A Guide For Beginners – Forbes Advisor UK

Cryptocurrency has long been a hot topic in investment circles, but its popularity has significantly increased in recent years. While it is without question an extremely risky investment where you could lose all your money, some investors see it as a legitimate option for inclusion in a portfolio.

If you are new to this market, remember that buying cryptocurrency involves inherent risks just like any investment. It’s important to conduct thorough research and understand how each type of cryptocurrency functions before making any investment decisions.

What is cryptocurrency?

Cryptocurrencies are digital currencies that generally operate outside the regulation of any individual company or government. In contrast to traditional currencies like the pound or the US dollar, cryptocurrencies are not backed by a central authority, such as the Bank of England.

Instead, they are overseen by an online, decentralised network of users. Cryptocurrencies are often envisioned and referred to as digital coins or tokens. They are guarded by encryption through sophisticated blockchain technology – meaning that, effectively, they are 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, your options of merchants that accept crypto are more limited than those who accept traditional currencies.

When you conduct a crypto transaction, a group of computers using blockchain software checks if 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 check these transactions and get paid for their work. After a transaction is checked and confirmed, the person receiving the money can access it using their secret code, often called a private key.

As well as using cryptocurrency as digital money, some people invest in it hoping its value will increase over time, similar to investing in stocks or gold – although, as noted, the risks associated with crypto are extremely high.

Types of cryptocurrencies

In 2009, Satoshi Nakamoto introduced the first cryptocurrency, bitcoin. With a market cap over $1 trillion, bitcoin is now the world’s largest cryptocurrency.

Today, there are nearly 10,000 cryptocurrencies in total, collectively amounting to a market capitalisation of more than $2 trillion.

Some of the biggest cryptocurrencies include:

Bitcoin (BTC)

Like other cryptocurrencies, bitcoin operates on a blockchain, or a 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.

Bitcoin’s value has experienced a substantial surge over the past decade, garnering widespread recognition. In May 2016, one BTC cost approximately $500. However, as of May 2024, the price had skyrocketed to more than $60,000 for a single Bitcoin. That’s an increase of 11,900%.

Ethereum (ETH)

It wasn’t until 2011 that alternative cryptocurrencies, later dubbed “altcoins,” entered the scene. However, Ethereum’s launch in 2015 truly brought altcoins into the limelight, marking the start of their surge in popularity. Ethereum stands out as the foremost altcoin, however, with a market capitalisation trumped only by bitcoin.

While bitcoin aims to function as a decentralised currency, Ethereum is more like a computer network. It lets people run special decentralised applications, or DApps, and set up smart contracts on its system.

Tether (USDT)

Tether, along with other tokens like it, stands out from other cryptocurrencies due to its categorisation 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.

Theoretically, the stablecoin will have a method of maintaining its value equivalent to its peg, whether that peg be the dollar, the euro or something else entirely. In the case of Tether, the token’s value is maintained by reserves of US dollars equivalent to USDT’s total value.

In this way, Tether and other stablecoins are expected to exhibit greater stability than other cryptocurrencies, making them a preferred choice among investors concerned about the volatility of digital assets.

Solana (SOL)

Solana was designed to support decentralised finance, or DeFi applications, DApps and smart contracts. It uses a unique method combining proof of stake 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 fees on Binance, a top global crypto exchange. Introduced in 2017, BNB now serves multiple functions, including trading, payments and travel bookings.

Pros and cons of investing in cryptocurrency

While advocates of cryptocurrency investing may cite benefits such as decentralisation, accessibility and diversification, many investors view the potential returns as the biggest pro of investing in crypto.

However, it is important to acknowledge the risks of crypto investing as well. Cryptocurrencies often experience dramatic price swings, and as government regulations evolve, volatility is likely to continue. Security can also be of concern. Not all crypto projects are created equal, and many investors have been the victims of scams or fraud in the crypto space.

As is often said, anyone contemplating crypto investment should only invest what they are willing to lose. Cryptocurrency has yielded substantial profits for some investors, but others have incurred significant losses.

What to consider before investing in cryptocurrency

Before diving into any investment, including crypto, you must do your due diligence. When evaluating if a crypto 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’s important to understand the details and unique investment proposition of each cryptocurrency before you get involved.
• Your risk profile Be honest with yourself when evaluating your risk profile and the volatility of any cryptocurrency. Any crypto investor should be prepared for the possibility of a major drop in prices.
• Your investment goals Ask yourself how a crypto investment would fit into your larger financial goals. It is important to make sure that you are not relying entirely on your crypto investment for essential life goals like retirement. Diversification and planning are key.

How to invest in cryptocurrency

For beginners entering the realm of cryptocurrency, navigating the process of purchasing digital currencies may seem daunting. However, you can kickstart your cryptocurrency investment journey by adhering to these simple steps.

1. Pick a broker or cryptocurrency exchange

There are two ways you can go about purchasing bitcoin and other cryptocurrencies – either through a broker or through a cryptocurrency exchange.

• Cryptocurrency brokers simplify buying crypto but may charge higher fees or restrict moving holdings off-platform. Some investors prefer holding coins in crypto wallets offered by these platforms for added security.
• Cryptocurrency exchanges such as Coinbase, Gemini and Binance offer platforms for buying and selling digital currencies. However, these platforms can be overwhelming for new investors. While user-friendly options make buying easier, they usually have higher fees compared to standard trading platforms.

2. Set up an account

After selecting a cryptocurrency broker or exchange, you will need to create an account. Generally, this requires signing up and providing personal information to prove who you are, often known as know your customer protocols. This may involve entering information from your driver’s licence or passport. Sometimes, you may need to provide a photo of yourself or a form of identification.

3. Add funds to invest

Before you can begin investing in crypto, you must ensure funds are available in your account. You can add money to your account through various methods, including connecting it to your bank, initiating a wire transfer or using a debit card (some banks impose limits on how much you can move 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 chosen.

Avoid borrowing to fund your crypto transaction as this simply increases the potential harm of losing your investment. This includes not using a credit card to move money to your account.

4. Initiate your cryptocurrency transaction

With your account funded, you are ready to begin purchasing crypto. Once you have decided on the cryptocurrency you wish to buy, you can enter its symbol – for instance, BTC for bitcoin – and specify the quantity of coins you want to purchase.

Many exchanges and brokers permit purchasing fractional shares of cryptocurrencies with high values, such as bitcoin or Ethereum. This accessibility ensures that those without significant capital can still invest.

How to keep your cryptocurrency secure

Cryptocurrency exchanges are often vulnerable to theft or hacking. Losing or forgetting the access codes to your account could result in the loss of your investment. That’s why keeping your cryptocurrencies in a safe storage place is crucial.

If you’re buying cryptocurrency through a broker, crypto is usually held in a crypto wallet linked to the exchange. If you are dissatisfied with the exchange’s service provider or prefer a more secure storage option, you may transfer your assets to a separate hot or cold wallet.

• Hot wallets Hot wallets are cryptocurrency wallets operated on internet-connected devices such as tablets, computers or phones. While convenient, they pose a higher theft risk due to their continuous internet connection.
• Cold wallets Cold wallets, such as USBs or hard drives, provide top-tier security for storing cryptocurrency because they’re offline and disconnected from the internet. However, there are risks involved. If you lose the associated keycode or experience device failure, you could permanently lose access to your cryptocurrency.

Depending on the exchange and the transfer amount, a nominal fee may be required to transfer your crypto off of the exchange.