You will have heard stories of people making a fortune trading Bitcoin – so how do you cash in on cryptocurrencies without getting your fingers burned?
A lot of people have lost a lot of cash playing with digital currency investments – but Bitcoin and others are currently riding high.
So can you really make a killing out of random numbers generated in the ether?
Closing on Netflix
It’s certainly tempting. With Bitcoin’s market cap now hovering around the $70bn mark, it’s fast approaching Netflix’s valuation of $78bn.
Bitcoin’s value has risen from $997.69 on 1 January to $4,237.05 on 12 September – that’s an increase of 320% in just under nine months.
However, there have also been some big falls. On 11 June 2017 it hit a high of $3,018.54, then plummeted to $1,938.94 by 16 July.
It has since bounced back – but it would have taken nerves of steel not to sell when the fall started. We’ve seen in the past that Bitcoin can be subject to big fluctuations.
So can you trade Bitcoin and other digital currencies safely?
How cryptocurrencies work
First, it’s important to understand how they work. Everyone is familiar with the concept of a hard currency such as the dollar or the pound, issued by a central government.
A digital currency such as Bitcoin is generated by an opensource, peer-to-peer network.
All cryptocurrencies make use of what is called distributed ledger technology, or ‘blockchain’ – a database in the cloud that is continuously updated and certified.
Each new transaction creates a ‘block’ of data that is completely tamper-proof thanks to complex cryptographic algorithms that give the currency its name.
New bitcoins are ‘mined’ using special software, with rival teams competing to solve complex mathematical problems. They are paid with new bitcoins, generating new currency that has an intrinsic value – the financial effort put into producing it.