It seems to be the buzz -word of the year but what exactly is Cryptocurrency?

Cryptocurrency is essentially a medium of exchange. Just like currencies such as the pound, the dollar and the euro but designed for the purpose of exchanging digital information, through a process made possible by certain principles of crypto currency. Or perhaps put simpler, it is a peer- to- peer electronic cash equivalent.

Unlike typical online financial transactions which involve commercial or government entities acting as the middle man, peer-to-peer currencies provide a way of moving value directly between two people in the same way that private transactions involving cash in hand or valuable items, such as gold, are done today.

Think of it as a sophisticated computer program that encrypts, verifies and records transactions. While users are anonymous, a public record or “block chain” is public and shared between system users. Mathematical proofs are used to verify the authenticity of each transaction.

A person’s crytocurrency is stored in a special file called a wallet, which also holds each address the user sends and receives the currency from as well as password/private key known only to the user, which is required before the cryptocurrency may be spent.

It is spent/exchanged by initiating a transfer request from an address in the wallet of the payer to an address of the payee.

While there have been dozens of initial coin offerings (ICOs) the undisputed champion remains bitcoin. Bitcoin is the first decentralized ledger currency. It is the Cryptocurrency with the most popular, most notable and highest market capitalization

The price of bitcoin has fluctuated wildly since it was launched in 2009, when two pizzas were bought for 10,000 Bitcoin. By 2013, each Bitcoin peaked in value at $1,000.

Some see Cryptocurrency as an eventual replacement for traditional, government-issued money. Even with the recent declines, the price of bitcoin has more than tripled this year; another crypto currency, Ethereum, has gained more than 2,300 percent. The success of these currencies has created a new class of “crypto-millionaires” and spawned hundreds of other digital currencies, called altcoins.

But when it comes to actually making day-to-day transactions, bitcoins aren’t yet as useful as conventional currency. At the moment, only a handful of businesses, mostly online, accept bitcoins as payment. Compared to more conventional investments such as stocks or bonds, the market for bitcoins is still in its infancy. It is not legal tender. No law requires companies or individuals to accept bitcoins as a form of payment. Instead, bitcoin use is limited to businesses and individuals that are willing to accept bitcoins. If no one accepts them, bitcoins will become worthless.

Unfortunately most people who invest in bitcoin have little or no understanding of what they are buying. There still seems to be a great deal of confusion concerning what exactly Bitcoins are, and whether they truly represent a once-in-a-lifetime investment opportunity or if there is a bitcoin bubble ready and poised to burst.

At a very basic level, there are two obvious sources of risk: High volatility by definition makes bitcoin risky.  Bitcoins can be traded for traditional currency at exchange rates that fluctuate. As is nothing short of evident, bitcoin prices have been extremely volatile, and are subject to wide price swings.

And then there are the obvious security risks. Given the relative infancy of all parties involved in the act of investing in bitcoin the security protocols and interfaces, etc. are ripe for attacking from a hacker’s point of view. Unlike our tangible monetary system it is not properly regulated and so it has none of the stability mechanisms typically associated with a currency.

Speculators have been drawn to cryptocurrencies as a way to make a quick profit. But like any speculative investment, from real estate to equities, you can lose money. With digital currency, profits or losses are virtually impossible to predict.

What is certain is that It is not a safe haven: despite excitable claims the price could hit $10,000, where it goes next is anybody’s guess, so investors should approach with caution. Warren Buffett called it all a ‘mirage’ a few years ago.

I would say it’s probably best not to think of it as funding your retirement. But hey! Don’t listen to me too carefully. If I’d invested £100 in Bitcoin every time I told someone else it was a bad idea I would probably be sat drinking margaritas on a beach right now.