Cryptocurrency inspires passionate opinions across the financial spectrum, from investors who believe it’s a transformational technology to those who worry it’s a passing fad. Whatever your position, it’s important to understand the basics before investing.
Crypto is a form of digital money that uses encryption to record transactions securely and instantly. It’s not backed by any government or central bank, and its value is determined mostly by supply and demand. Supply refers to how many coins or tokens are available, and demand is based on how much people want them. For example, the price of bitcoin rises and falls based on a combination of factors, including how many people are buying it, what other assets it can buy, and how widely accepted it is as payment.
Unlike traditional currency, which comes in bills and coins you can hold, most cryptocurrency is stored digitally in a wallet. These are typically run by groups or individuals rather than banks or other financial institutions, and information about them is often sparse and insecure. Moreover, crypto activities are not yet regulated in the UK, so there’s no safety net if something goes wrong.
While some cryptocurrencies have built-in features to make them more secure, most rely on the public blockchain technology to protect against hacks and other security issues. The technology is open source, which means its code can be reviewed by anyone. This transparency helps create trust in a currency that doesn’t have the backing of any established institution.
Another benefit of crypto is its ability to be transferred without the need for intermediaries, such as banks or payment processors. This can speed up the transaction process and lower fees for consumers. The popularity of crypto has also led to the development of products that let you spend it like a regular debit or credit card.
One drawback to using crypto for day-to-day spending is its wild price swings. It can be hard to know what a purchased item will be worth tomorrow, and the resulting speculative trading can wreak havoc on prices. Additionally, not all businesses accept it, and services that do may charge extra for the privilege.
As the market continues to develop, it’s worth keeping an eye on how regulators treat it. If they decide to treat it like a currency or asset, that could affect how much you pay in taxes when you sell or exchange your crypto. In the meantime, it’s important to take steps to safeguard your digital wallet and investment. Store your seed words (a secret phrase or password that lets you unlock your wallet) somewhere safe, and avoid connecting to it on public Wi-Fi if possible. If you must, use a virtual private network service to reduce your risk. And don’t enter your wallet seed words on websites that are phishing or scamming you. You should also keep your wallet on a device that you can physically control, and not a phone or tablet that could be stolen.