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What are cryptoassets?

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In any reading of the newspapers in recent years, you are almost certain to have come across the term cryptoassets. What are they, what do they do, and how useful are you are likely to find them?

What are cryptoassets?

Cryptoassets are also known as cryptocurrencies – and therein lies the key to the definition. “Crypto” is from the Greek word for hidden or secret, explains the Bank of England. “Currency” comes from the Latin and, of course, represents the cash used as a means of exchange.

Some of the more wildly known cryptoassets are Bitcoin, Ripple, Litecoin and Ethereum.

Unlike the physical cash in your pocket, however, cryptocurrency is entirely electronic, and its transactions are masked by secrecy and effectively hidden from normal view. That is the appeal of cryptoassets to some people, who welcome the anonymity and who feel that the electronic peer to peer transfer of funds gives them greater autonomy, free of the mediation of any banking system. This makes the medium of exchange less like money, so banks prefer the term cryptoassets over cryptocurrencies.

That so-called freedom from central authorities and formal banking systems, though, leaves the user of cryptoassets entirely on their own – if your funds are stolen or misappropriated in any way, it is up to you alone to bear the consequences.

How are cryptoassets made?

In the absence of any physical notes or coins and without the regulation of any central banking system, how are cryptoassets made?

Cryptoassets and currencies are made through a process of “mining” explains the Money Advice Service. Mining describes the way the cryptoassets emerge from a series of complex mathematical problems that create a so-called “blockchain”. The blockchain provides both the security for the electronic transactions made and keeps a permanent record of those same transactions.

Compared with traditional forms of money, therefore, cryptocurrencies enable cheap, fast, and secure transactions. Although you cannot yet use your cryptoassets to buy the groceries at your local shop, there is no reason at all why that should not one day become the case. An article in the Independent newspaper on the 14th of May 2019 explained how some international retailers have already begun to accept such payments.

How useful are cryptoassets?

One of the principal obstacles to the development of cryptoassets as a genuine, alternative currency and mainstream form of payment is the extreme volatility of the cryptoassets – represented by their “tokens”.

Put simply by the Financial Conduct Authority (FCA) cryptoassets represent “a very high risk, speculative investment”. More than that, if you do decide to invest in such assets, be prepared to lose all your money, warns the FCA.

An illustration of the extreme volatility of cryptoassets is provided by the Bank of England which remarked that in the four years to 2018 oil prices fluctuated by less than 10% in any one day. One of the leading and best-known cryptoassets, Bitcoin, by contrast, increased in value by 65% one day, only to plunge by 25% another.

Until cryptoassets become more widely accepted into the mainstream, regulation remains practically non-existence. The FCA notes that such assets are regulated only for the anti-money laundering and other crime prevention purposes.

Given the novelty of cryptoassets, taxation on holdings and trading is such assets is an understandably complicated process – explained in some detail by HM Revenue & Customs.

This data is correct as at the time of writing.

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