Why should I invest in Cryptocurrency, what is Bitcoin, Iota and Ripple and what are the risks involved?

DESPITE news about Bitcoin and others dying down recently, it is still worth getting your head around the cryptocurrency explosion.

In this guide, we explore the important questions behind the cybercash surge, the potential risks of investing in it and whether it is all just a bubble.

What is cryptocurrency?

Cryptocurrency is a digital money system designed to make transactions super secure.

The complex tender uses cryptography - a form of secret coding originating from the Second World War - to process transactions securely and to verify them.

A host of different currencies exist under the cryptocurrency banner. The most well-known, Bitcoin, was created in 2009 as a form of digital money and world payment system.

Mining Bitcoin involves a computer solving a difficult mathematical problem with a 64-digit solution. For each problem solved, one block of Bitcoin is processed and the miner is rewarded with new Bitcoin.

Over the past year, Bitcoin has exploded in value and seen a drop-off afterwards - with a single coin worth £12,908 on December 20 sloping to £9,802.77 on January 1.

Unlike regular money, the cybercash has no physical presence and differs from regular transactions by using decentralised control as opposed to central banking systems.

Normally in banking, corporate boards or governments control the supply of money by printing units of money or demanding additions to digital banking ledgers.

But in the world of cryptocurrency, the production of currency is generally capped. Bitcoin's younger brother Litecoin consists of 84 million units, for example, as opposed to its sibling's 21 million.

The same is true of "altcoins" - similar currencies which have been launched in Bitcoin's wake that include Ethereum and Ripple, a system to connect different payment systems together.

What risks are involved with investing in Bitcoin, Iota and Ripple?

The legal status of cryptocurrencies varies substantially from country to country and is still undefined or changing in many of them.

Only yesterday, the head of the US Securities and Exchange Commission warned bitcoin and other cryptocurrency investors to be aware of scams and criminal activity in the sector.