Last update: 12/11/2021
We tell you everything you need to know about them.
What are cryptocurrencies?
They’re digital assets that use cryptographic coding to guarantee the ownership and integrity of transactions, and to prevent someone from making additional units from copies (like with a photo). Cryptocurrencies do not exist physically, but rather are stored in a digital wallet.
How do they work?
Cryptocurrencies are markedly different to traditional tender. They’re not regulated or controlled by institutions, and transacting with them doesn’t require an intermediary. They’re subject to a decentralized database, blockchain or shared accounting registry that oversees transactions.
Cryptocurrencies are an unregulated means of payment. They are not backed by a central bank or public authority, and are not covered by customer protection mechanisms such as the Deposit Guarantee Fund or the Investor Guarantee Fund.
It’s crucial to remember that when you trade a cryptocurrency, you cannot cancel the transaction because the data in a blockchain registry cannot be deleted. To “reverse” a transaction, you must do the opposite.
Since cryptocurrencies have no physical form, you can only store them in a digital wallet (which are also not regulated).
How many types of digital wallets are there?
A digital wallet is software or an application you can use to store, send and receive cryptocurrencies. Unlike a physical wallet, they hold the keys that give you ownership of, and rights over, the cryptocurrencies you can use for transactions or transfers. If you lose the keys or they are stolen, you may lose the associated cryptocurrencies, with no way of recovering them.
There are two types of wallets: hot and cold. While hot wallets are connected to the Internet, cold wallets are not. Hot wallets include web wallets, mobile wallets and desktop wallets ( which needa computer connected to the Internet). Cold wallets include hardware wallets and paper wallets, which are simply a printout of a private key.
How is a cryptocurrency valued?
A cryptocurrency’s value varies according to supply, demand and user commitment. There are no effective mechanisms to prevent manipulation (such as those in regulated securities markets), so prices are often set without public information to back them. We recommend you read this joint press statement by Banco de España and the Spanish stock market authority (CNMV) on the risks of buying cryptocurrencies.
Cryptocurrencies use blockchain
Cryptocurrencies operate through a shared accounting registry known as blockchain. Blockchain technology provides heightened security and prevents single digital assets being transferred twice or forged. It serves as a large accounting ledger for recording and storing vast amounts of information. That information is shared in the network and protected, preventing it from being altered or deleted.
What is "cryptocurrency mining"?
This is the process required to validate transactions made with digital assets, which for bitcoin means verifying and recording transactions in the blockchain.
Cryptocurrency mining involves successfully solving the mathematical puzzles that arise, and miners are rewarded with cryptocurrencies.
How many cryptocurrencies are there?
To create cryptocurrencies, you must know cryptography or, at least, how to program to clone code from another cryptocurrency. That code is used to create a cryptocurrency, like bitcoin, ether and thousands more.
What is a bitcoin?
Bitcoin was the name given to the first cryptocurrency. In 2009, a person or group by the name of Satoshi Nakamoto created bitcoin with blockchain technology (which they had also invented).
How can I acquire bitcoins?
By trading them on specialized exchanges. You should keep in mind that bitcoins and other cryptocurrencies are complex instruments that might not suit you if you lack the required knowledge. In addition, their price is highly speculative, which could lead to the loss of what you paid for them.
For more information on bitcoin, see this piece by Openbank and this from Finanzas para Mortales (Finance for Mortals).