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You have probably heard people talking about bitcoin and how much it has gone up in value, and then crashed, over and over in the last year or so. Then there are other cryptocurrencies like ethereum (known as ‘ether’) which are also gaining in popularity and value.
Investing in cryptocurrencies seems like a good way to make money quickly, but this sector is volatile and scary to those who are new to it. So, what are cryptocurrencies, and how can you make money from them?
Any discussion about cryptocurrencies has to start with bitcoin. Bitcoin was created in 2009 by someone (or a group of people) known as Satoshi Nakamoto. It’s a decentralised form of money (i.e. there’s no central bank or government overseeing it) that works on a technology called ‘blockchain’.
All transactions made on the blockchain are made secure by very complicated cryptography (puzzles) that only very powerful computers can unpick, and this is repeated on hundreds of thousands of computers all around the world. All transactions are recorded on all of the computers which cuts out the possibility of fraud.
Once bitcoin started to establish itself and developers learned more about blockchain technology, other cryptocurrencies were created such as ether which runs on the ethereum blockchain network and is generally referred to as ‘ethereum’.
There are also many other ‘altcoins’ that have become popular with some investors in recent years such as Bitcoin Cash, Stellar Lumens, Monero, ZCash, Ripple, Litecoin and more. In fact, there are thousands of altcoins in existence, although the majority of them are worth next to nothing.
Remember, if you do decide to make any new or large financial decisions, always speak to a Financial Conduct Authority registered financial adviser before taking financial advice, and think very carefully before acting.
Why invest in cryptocurrency?
There are two main reasons why people like to invest in cryptocurrencies. Firstly, there is potentially a lot of money that could be made out of it. When bitcoin first launched in 2009 it was worth just a few cents, but recently it reached a high of over $64,000 (£46,000).
The second reason is diversification. Cryptocurrencies tend to move in a different way to other investments like shares and property, so more and more investors are putting a small percentage of their cash in bitcoin and ethereum particularly, simply to spread their risk.
If you do decide to put your toe in the crypto waters, make sure you don’t put in any more than you could comfortably lose because, in the short-term at least, it’s quite possible that you will.
How to invest in cryptocurrency safely
Cryptocurrencies are a highly volatile sector to invest in, so you need to be careful where you tread and make sure you never invest money that you can’t afford to lose. Here’s your three-step guide to investing in crypto with confidence.
Consider your time horizon
There are two main ways to look at crypto investing:
- You think that cryptocurrencies are the future of money and you want to be holding some of the coins when the switch happens.
- You would like to make a fast buck out of the many ups and downs of the crypto market.
If the first attitude above is your plan then it’s best to invest a small amount regularly in one or more cryptocurrencies that you like the look of and then holding them (or ‘hodling’, as the crypto people like to call it) through thick and thin, whatever the market does.
If it’s the second then you will need to watch the market on a daily basis and make decisions about when to buy and sell for maximum profit. This is a much, much riskier approach to crypto investing than the first way. But, you can potentially make some good money if you’re willing to spend time watching the markets.
Think about setting up an account with an exchange
There are various cryptocurrency exchanges on the market but there are only a few that are safe to use. Many should be avoided because they are either insecure (hackers could get into them and steal all your coins) or they are actually criminal and only there to take your money.
So, it’s important to go with a well-established, secure and trusted exchange first of all. The most well-established and trusted exchange is Coinbase.com, which has been running since 2012 and is the biggest of the crypto exchanges. It is easy to use once you have proved your identity and transferred some money into it from your bank account or debit card. You can also keep your coins in their online ‘wallet’. It is not the cheapest exchange but I personally think it’s worth paying their fees for the security.
If you’re looking to trade coins regularly then you could consider setting yourself up on eToro.com, where you can either trade crypto according to your own research or copy other, more experienced traders on the platform. Trading charges also apply.
Decide which coins you want to invest in
I think the two ‘must-haves’ for any crypto investor are bitcoin and ether (ethereum). Bitcoin is considered a ‘store of value’, like gold, because there’s a limited amount of it in the world so the more popular it gets the more its price goes up. Ethereum doesn’t have a limited supply but it is used a lot by developers to create other products and the coin is used within the cryptosphere to buy other coins.
After that, some investors like to put a bit of money in a handful of the major altcoins like Bitcoin Cash, Litecoin, Stellar Lumens, XRP and Monero just in case.
What you can do with crypto
It’s one thing to invest in cryptocurrencies to make money long-term, but it’s worth knowing that you can use them for real-world spending and investing too. Here are a few ways you can ‘spend’ your crypto.
Buy anything with a crypto card
There are about thirty crypto debit cards that you can choose from that will enable you to buy anything anywhere with crypto.
Jonny Fry, who runs TeamBlockchain, explains to me: “Essentially if you have a crypto debit card that is linked to Visa, wherever you can use Visa globally you could spend your bitcoin. As you shop, money is then transferred from bitcoin into the currency that you have just made your purchase.”
It’s a handy way to buy things when you’re abroad to avoid incurring exchange fees.
One of the big advantages of cryptocurrencies is that they make it easier to send money abroad. Earlier this year a bitcoin miner (someone whose computer unpicks the cryptography that secures bitcoin transactions) called Vineet Budki bought a $1 million (£719,000) property in Dubai entirely with bitcoin.
Although bitcoin transactions tend to be very slow, that’s not a problem when it comes to making high-value purchases, like a house abroad.
In some countries, cryptocurrencies have even become legal tender. In El Salvador, for example, Bitcoin is now legal tender anywhere in the country.
Buy a coffee in Starbucks
A few chains and individual retailers now accept bitcoin as payment. Starbucks and WholeFoods will take them and I have come across a florist in South Africa and a number of art dealers who take them.
Gary Nuttall, emerging technology consultant, tells me, “You can buy a beer and a burger with bitcoin in some places around Shoreditch in London and in food places around Silicon Valley.”
However, as bitcoin transactions can take quite a long time to process, it’s unlikely that we will all be buying our burgers with bitcoin on a daily basis in the near future.
Buy a car
Simon Peters, crypto analyst with eToro, tells Stylist: “Tesla announced they would accept bitcoin but have gone back on the idea for the moment. The idea might go back soon with talk that miners could use renewable energy, though.”
Actually, some of the big Silicon Valley companies like Tesla and Square (owned by Twitter founder Jack Dorsay) also have significant bitcoin holdings on their balance sheets as a hedge against inflation, so they clearly believe in it even if, outwardly, they say they’re not sure about its ecological credentials.
Invest with it
You can use your cryptocurrencies to invest in stocks and shares on platforms like eToro.com. eToro takes various currencies and enables you to trade in shares, then, if you like, convert them back into cryptocurrencies.
Key crypto terminology you need to know
A type of digital money. You can’t see it or feel it but you can buy with it and it has its own value. It exists as a decentralised currency which is encrypted, digital information that operates outside of banks and has no central authority to ratify its value or transactions.
This is a unique code that is the ‘address’ for your money on the blockchain. You can send and receive crypto from that code. You can have a ‘hot wallet’ where you store your crypto within a website such as Coinbase, or a ‘cold wallet’ which is a code that you keep on a separate device that is a special type of USB stick or even on a piece of paper.
This is a digital ledger held on computers all around the world logging all the transactions ever made in a particular cryptocurrency. It’s made of individual ‘blocks’ that are ‘chained’ to each other through really complicated puzzles (cryptography). Once a block is created by all the various transactions it’s added to the chain.
The first cryptocurrency invented and currently by far the most valuable. It was created in 2008 by Satoshi Nakamoto, a person (or persons) unknown. There is a limited number of bitcoin in the world. It’s decentralised and is operated by ‘bitcoin miners’ around the world that unlock the cryptography that secures bitcoin transactions through powerful computers.
A crypto version of saying you are ‘holding’ your currencies. In other words, although the market has gone right down, you’re not selling, you’re holding your position.
The second biggest and best-known cryptocurrency after bitcoin. Unlike bitcoin, ethereum – or rather ‘ether’ which is the name of the coin as opposed to ‘ethereum’ the network – is not limited in number. It is programmable money and enables developers to create ‘dApps’ (decentralised applications) and to write ‘smart contracts’ which can create rules about how, when and where the coins can be spent.
Apart from bitcoin and ether there are literally thousands of ‘alternative coins’ or ‘altcoins’, some of which are gaining in popularity such as Litecoin, Bitcoin cash, XRP, Monero, Zcash, Stella Lumens and more. As bitcoin goes up or down in value the main altcoins tend to follow.
FOMO (Fear Of Missing Out)
A feeling which often makes people invest in cryptocurrencies when they shouldn’t!
Speak to a Financial Conduct Authority registered financial adviser before taking financial advice, and think carefully before making any decision.
For more expert-led guides and tutorials follow The Curiosity Academy on Instagram (@thecuriosityacademy).
Jasmine Birtles, founder moneymagpie.com
Jasmine broadcasts, writes and speaks about all aspects of personal finance including investing; banking and apps, savings, pensions, mortgages, credit cards, debt, utilities, FinTech and cryptocurrencies. In 2021 she launched her brand new webinars series for anyone who wants to learn how to make money by investing it.
Get direct training on how to invest in cryptocurrencies by taking Jasmine’s next crypto investing webinar on 19 August.
Images: Getty and courtesy Jasmine Birtles