Illustration by Erfan
When Bitcoin first came out in 2009, it wasn’t drawing much interest. Not many people knew how to invest in crypto and what its potential is. Fast forward 12 years, hundreds of more cryptocurrencies have come and gone, and Bitcoin has reigned supreme as it reached an all-time high price of $68,521 in Nov 2021. Trading activities have become extremely popular and having some crypto in their portfolio is now a common thing for many traditional investors.
If you want to invest in cryptocurrencies but don’t know where to start, this is the beginner’s guide for you.
Cryptocurrency is a digital currency that you can buy, sell, spend and trade on exchanges. It is secured by cryptography, which makes it nearly impossible to be faked or double-spent.
Crypto is based on blockchain technology. That's a chain to register and distribute information that’s not controlled by any single institution. This means it eliminates the middleman — such as a bank — and allows buyers and sellers to transact business directly with each other.
There are around 5,000 to 7,000 cryptocurrencies (including failed ones) in existence. Bitcoin is the largest cryptocurrency, with a market cap of around $1.11T, followed by Ethereum. Other popular cryptocurrencies include Binance coin, Tether, and Litecoin.
Cryptocurrencies are legal, but they’re not legal tender. In the UK, you may have to pay tax on them because they are not eligible to be held in tax-free accounts such as ISAs.
You can earn and use it anonymously. This is great if you value your online privacy and don’t want to hand over too much of your digital data. Every payment will be 100% encrypted, no one can check your payment information, and it can’t be leaked.
Accessibility and liquidity. A major benefit of Bitcoin is that it’s a very accessible and versatile currency. Transactions require little to no fees and paperwork, and they only take a few minutes to reach another user. This makes spending money in another country and exchanging for other currencies easy. Crypto can also be easily sold at any moment.
High return potential. In the five years to 31 December 2020, the S&P 500 has compounded at an annualised growth rate of 14.5%; while bitcoin has returned 131.5%. With a growing number of users believing crypto is a promising global currency, many investors and businesses have decided to adopt it. This helps with increasing the higher return potential, especially if you buy crypto at a lower price.
Volatility. Crypto is highly volatile, which means while there are chances for you to become an overnight millionaire, you can also lose all your money.
Limited use. Whilst some cryptocurrencies are now accepted across a growing number of payment platforms (like PayPal), the number of places where you can exchange crypto for real goods or services are still very limited.
Irreversible. Transactions are irreversible and final, so nothing can be done if the wrong amount is sent or if it’s sent to the wrong recipient. In addition, there’s a risk of loss. If you store your coins in a crypto wallet, when you lose access to your private key, your funds could become inaccessible forever.
Unregulated and unbacked. Since crypto is not legally protected and irreversible, it is wide open to being exploited by criminals as a means to scam unwary investors. There’s also no guarantee of a minimum valuation - if a big group of investors decides to stop using their coins and sell them, the value of it could decrease greatly and affect users with a large amount of the cryptocurrency.
Read how to avoid crypto scams here.
No matter what, cryptocurrency should occupy only a very small part of your portfolio. You need to fully understand the risks of crypto and also the level of risk you’re willing to take. Much like investing in gold, crypto doesn't pay interest or dividends. The only way for it to be a good investment is when its price increase significantly. It’s recommended to not allocate more than 5%.
Do your research and read user reviews. Usually, there will be a white paper for each cryptocurrency when it launches, explaining what it is aiming to do. Look also at the strength of the user community, the quality of the tech and team behind the cryptoasset, and of course, the currency’s price performance to date. Will it have longevity? What do you think will drive future price movements?
If in doubt, start small with one of the more established cryptocurrencies like Bitcoin and Ethereum. Bitcoin has become so popular to the point it’s practically synonymous with “cryptocurrency”, but there are actually some other cryptocurrencies that have performed even better.
You can’t get cryptocurrencies in all the usual financial places. Banks don't offer them and neither do investment brokerage firms. You can only buy, hold and sell on dedicated crypto exchanges.
There are 4 areas you should look at when selecting the right exchange platform: security, fees, features and wallets. Some good platforms available in the UK are Coinbase, Gemini, Kraken, Revolut and eToro.
Security: Thoroughly evaluate your chosen platform’s security credentials, and check out the list of platforms that are registered and temporarily registered with the FCA in the UK.
Fees: While some platforms have better rates than others for the same kind of transaction, fees can vary widely across different platforms depending on the cryptoasset, type of account and subscription you choose. Always shop around for the best deals.
Features: See what the platform has to offer in terms of resources, education and other perks, and whether they are worth the fees you’re paying. Some reward you with cryptocurrency when you sign up with a promo code or complete a certain action (Coinbase), and some have more unique features like copying other investors’ strategies (eToro).
Wallets: Not all exchanges offer integrated digital wallets. If you want to use a linked online wallet to store your keys, you need to check out if the crypto exchange supports one.
A crypto wallet can be either a hot or cold wallet. It’s a software program that stores the private and public keys that connect you to the blockchain where your cryptos exist.
A hot wallet is one that’s connected to the internet. It’s easy to set up and convenient to access. The only downside is that it could be vulnerable to identity theft. Which digital wallet you choose will depend on your own desire for a balance between security and convenience. Some crypto exchanges also offer digital wallets for your cryptos. Avoid storing the keys to a large amount of crypto in one hot wallet, just in case your security is compromised and you lose access to all your funds.
A cold wallet can be a piece of hardware, or paper, which is not connected to the internet. This is a less popular, but safer choice, as there’s little to no risk for it to be manipulated online.
Keeping your crypto secured after you buy it is very important. Basically anytime you use crypto online, you need to make sure your investment is secure. You should use a VPN as an extra layer of protection to make sure your data is secured and encrypted, especially when you own a lot of cryptos.
Now that you’ve done all the above, be ready for a wild ride! You can sell your cryptos at the same venues where you purchased them.
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