A relatively new phenomenon, cryptocurrencies have taken the world by storm and there are now thousands of these digital assets, with more appearing each day. Many people are now asking themselves whether they should steer clear or buy into the new hype.
This article lends a hand in offering some of the key facts you need to know to consider your decision to invest in cryptocurrency.
What is Cryptocurrency and How Does It Work?
According to HMRC’s definition of cryptoassets, otherwise known as cryptocurrencies, they are “cryptographically secured digital representations of value or contractual rights that can be transferred, stored and traded electronically”.
In simple terms, cryptocurrency is a digital asset that can be used by traders or used to pay for things. Floki Inu and Bitcoin are both examples of cryptocurrencies. Interestingly, cryptocurrencies aren’t based on any actual asset, so there’s no intrinsic value. Their value is determined by supply and demand – essentially, it’s only worth what a buyer will pay for it. Therefore, cryptocurrencies are speculative, unpredictable, and hard to accurately value on the market.
Unlike standard currency, cryptocurrencies are not overseen or controlled centrally, and they can operate on any open network. Rather than being run by a bank or building society, cryptocurrencies are conducted peer-to-peer. Instead, they use ‘distributed ledger technology to keep a public record of all transactions. This type of technology is a way of synchronizing and sharing data globally through a decentralized database, and its role is meant to prevent double-spending of cryptocurrencies.
Many people question the legalities of cryptocurrencies. To make things clear, they are legal but they’re not legal tender. As a result, in the UK, it’s often the case that you must pay tax on them because they are not eligible to be held in tax-free ISAs.
How Many Cryptocurrencies are There and What are They Worth?
There are around 5,000 to 7,000 cryptocurrencies in existence. Bitcoin is the largest and probably most well-known cryptocurrency with a market cap of approximately $600bn. Bitcoin is followed closely by Ethereum; and other popular cryptocurrencies include XRP, Tether, and Litecoin. To put things into perspective, the top five cryptocurrencies amount for more than 80% of the crypto market.
There is plenty of appeal to cryptocurrencies.
Buying, Spending & Trading Cryptocurrencies
You might be sceptical about trusting your money to a brand-new name, but there are lots of start-ups offering ways to trade cryptocurrency. For example, the established banking platform Revolut, now allows users to invest in currencies like Bitcoin, Ethereum, and Stellar. One thing to remember about Cryptoasset investing is that it’s unregulated in the UK, often described as high risk and speculative.
Is Investing in Cryptocurrency Risky?
Since Cryptocurrency is unregulated and in ‘new age, there are lots of risks in getting involved. However, there are big rewards should you do it correctly. For example, scams are rife and the cryptocurrencies themselves can be volatile. Despite this, consumers remain attracted to the idea of investing in cryptoassets which are gaining mainstream acceptance. Indeed, there have been plenty of companies who are welcoming cryptocurrencies, allowing customers to buy, sell and hold cryptocurrencies. PayPal made the decision to do just this which signals that the use of digital currencies is becoming more commonplace.
You Want to Invest but How Do You Choose a Cryptocurrency?
Starting to explore crypto, the first step is to decide which currency you want to buy. There is so much information online regarding this so the best place to start is by reading guides and user reviews. Usually, each cryptocurrency has a white paper when it launches, which explains what it aims to do.
In addition to doing your own research and reading, you also need to consider the strength of the user community, the quality of the technology, and the team behind the cryptoasset. Not forgetting, the cryptocurrency’s price performance to date. This research will help you assess the longevity of the cryptocurrency and have an idea of future price movements. Education is key when it comes to cryptocurrencies.
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