Understanding Cryptocurrency, Bitcoin (and the others!)

Cryptocurrency – you’ve heard about it; it certainly creeps into the news more regularly than ever before and perhaps you’re even tempted to invest in it! However, ask yourself – do you really understand it? I’m constantly asked by my clients about it and just last week, someone suggested I write about it. So that’s what I’m going to do – while its name “Crypto” is as cryptic as it sounds, I’m going to help you get to grips with it in this piece. Before I start though, I must stress that this is NOT a recommendation. If you’ve been thinking about whether to invest in Cryptocurrency, please remember that it is not regulated by the FCA.

There’s Risk Attached

I do want to make it clear before I begin that Cryptocurrency is regarded as a risky investment with high volatility so it shouldn’t be used by anyone except experienced investors with a high capacity for risk and who can afford to lose their investment. So don’t consider it unless you tick that box!

As for what it means, there’s a good definition of Bitcoin on Investopedia but I will give you a brief outline too. Put simply, it is a medium of exchange (such as the GBP or the USD) but it is digital and uses encryption techniques to control the creation of monetary units and to verify transfer of funds. It is not available in physical form of notes and coins.

Here’s some more:

• It’s a decentralised digital currency that “promises” lower transaction fees than traditional online payment mechanisms.
• It is not operated or issued by government-issued currencies (or banks), but by a decentralised authority that creates, distributes, trades, and stores it – this is known as a blockchain.
• An individual Bitcoin is not valuable as a commodity.
• It is not legal tender in most countries, but there are a few countries that use it – see more on this below. It is not a physical currency, but you can keep an eye on your balance on a public ledger that you have access to (every record is encrypted for security) All Bitcoin transactions are verified using a process known as “mining”, this is a computer-generated programme.
• It can be accepted as payment for services or products, you might see signs saying, “Bitcoin Accepted Here” and transactions are processed through a special terminal, QR code or touch-screen. Some online businesses accept Bitcoin. The thought process is that in the future, Bitcoin or other Cryptocurrency will be used in place of “traditional” money – we shall see! It is highly volatile, for many reasons such as headline news that affect it, a good example was the high-profile use of Bitcoin for drugs via the Silk Road in 2013. Even social media affects it (as an example, Elon Musk tweeted that his company would no longer accept Cryptocurrency as payment for its vehicles – this led to a sizable sell off). Other issues include security breaches, high inflation for developing countries using it, the uncertainty of its future value and more (if you’re interested, go to Investopedia again for further information – Why is Bitcoin’s value so Volatile

Other Cryptocurrencies

Of course, while Bitcoin was the first Cryptocurrency, there are many others. The introduction of Bitcoin prompted a flurry of activity, and this list is the ten biggest Cryptocurrencies and their symbols (based on market capitalisation):

• Bitcoin (BTC)
• Ethereum (ETH)
• Tether (USDT)
• Binance Coin (BNB)
• Cardana (ADA)
• Dogecoin (DOGE)
• XRP (XRP)
• USD Coin (USDC)
• Polkadot (DOT)
• Uniswap (UNI)

Countries that Use Cryptocurrencies

When I was researching, I was surprised to find how many countries use Cryptocurrency as part of their standard arrangements including India, USA, South Africa, Russia and so on. This was a revelation to me, especially as it’s not ‘real’ money! For the top twenty countries who use Cryptocurrency take a look at the European Business Review.

Costa Rica and El Salvador are a couple of the Crypto-friendly countries in the world. They accept Cryptocurrency as their normal means of exchange and a significant number of businesses have begun to accept Cryptocurrencies as a form of digital payment.

Buying Cryptocurrency

If you do want to buy one or several of the above Cryptocurrencies, first, you need to choose a broker or Crypto Exchange, the latter is a platform where buyers and sellers meet to trade Cryptocurrencies. The most well-known exchanges are Coinbase, Geminie and Binance.US. There are many others, but I do stress caution if you choose to go down this route. These companies’ standard trading interfaces may present challenges for beginners who have no experience of trading stocks and shares. However, for those of you that do have experience, there are some user-friendly easy purchase options.

Important Notes to Consider

Please be aware that you could lose your investment if you forget or mislay the codes to access your account. Millions of dollars’ worth of Bitcoin has already been lost due to that very reason! This is why it is vitally important to have a secure storage place for your Cryptocurrencies if you do buy them.

My Cryptocurrency Experience

As a Financial Advisor, it’s important that I understand all types of investment so in order to have my own first-hand experience of Cryptocurrency I chose a broker and opened my own account with Coinbase. They seem to have good reviews and a lot of investors. I liked the look of their account with both browser access and an iPhone App. I’m not recommending Coinbase – I just felt it was the “best” of the brokers that I looked at. It was almost a random choice actually! I didn’t invest much because I am an investor and not a speculator or gambler, so I transferred the “enormous” amount of £100 to Coinbase after setting up my account. Setting up the account required several layers of security and took 24 hours to be verified properly. I suppose that level of diligence gave me some confidence!

Checking the Value of Cryptocurrencies

If you do buy Cryptocurrency or you have it already, I would say that Google Finance is a good place to check the value of Cryptocurrencies and using Bitcoin as an example, the fluctuating value of Bitcoin can be found on Google Finance. At the time of writing Bitcoin has varied by 240% or in pounds and pence my £100 could have gone up to £240 or fallen to £40.

Last Words

It is interesting that Cryptocurrency has come a long way since it launched in 2009. The trend isn’t slowing down and who knows where the next 12 years will take it? However, I am not a fan at the moment so for anyone interested, my recommendation is that you pay attention to it and observe for a while.

I hope that the above has given you an overview of Bitcoin and other Cryptocurrencies. Perhaps if you are interested, let me know and maybe I will update this article sooner with my experience of my £100 investment over the coming months. Will I make a fortune or lose the lot? Only time will tell.