When the term ‘cryptocurrency’ or ‘crypto’ is mentioned, you might have heard a little about this volatile investment space, or have no idea how it works. Either way, it always tends to invite discussion and interest amongst anyone who would like to start investing, especially when you mention Bitcoin, Ethereum or even Dogecoin.
If you have been interested in learning more about cryptocurrency or would like to start investing yourself, then you have come to the right place. Keep reading to find out more about starting on your crypto journey, what the risks are and how to safely begin investing in this space.
What is cryptocurrency?
Cryptocurrency is a digital form of currency that is defined by the way it is secured by cryptography, which makes it incredibly difficult to counterfeit or manipulate.
Another defining feature of cryptocurrencies is that they are usually part of a decentralised network that uses blockchain technology. This means that they do not come under the influence of any central authority, namely a government or larger financial institution, so are harder to influence by external parties.
In essence, they are virtual coins that can be purchased and traded for goods or services, or can be invested in for the purposes of making money. However, the volatility of cryptocurrency makes it one of the more high-risk investment options available in the UK.
How many cryptocurrencies are there?
According to Statista, there were just 66 cryptocurrencies available in 2013, but by the end of 2021 there were over 8,000. This just shows the surging popularity and subsequent creation of new and different digital currencies, with the figure rising month-on-month as the crypto investment space continues to blossom.
However, there are several top performing digital currencies that currently take the market share in terms of investment and popularity. They include:
- Binance Coin
At time of writing, the most popular digital currencies are undoubtedly Bitcoin and Ethereum, given that their price is in the thousands. This is more than likely to change over time, with the rise of new cryptocurrencies and Altcoins that will gain traction in the market.
At its height, Bitcoin reached a price of over $66,000 in September 2021 before dropping back down to half of that just a few months later. This shows not only the potential of investing in cryptocurrency (given that 1 Bitcoin was worth just over $100 in 2013), but also the risk in that the price can change so rapidly.
How to buy cryptocurrency in the UK
You are able to purchase cryptocurrency through many different online platforms known as Crypto Exchanges, all via a medium known as a Crypto Wallet where you can store your currency and manage it as you see fit.
- Crypto Exchanges – these are the platforms where cryptocurrency is hosted, meaning that you can access an overall view of crypto performance, and get advice on which ones would be suitable for you. They include exchanges such as Binance, Coinbase and Crypto.com
- Crypto Wallets – these work in the same way as a current account for your regular currency, in that it is a space to hold your digital currency and manage it as you please. They can be split into Hot and Cold Wallets
- Hot Wallet – this type of wallet is for, small, fast transactions and as such are usually constantly connected to the internet to allow for accessibility. They are easy to use but should not be relied upon to store all of your digital currency, as they are not as secure as Cold Wallets. This is also known as a Custodial Wallet, meaning that it can be accessed by the platform it is held on, as opposed to a Non-Custodial Wallet
- Cold Wallet – this type of wallet is much more secure and as such, is ideal for holding the majority of your cryptocurrency. It can be referred to as a Non-Custodial Wallet that you only have access to, and as such is much better for long-term storage of your digital currency
These two elements allow you to buy, sell and trade Cryptocurrency as you see fit. Like many online services they can be accessed on a desktop or through a mobile app at any time, which is especially important for fluctuating prices that are liable to change dramatically during a 24-hour period.
What are the risks of investing in crypto?
- Due to the volatility of many digital currencies, it would be wise to start small when it comes to investing in cryptocurrency as it would be classed as a high-risk investment.
- It might seem an attractive prospect to invest a lot of money, anticipating a quick return, but this can be difficult to predict and you can easily end up losing your money.
The price of a certain currency can change by thousands in a very short space of time, especially with the most popular coins, so it is worth warming up to the market first. That means getting used to how Crypto Exchanges and Wallets work, not to mention becoming familiar with the terminology that is so prevalent in this space.
Thankfully there are many resources that can help you become accustomed to the way in which Cryptocurrency works and how you can safely invest in it without taking on too much risk all at once.
The language of cryptocurrency
- Altcoin – any cryptocurrency that is an alternative to Bitcoin
- Blockchain – blockchain technology is what cryptocurrencies use to remain secure as it is a system that makes it very difficult to hack, manipulate or influence in any way
- The format involves a set of connected blocks that each represent a set of transactions, like an online ledger. Each time a new transaction is created it is independently verified by each member of the network and since an entire network has to verify the data, it makes it very difficult to manipulate
- Crypto Wallets – these work in the same way as current accounts but for your digital currency, either acting as an account for quick transactions and connected to the internet all the time (Hot Wallets) or an account that can only be accessed by one person and is designed for keeping larger amounts secure (Cold Wallets)
- Crypto Exchanges – these are the platforms used to buy, sell and trade cryptocurrency, giving you an overview of the market and allowing you to make an informed decision about your investment portfolio
- Decentralised Finance – based on similar emerging technology but with an emphasis on removing the control banks and financial institutions have on your money and improving transaction speed
- Otherwise known as DeFi, it is designed to serve the individual, as opposed to Centralised Finance (CeFi), which is used by banks with an emphasis on making money from you, but does offer traditional security
- It is still very early in its evolution but early applications include Peer-to-peer (P2P) financial transactions that use cryptocurrency in exchange for goods or services
- Fiat currency – government issued currency, as opposed to cryptocurrency
- Fork – a fork occurs in a blockchain when community developers change something about the original protocol or set of rules. This is usually to add functionality or improve security around the blockchain but this can actually lead to the fork being utilised to create an entirely new cryptocurrency
- Soft Fork – a simple amend to the protocol that is adopted by all users and carried forward
- Hard Fork – this is a radical change that means the new blockchain is not backward compatible with the original. This often leads to a brand-new cryptocurrency
If you aren't quite ready for the high-risk of cryptocurrency but are still interested in savings & investments, use the link below to find products to suit you.