What are cryptoassets?
There are thousands of types of cryptoassets out there – or, as you might know them, cryptocurrencies. You have probably heard of a few: Bitcoin, Ripple, Litecoin and Ethereum have all been mentioned in the news. But what are they exactly?
Well, let’s start by breaking down the word ‘cryptocurrency’. The first part, ‘crypto’, comes from the Latin word for ‘hidden’ or ‘secret’. This reflects not only the secure technology used to make payments and record who owns what, but also the fact that they exist purely electronically – and there is no central bank or government to manage the system and step in if something goes wrong.
The second part, ‘currency’, explains why they were designed in the first place: they are a type of electronic cash.
But cryptocurrencies are not like the cash we carry. They are an alternative way of storing value, with transfers and payments occurring through a peer-to-peer system. In other words, users can send and receive the ‘cash’ directly without an intermediary such as a bank.
Some find this appealing because they think it means they have more control over their funds, and it frees them from relying on traditional financial institutions and government regulation. But there are significant risks; with no banks or central authority to protect you, if your ‘money’ is stolen or mishandled, no one is responsible for helping you get it back.
How is cryptocurrency created?
Bank of England's explainer on cryptoassets.
-
Different cryptocurrencies are created in different ways. One you may have heard of is mining; this is how bitcoins are created. Bitcoin miners check for transactions on the network; this is where users send and receive bitcoins or store the digital currency. Then they work out complicated mathematical puzzles using extremely powerful computers to find out if the transactions are valid. If they are valid, the miners record them on a public log of who owns what. Miners are paid for doing this in new bitcoins. This log is known as the distributed ledger. You may have heard of the term distributed ledger technology – that’s what it means. The ledger is called the block chain because as transactions are validated they are bundled up into blocks, which are then added to the end of the ledger. Each block includes a reference to the previous one, linking them all together in a long chain. Linking blocks together in this way makes it very difficult to tamper with the ledger. Someone trying to cheat the system would need to get more computing power than all the miners put together. This means bitcoin and similar platforms are very secure – but also very expensive to run.
What can you buy with them?
Put it this way, you wouldn’t use cryptocurrency to pay for your food shop. In the UK, no major high street store accepts cryptocurrency.
It is generally slower and more expensive to pay with a cryptocurrency than a recognised one such as sterling.
Development is under way to make cryptocurrencies easier to use, but for now they can’t really be considered a legitimate form of money. This is why central banks refer to them as ‘cryptoassets’ instead of ‘cryptocurrencies’.
Today, they are generally held as investments by people who expect their value to rise.
Some cryptoassets have risen in value but many have dropped considerably. As the chart below shows, they are extremely unpredictable – even if you compare them to other unstable assets such as oil.
How unpredictable is their value?
Very. Let’s use Bitcoin as an example.
From 2015 to 2024, the value of the pound did not change by more than 10% in one day. On the other hand, the value of Bitcoin changed significantly during the same period – rising by 22% in one day and falling by 26% on another.
Huge changes like these show how volatile cryptoassets are (and Bitcoin is one of the more stable ones). They are a very risky investment.
If you are thinking of investing in one, you need to be prepared for your investment to go up or down. It is even possible that its value could fall to zero – making it worthless.
