Crypto 101: Demystifying the Rise of Digital Currency
By Alice Cripps
In 2009, a new global phenomenon was born. Over the course of the last decade, cryptocurrency has become an increasingly popular and widespread form of alternative payment. But what does this mean for consumers?
In September 2021, El Salvador made history by becoming the first nation to accept the cryptocurrency Bitcoin as legal tender. Experts have questioned whether this may pave the way to international endorsement of digital currencies.
However, the rise of crypto is extremely polarising in our society. While avid users are enthusiastic and hopeful for the future of digital currency, many are still confused or anxious about its risks. Read on for the lowdown of what consumers need to know about this latest financial trend.
What is Cryptocurrency?
In short, a cryptocurrency is a tradable digital currency which does not exist in a physical format. What makes cryptocurrencies so unique is that they are encrypted, that is to say they are protected by cryptography and are therefore virtually impossible to counterfeit or double-spend. They are also decentralised, so not bound by the government or centralised institutions.
There are currently over 12,000 different cryptocurrencies in use, with the renowned currency Bitcoin as the forerunner. Once you have purchased coins, you can use them in online transactions wherever cryptocurrency is an accepted payment method, or exchange them with other users. As with any currency, the value fluctuates, although generally more so than with conventional stocks and bonds.
How Do You Invest in Cryptocurrency?
Investing in cryptocurrency can seem complicated at first, and perhaps scary for those of us who are accustomed to traditional forms of banking. Here are a few simple steps to follow if you are looking to invest in crypto.
1. Gather your documents
The good news is that you don’t need to prepare much to invest in Bitcoin or alternative coins ("Alt-coins"). Just make sure you have access to your personal identification documents, bank account information, and that you have a stable internet connection.
2. Join an exchange
As there isn’t one official exchange for buying coins, but the good news is you have the choice between a number of exchanges to facilitate transactions. You can consider these exchanges the middlemen of crypto investment. Among the most popular and trusted are Binance, Coinbase, and Kraken.
3. Choose a wallet to store your coins
You will need a wallet to store coins once you have purchased them. Two types of wallets exist: hot wallets and cold wallets. Hot wallets are usually free, and more convenient, given the fact they are digital. However, they are less secure than cold wallets which are sometimes the subject of high-profile hacks. Cold wallets are typically handheld devices that can look like USB sticks or external hard drives and usually fall somewhere in the range of £45-75.
4. Link your wallet to your bank account
This step is pretty simple; by connecting your traditional bank account to your crypto exchange account, you will be able to purchase and sell coins at your convenience.
5. Place an order
You can now purchase as many coins as you want. However, it is vital that you determine what the associated risks are before choosing how much to invest.
What’s the catch?
The main risk of investing in cryptocurrency is that profit is not guaranteed. It is true that the value of a cryptocurrency can reach incredible highs, but its volatility as a currency means that its value can fall just as quickly. Commonly known as the ‘crypto crash’, the price of Bitcoin dropped by 65% in January 2018.
Since its development in 2009, Crypto enthusiasts have preached that the world of digital currency is a waiting game. As soon as an economic or geopolitical crisis hits, cryptocurrency should logically thrive in a recession. However, Bitcoin prices have actually fallen by around 10% since Russia invaded Ukraine last month.
There are also safety risks associated with digital currency platforms. As Bitcoin is well-known and easy to use, it is therefore attractive to newbies, meaning it is the biggest target for hackers.
So, what does the future hold for digital currency? No financial expert can predict the exact future of cryptocurrency. There is no doubt that it is gaining momentum, but we must not forget that the concept is still very young and is not yet well established around the world.
Whatever your opinion on digital currency, investing in crypto can be a fantastic way to make long-term financial gains. Just make sure to keep your investments small when you’re starting out, and keep up-to-date with the latest crypto news.
Alice Cripps is a graduate in French and English Literature from the University of Birmingham. She is currently working as a university-level English teacher in Toulouse, but has plans to enter into the publishing industry. In her spare time, she loves reading, travelling and trying out new brunch spots.
