of April before slumping again to around $42,000.

This month the cryptocurrency has fallen back to below $40,000 after Elon Musk withdrew his support for the currency and Beijing announced its ban.

Tesla boss Elon Musk had previously said his car firm had bought $1.5billion of Bitcoin and said his business would accept them as payment for its cars.

However he later said the electric car company would not accept the digital currency due to environmental concerns over how it is mined.

China this week also banned banks from providing services related to cryptocurrency transactions, and warned investors against speculative crypto trading.

At the time of writing, the value of Bitcoin is $39,790, or the equivalent of £28,076.

It’s down by just 1% over the past 24 hours, according to CoinMarketCap, but is down by a third over the last month.

Bitcoin has suffered a series of other blows in recent months, including Turkey’s announcement that it would ban crypto payments.

This goes to show that its volatile nature means you should be aware of all the risks involved.

Because your cash can go down as well as up, you’ll need to be prepared to lose any money you invest.

Although it’s possible the currency might still go further up, investing in cryptocurrencies or stocks and shares is not a guaranteed way to make money.

For instance, the price of Bitcoin plummeted when the coronavirus crisis first hit, falling to lows of £3,300 last March.

People considering investing in Bitcoin or shares and stocks have been warned over “risky” tips being shared on TikTok.

How risky is Ripple’s XRP? The dangers of buying the cryptocurrency explained.

The price of Dogecoin saw a recent surge but it is unpredicatble so again, you should be aware of the dangers.

This post first appeared on thesun.co.uk