Bitcoin: what is the controversial cryptocurrency, price, can you buy it - and how does it work?

The FCA has sent out a warning to investors in cryptocurrencies

Those investing in so-called cryptocurrencies like Bitcoin have been warned by the Financial Conduct Authority (FCA).

The watchdog has said investors should be “prepared to lose all their money” if the value of their investment collapses, since cryptocurrencies are not covered by investment regulation or protection.

It comes as the price of Bitcoin, which is the world’s most infamous cryptocurrency, hit record highs.

The price of Bitcoin recently hit record highs (Getty Images)

So, what is Bitcoin, how does it work - and how do you buy and sell it?

Here’s everything you need to know.

What is Bitcoin?

Bitcoin is the world’s biggest cryptocurrency which emerged following the 2008 financial crisis.

With Bitcoin, people are able to bypass banks and traditional payment methods, as it is a type of digital currency that it is completely virtual.

The fact that it is not controlled by the government or banks makes Bitcoin popular with investors.

People can use it to buy products and services, but hardly any shops accept the cryptocurrency.

How does it work?

Bitcoins are not physical coins. Instead, each Bitcoin is made up of a string of code.

It is essentially a computer file which can be stored in a “digital wallet” within a smartphone or computer.

Other people can send Bitcoins - or parts of Bitcoins - to your online wallet, and you are able to send them back, forming a digital transaction.

Each transaction is recorded publicly, on something that is called the “blockchain” - a shared database of transactions.

The blockchain’s history is traceable, so people are not able to spend coins they don’t own or make copies of Bitcoins.

People called “miners” secure the blockchain using high-powered computers which verify Bitcoin transactions.

There are currently more than 18.5million Bitcoins in existence.

How do you buy and sell Bitcoin?

There are three main ways that people can acquire Bitcoins - buying them using “real”, government-issued money (known as “fiat” currency), selling things in return for Bitcoins or creating them using a computer.

If someone does swap traditional fiat currency for cryptocurrencies, they must be stored in a digital wallet.

Finance firms have even created new investment products which are based on Bitcoin and other cryptocurrencies.

What can you buy with Bitcoin?

Buying and selling with Bitcoin isn’t simple.

There are problems when it comes to using a cryptocurrency, as it tends to swing in value - meaning it is difficult to place a reliable price on goods and services.

Sometimes, within a space of a single hour, Bitcoin’s value can fall by thousands of pounds before rising again by a similar amount.

There are ways to pay for goods using Bitcoin through certain apps, like BitPay, which can convert crypto funds in a digital wallet to pay for things in traditional currencies.

As transactions have increased, firms including Microsoft, Lush and Expedia now accept Bitcoin payments.

In a world-first, in 2010 a Florida man paid a British man 10,000 Bitcoins to order him two Papa John’s pizzas, which would be worth more than $300million today.

What is Bitcoin’s current value?

Media attention, investments by finance firms, and comparisons between Bitcoin and gold have all recently influenced the price of the cryptocurrency.

Last week, the price of Bitcoin surged to a record high of almost $42,000.

However, it quickly dropped by as much as 25 per cent a few days later.

On Thursday 14 January, it briefly bounced back above $40,000.

Some economists believe that Bitcoins are entirely worthless, whereas some investors view the cryptocurrency in the same way as gold - that it can hold its worth during times of economic stress or rising inflation.

But for it to have real value experts have said it needs to become much less volatile.