Bitcoin and other cryptocurrencies are digital assets that can be bought, sold, spent, and traded on exchanges. Before you start, make sure you’re aware of the risks, volatility, how to avoid scams, and how to choose which cryptocurrency to buy.
Cryptocurrencies are a relatively new phenomenon that has sparked worldwide interest. There are now thousands of these digital assets available, with more being added every day. Should you invest in cryptocurrencies because of the hype, or should you avoid them? Here’s a quick rundown of the most crucial information.
What is cryptocurrency and how does it work?
Crypto assets, or cryptocurrencies, are “cryptographically secured digital representations of value or contractual rights that can be transferred, stored, and traded electronically,” according to HMRC’s definition.
A cryptocurrency, to put it another way, is a digital asset that can be traded and used to make purchases. There is no intrinsic value because it is not based on any actual asset; rather, supply and demand determine the value – in other words, it is only worth what a buyer is willing to pay. As a result, cryptocurrencies are risky, volatile, and difficult to value accurately.
Peer-to-peer transactions are transactions between individuals. Cryptocurrencies are not centralised and operate on an open network, unlike traditional currencies. Transactions are peer-to-peer rather than being managed by a bank or another authority.
Using “distributed ledger technology,” they keep a public record of all transactions (the most well-known type is blockchain). It’s a method of synchronising and sharing data across the globe via a decentralised database, with the goal of preventing double-spending of cryptocurrency.
Cryptocurrencies are legal, but they are not legal tender. You may have to pay tax on them because they are not eligible to be held in tax-free wrappers like ISAs in the UK.
How much are cryptocurrencies worth, and how many are there?
Depending on whether you include failed cryptocurrencies, there are between 5,000 and 7,000 cryptocurrencies in existence. Bitcoin is the most valuable cryptocurrency, with a market capitalization of around $600 billion, followed by Ethereum. Other popular cryptocurrencies include XRP, Tether, and Litecoin. The top five cryptocurrencies currently control more than 80% of the market.
What is the most efficient method for purchasing, spending, and trading cryptocurrencies?
Many startups are offering ways to trade cryptocurrency, but you might be hesitant to put your money in the hands of a startup. Users can now invest in cryptocurrencies such as Bitcoin, Ethereum, and Stellar through Revolut, a more established platform that launched in 2015.
What are the possible risks?
There are a lot of them, because the industry is reminiscent of the Wild West. Scams abound, and the currencies themselves are volatile, but customers don’t seem to mind, and crypto assets are becoming more mainstream. PayPal’s announcement in October that its US customers will be able to buy, sell, and hold cryptocurrencies like Bitcoin, Ethereum, Bitcoin Cash, and Litecoin beginning in 2021 signaled that the use of digital currencies is growing rapidly. However, not everyone supports the mainstreaming of cryptocurrency.
“There is growing evidence that crypto assets are harming consumers and markets,” the Financial Conduct Authority (FCA) of the United Kingdom stated. It recently dealt a blow to the cryptocurrency industry by prohibiting retail investors from purchasing cryptocurrency derivatives and exchange-traded notes beginning in January 2021.
This means that the sale of products based on cryptocurrency prices is prohibited, but not the purchase of cryptocurrencies. The FCA highlighted the difficulty for consumers in determining the true value and risks of these products, as well as the presence of market abuse and financial crime in the secondary market for crypto assets.
When Buying a Cryptocurrency, What to Look for:
If you’re still convinced you want to try cryptocurrency, you’ll need to decide which currency to buy. Start by reading some guides and user reviews because there is so much information available online. When a cryptocurrency first goes live, it usually comes with a white paper that explains what it’s all about.
Consider the strength of the crypto asset’s user community, the technology and team behind it, and, of course, the currency’s price performance to date. Will it be able to withstand the test of time? What factors do you think will influence price movements in the future? Start with one of the more well-known cryptocurrencies, such as Bitcoin, if you’re unsure (read our recommended guide on crypto investment here).
WARNING: We are unable to advise you on whether or not any particular investment is suitable for you. Depending on the investment you make, your capital may be at risk, and you may receive less than you paid in.