Why is the CBA offering crypto services?

The Commonwealth Bank’s announcement this week that it’s about to enter the world of cryptocurrency services for its customers is a timely reminder of about the need to keep up to date with the rapidly changing global economy.

While there is no shortage of information around, here’s a brief overview based on our research. Please note this is general information only.

So what is cryptocurrency?

Cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend.

Cryptocurrency is a decentralised network based on blockchain technology.

A blockchain is an open, distributed ledger enforced by a disparate network of computers that records transactions in code.

In theory, any type of contract between two parties can be established on a blockchain as long as both parties agree on the contract. This takes away any need for a third party to be involved in any contract.

In order to conduct a transaction on the blockchain, users agree to pay a small fee, which helps maintain the security of the blockchain itself. A storage wallet is also needed.

There are several types of cryptocurrencies on the market, although the most popular versions are Bitcoin and Ethereum.

A feature of most cryptocurrencies is that they have been designed to slowly reduce production and some have an absolute limit on supply. For example, the number of Bitcoins is not expected to exceed 21 million.

Ethereum, on the other hand, works slightly differently with issuance capped at 18 million. Ethereum tokens per year, which equals 25 per cent of the initial supply. Limiting the number gives it higher value.

What can it be used for?

The original appeal was that cryptocurrency functions outside of traditional banking and government systems, rendering them theoretically immune to government interference or manipulation.

These days, cryptocurrency is being used by its owners to pay bills or make purchases or as collateral to obtain online loans or to invest in business start-ups.

The list of items that you can buy with digital currency increases as more merchants see the advantage of offering a wider variety of payment options.

In fact, the first purchase reportedly made with Bitcoin was two pizzas for 10,000 Bitcoin.

How does it work?

To send an amount of Bitcoin to a friend, you create a transaction using your Bitcoin wallet and request to send Bitcoin to your friend's wallet, agreeing to pay a nominal transaction fee along the way.

After you make the transaction request, your transaction gets grouped with other transactions into a block on the Bitcoin blockchain.

Miners validate new transactions and record them on the global ledger, ie the blockchain.

Some of the attractions are the speed of transaction and low fees compared with using traditional money transfer services.

How risky is it?

Cryptocurrencies face criticism for their use for illegal activities, exchange rate volatility, and vulnerabilities of the infrastructure underlying them.

On the other hand, they have been praised for their portability, divisibility, inflation resistance, and transparency.

At the end of the day, cryptocurrency carries risk just like any other investment.

Successful traders and investors have built digital fortunes thanks to the volatility of Bitcoin. However, others who weren't so lucky, lost their funds quickly.