There’s a lot of buzz around cryptocurrency in the media but most of us don’t even know what it is. We’re going to break it down, and look at the ins and outs of cryptocurrency.
The Cryptocurrency market comes with risk, so you should do thorough research beforehand if you plan to invest. It's a good rule of thumb to think if you can’t afford to lose money, then you shouldn't risk it.
What is cryptocurrency?
Cryptocurrency, or crypto, is a type of digital currency that you use instead of hard cash or cards for some purchases. Bitcoin, which you may have heard of, is an example of a cryptocurrency, first launched in 2009. Bitcoin is just one of around two thousand cryptocurrencies available today. Cryptocurrency came about for the purpose of making secure transactions, but most importantly, it was designed to cut out the middleman, i.e. banks.
Crypto isn’t widely accepted in the UK but it’s slowly becoming more popular. In the place it is accepted, it can be used to buy a variety of items - meals out, wedding stationery or VPN services. LUSH cosmetics accept crypto online, as does overstock.com, and some sellers on Etsy.
How does it work?
It works using a technology called ‘blockchain’. Simply put, these digital chains are blocks of information linked together. Every time a transaction is made with cryptocurrency, it is recorded onto a new block. It can’t be removed and provides a secure transaction trail. It’s not susceptible to fraud because it can’t be changed easily. Think of blockchain as a digital ledger. Cryptocurrency transactions are protected by cryptography, a complex mathematical code, and the use of private and public keys.
You can buy and sell crypto at online exchanges. One of the most popular exchanges is called Coinbase. It's based in the US, but you can buy and sell crypto from any country that supports it. Remember, there are always fees involved when you trade crypto.
However, not everywhere is onboard with crypto and it’s illegal in some countries.
How to store crypto
Crypto should be stored in wallets. You can get cold wallets and hot wallets.
Cold means it's stored in a physical device that isn't connected to the internet. Cold wallets are bought online which can cost roughly between £50 and £150.
Hot means it's stored digitally online. Both methods are heavily secured. You can also store your crypto in exchanges, but this isn’t recommended. Exchanges are vulnerable to hacker attacks.
Can cryptocurrency be converted to cash?
Yes, cryptocurrency can be sold and converted back into cash. You can do this at online exchanges and ATMs. There are always fees involved with this kind of trade. Some wallets allow you to withdraw the crypto and load it onto your bank card.
What are the dangers of cryptocurrency?
There are several dangers with crypto. Firstly, it's a pretty volatile market – meaning the value goes up and down a lot. You may have a coin worth £1000 today, and tomorrow it could drop to £500. Of course, it can go up too, but it’s important to be aware of the downside.
There hasn’t been a breach of the blockchain technology so far, but cryptocurrency is based in the digital world. Even though it’s subject to stringent security, there’s still a possibility that hackers could steal your currency - especially if it's stored it in one of the exchanges. This is one of the reasons a cold wallet for storing crypto is recommended.
Be aware of websites that set themselves up to look like crypto exchange sites. You should always check the website you’re on is secure by checking the browser for ‘https’ and the little padlock icon.
Is cryptocurrency a good investment?
Cryptocurrency can be a good investment, but it can also be a very bad one. Some have made a lot of money with cryptocurrency, but mainly some have lost a lot of money. The volatility of the market means it’s hard to predict the future value of the coins.
The rule of thumb is, if you can’t afford to lose the money, then don’t invest it in cryptocurrency - it’s not worth the risk.
Disclaimer: All information and links are correct at the time of publishing.