News
A Beginner’s Guide – Forbes Advisor UK
Summary
Show more Show less
Cryptocurrency has long been a hot topic in investor circles, but its popularity has increased significantly in recent years. While it is undoubtedly an extremely risky investment where you could lose all your money, some investors see it as a legitimate option to include in a portfolio.
If you are new to this market, remember that purchasing cryptocurrency comes with inherent risks, just like any investment. It is important to conduct thorough research and understand how each type of cryptocurrency works before making any investment decisions.
What is cryptocurrency?
Cryptocurrencies are digital currencies that generally operate outside the regulation of any single company or government. Unlike traditional currencies such as the pound or the US dollar, cryptocurrencies are not backed by a central authority, such as the Bank of England.
They are instead overseen by an online, decentralized network of users. Cryptocurrencies are often imagined and called digital coins or tokens. They are protected using sophisticated encryption blockchain technology – meaning that they are, in fact, self-regulated by those who create, own and trade them.
You can use crypto “coins” to make purchases online, just like you would with regular money. However, the options of merchants who accept cryptocurrencies are more limited than those who accept traditional currencies.
When you make a crypto transaction, a group of computers using blockchain software checks whether the payment is valid. If everything is in order, the transaction is processed.
The blockchain system acts as a digital public ledger, recording all transactions. Miners or validators monitor these transactions and get paid for their work. After a transaction has been reviewed and confirmed, the person receiving the money can access it using their secret code, often called a private key.
In addition to using cryptocurrency as digital money, some people invest in it hoping that its value will increase over time, similar to investing in stocks or gold, although, as noted, the risks associated with cryptocurrencies are extremely high.
Types of cryptocurrencies
In 2009, Satoshi Nakamoto introduced the first cryptocurrency, bitcoin. With a market capitalization of more than $1 trillion, bitcoin is now the largest cryptocurrency in the world.
Today there are nearly 10,000 cryptocurrencies in total, totaling a market capitalization of over $2 trillion.
Some of largest cryptocurrencies to include:
Bitcoin (BTC)
Like other cryptocurrencies, bitcoin operates on a blockchain or shared public ledger. To ensure security and prevent fraud, transactions must be verified through a process called proof of work, in which miners solve cryptographic puzzles.
The value of Bitcoin has seen a substantial increase over the past decade, gaining widespread recognition. In May 2016, one BTC cost around $500. However, as of May 2024, the price had skyrocketed to over $60,000 for a single Bitcoin. This is an increase of 11,900%.
Ethereum (ETH)
It wasn’t until 2011 that alternative cryptocurrencies, later dubbed “altcoins,” entered the scene. However, the launch of Ethereum in 2015 really brought altcoins into the limelight, marking the beginning of their growing popularity. However, Ethereum stands out as the most prominent altcoin, with a market capitalization beaten only by Bitcoin.
While bitcoin aims to function as a decentralized currency, Ethereum is more like a computer network. It allows people to run special decentralized applications, or DApps, and set up smart contracts on their system.
Tether (USDT)
Tether, along with other similar tokens, is distinguished from other cryptocurrencies by its classification as a stablecoin. The value of a stablecoin is usually pegged to another store of value. Most often this is a government-issued currency, such as the US dollar, but it could be gold or some other commodity.
In theory, the stablecoin will have a method of holding its value equivalent to its peg, regardless of whether that peg is the dollar, the euro, or something else. In the case of Tether, the value of the token is maintained by reserves of US dollars equivalent to the total value of USDT.
In this way, Tether and other stablecoins are expected to exhibit greater stability than other cryptocurrencies, making them the preferred choice among investors concerned about the volatility of digital assets.
Solana (SOL)
Solana was designed to support decentralized finance, or DeFi applications, DApps and smart contracts. It uses a unique method that combines proof of participation and proof of history to process transactions quickly and securely. The platform’s native token, SOL, powers its operations.
Binance Coin (BNB)
Binance Coin is a cryptocurrency used for trading and commissions on Binance, one of the leading cryptocurrency exchanges globally. Introduced in 2017, BNB now performs multiple functions, including trading, payments and travel bookings.
Pros and cons of investing in cryptocurrency
While proponents of cryptocurrency investing may cite benefits such as decentralization, accessibility, and diversification, many investors see potential returns as the biggest advantage of investing in cryptocurrencies.
However, it is important to also recognize the risks of investing in cryptocurrencies. Cryptocurrencies often experience dramatic price swings, and as government regulations evolve, volatility is likely to continue. Security can also be a concern. Not all crypto projects are created equal, and many investors have been victims of scams or fraud in the cryptocurrency industry.
As is often said, anyone considering investing in cryptocurrencies should only invest what they are willing to lose. The cryptocurrency has produced substantial profits for some investors, but others have suffered significant losses.
What to consider before investing in cryptocurrency
Before diving into any investment, including cryptocurrencies, you need to do your due diligence. When evaluating whether a cryptocurrency investment is right for you, be sure to consider the following:
- Project details Each cryptocurrency has its own investment thesis, consensus mechanism, and use cases. It is important to understand the details and unique investment proposition of each cryptocurrency before getting involved.
- Your risk profile Be honest with yourself when evaluating your risk profile and the volatility of any cryptocurrency. Any cryptocurrency investor should be prepared for the possibility of a sharp price drop.
- Your investment goals Ask yourself how a cryptocurrency investment would fit into your broader financial goals. It is important to ensure that you are not relying entirely on your cryptocurrency investment for essential life goals such as retirement. Diversification and planning are key.
How to invest in cryptocurrency
For beginners entering the realm of cryptocurrencies, going through the process of purchasing digital currencies can seem daunting. However, you can start your cryptocurrency investment journey by following these simple steps.
1. Choose a cryptocurrency broker or exchange
There are two ways you can buy bitcoin and other cryptocurrencies: through a broker or through a cryptocurrency exchange.
- Cryptocurrency brokers make it easy to buy cryptocurrencies, but they may charge higher fees or limit moving holdings off the platform. Some investors prefer to store coins in crypto wallets offered by these platforms for added security.
- Cryptocurrency exchanges like Coinbase, Gemini and Binance offer platforms for buying and selling digital currencies. However, these platforms can be overwhelming for new investors. While intuitive options make buying easier, they usually come with higher commissions than standard trading platforms.
2. Set up an account
Once you have selected a cryptocurrency broker or exchange, you will need to create an account. Typically, this requires registering and providing personal information to prove who you are, often known as knowing your customers’ protocols. This may involve entering information from your driver’s license or passport. Sometimes you may need to provide a photo or ID of yourself.
3. Add funds to invest
Before you can start investing in cryptocurrencies, you need to make sure that the funds are available in your account. You can add money to your account through various methods, including linking it to your bank, initiating a wire transfer, or using a debit card (some banks place limits on how much you can transfer to a crypto account per month). The time it takes for funds to become available in your account varies depending on the deposit method and the cryptocurrency broker or exchange you choose.
Avoid borrowing to finance your crypto transaction as this simply increases the potential damage of losing your investment. This includes not using a credit card to transfer money to your account.
4. Initiate cryptocurrency transaction
With your account funded, you are ready to start purchasing cryptocurrencies. Once you have decided on the cryptocurrency you want to buy, you can enter its symbol – for example BTC for bitcoin – and specify the quantity of coins you want to buy.
Many exchanges and brokers allow the purchase of fractional shares of cryptocurrencies with large values, such as bitcoin or Ethereum. This accessibility ensures that those without significant capital can still invest.
How to keep your cryptocurrency safe
Cryptocurrency exchanges are often vulnerable to theft or hacker attacks. Losing or forgetting your account access codes could result in the loss of your investment. This is why it is essential to store your cryptocurrencies in a safe place.
If you purchase cryptocurrency through a broker, the cryptocurrency is usually stored in a crypto wallet linked to the exchange. If you are unhappy with the exchange’s service provider or prefer a more secure storage option, you can transfer your assets to a separate hot or cold wallet.
- Warm wallets Hot wallets are cryptocurrency wallets managed on internet-connected devices such as tablets, computers, or phones. While they are convenient, they pose a higher theft risk due to their continuous internet connection.
- Cool wallets Cold wallets, such as USBs or hard drives, provide high-level security for cryptocurrency storage because they are offline and disconnected from the Internet. However, there are risks. If you lose the associated key code or experience a device failure, you may permanently lose access to your cryptocurrency.
Depending on the exchange and the transfer amount, a nominal fee may be required to transfer your cryptocurrency out of the exchange.