Bitcoins and other cryptocurrencies: everything you need to know

Bitcoins, digital currency, cryptocurrencies, blockchain etc. What are cryptocurrencies, and what should you know about them? We take a look at how cryptocurrencies are created and how they work.

What cryptocurrencies are

What we know as cryptocoins or cryptocurrencies are digital media for the exchange of goods and services. Cryptocurrencies do not have any physical support such as legal tender - the euro or the dollar, for example - and are stored in a digital wallet , and operate with a cryptographic code to guarantee ownership, ensure the integrity of transactions, and prevent any copies being made.

The pioneer cryptocurrency, the Bitcoin, was created in 2009 and gave rise to the first decentralised network of payments among peers, i.e. with no authorities or central banks acting as intermediaries. This innovation was brought about by Satoshi Nakamoto, the pseudonym used by the person or group of people who invented the protocol programming this cryptocurrency. Since then over 7,000 different cryptoassets have been created, although their characteristics are similar to the Bitcoin.

If you want to know more about Bitcoin, you can watch the documentary "Banking on Bitcoin".

Operational cryptocurrencies

In addition to Bitcoin, other cryptocurrencies have become popular in recent years, such as Ethereum, Dogecoin or XRP - formerly known as Ripple. The following are a few of the best known cryptocurrencies on the market:

How cryptocurrencies are created and how they work

Cryptocurrencies are digital assets which use a cryptographic code to guarantee ownership and ensure the integrity of transactions. The transaction with Bitcoin or other cryptoassets is carried out through the coincidence of public codes, related to the passwords - or cryptographic codes - created by the users.

For their operation, cryptocurrencies combine peer-to-peer services (P2P) with cryptography. The shared accounting records or blockchain guarantees security, preventing the same asset being used twice or being forged, for example. When a transaction is carried out, a blockchain entry is made which guarantees its security.

Users wishing to carry out transactions with cryptocurrencies must have an electronic wallet, to send or receive Bitcoin, Ethereum or any cryptocurrency they wish to operate with. The electronic wallets are used on mobile applications, and they look and operate like online banking wallets, but they do not have the backing of a regulated body controlling the transactions.

The fact that cryptocurrencies are created with an open code enables anyone with sufficient programming knowledge to create their own digital asset on the basis of one that already exists.

To acquire cryptocurrencies, however, users have two options:

At the moment, there is only a limited number of sites which accept payment in cryptocurrencies, although platforms and online shops are gradually joining the system. For example, Microsoft, some restaurants in the Subway chain or the travel platform Destinia accept Bitcoin payments. Other companies such as Amazon do not accept Bitcoin payments directly, but they can be made on payment gateways acting as intermediaries, such as Bitrefill or Fold.

Are cryptocurrencies dangerous?

The popularity garnered in recent months by cryptocurrencies, especially Bitcoin and Ethereum, has led the authorities to point out the characteristics and risks of using this type of asset. In fact, the European Supervisory Authorities tasked with overseeing the financial system (EBA, ESMA and EIOPA) recently announced that cryptoassets are not suitable as an investment or as a means of payment or exchange for most retail consumers.

In this regard, Spain's National Securities Market Commission (CNMV), the Bank of Spain and the Directorate General of Insurance and Pension Funds have echoed the European Union's warnings, and have stated that current regulations cover only a very limited portion of the activities that can be carried out with cryptoassets. Specifically, the CNMV and the Bank of Spain have introduced two legal initiatives within the last year:

This legal situation is, on the criterion of the authorities, “insufficient to properly contain the risks” to investors from transactions with cryptocurrencies.

With respect to these risks, as the CNMV has pointed out on several occasions, cryptocurrencies are not considered a means of payment and their circulation is extremely limited, i.e. this is a low-liquidity asset, thereby compromising someone who wishes to withdraw their investment without sustaining significant losses.

Also, from the point of view of investor security, the Spanish stock market regulator and the European Central Bank insist that cryptocurrencies are not subject to any specific regulation to provide investors and protection similar to that afforded to financial products, they do not have the backing of a central bank or any other public authority, and they are not covered by customer protection mechanisms such as the Deposit Guarantee Fund or the Investor Guarantee Fund.

The swings observed in the price of several of these cryptocurrencies have also led the authorities to focus on three factors which point to their risks as investment assets: their extreme volatility, their complexity, and lack of transparency.

Since they are complex instruments, they may not be suitable for small-scale savers. The price of cryptocurrencies is established in the absence of any authority with effective mechanisms to prevent manipulation. This means the price of these assets has a considerable speculative component, and people could lose their entire investment.

Another aspect to bear in mind is that the distributed ledger technology currently used to issue cryptoassets entails specific risks: loss or theft of the private passwords used to gain access to portfolios can lead to total loss of the assets, with no way of retrieving them.

Finally, the lack of transparency and the way in which these assets can operate anonymously have propagated their use by cybercriminals. There are increasing instances of money laundering with cryptocurrencies or scams via trading web pages, e-mails or messages on social media inviting people to buy cryptocurrencies in order to purchase certain fraudulent goods or securities. Cybercriminals also home in on users' ignorance concerning the purchase of these products, by creating fake cryptocurrency purchase web pages, where users do not receive the product purchased although they have paid for it.

The complexity of these assets means that investors are vulnerable to this kind of scam, and so the following recommendations should be observed at all times:

The use of cryptocurrencies is an emerging reality. Compile the necessary information to find out how to take action at any given time, assess any risks, and find the risk technology concerned.