Please keep in mind that cryptoassets are a highly volatile unregulated investment product with no UK or EU investor protection. You could lose all the money you put into them.

What is Cryptocurrency?

Updated On: Oct 31, 2021
What is Cryptocurrency?

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What is Cryptocurrency?

Cryptocurrency is digital money designed to be used over the internet. Like any type of money, cryptocurrencies can be used to transfer value from one person or institution to another. If you think of all the things you can currently do with the money in your bank account or the physical cash in your wallet, like buying products and receiving it as payment for work done, crypto is designed to do them and more.


Unlike other types of currencies, cryptocurrencies are not issued by the government or central bank, and you can use them without the help of a middleman like a bank or payment processor.


You can also buy, sell, invest and trade cryptocurrencies on exchanges. Crypto exchanges are like regular stock exchanges where you can buy and sell different types of assets. When you trade or invest in crypto, its value can drop or rise in correspondence with demand and supply, and you could lose all the money you put into it.


There are thousands of cryptocurrencies in the world today, but the most popular ones are bitcoin, ethereum, dogecoin, bitcoin cash and litecoin. Bitcoin was the first cryptocurrency ever created. It was launched in 2008 and remains the most popular cryptocurrency in the world.


The first part of the term, crypto, originates from the Greek word kryptos, which translates as β€˜hidden’. Cryptocurrency transactions are often protected through cryptography to keep them private and secure from anyone not involved in the transaction. These transactions are vetted by a technology called a blockchain.


A cryptocurrency blockchain is similar to a bank’s ledger or database. But instead of being managed by one bank, it is distributed across the different participants of the cryptocurrency’s entire network. No person, company, bank, or authority controls the blockchain, and anyone can participate.


How does Cryptocurrency work?

Cryptocurrency makes it possible to securely transfer value online, transfer money online and earn interest without the need for a middleman like a bank or payment processor. Imagine that you can send money to someone anywhere in the world without worrying about foreign exchange rates, transfer caps, high fees or government regulation. Cryptocurrency makes this possible.


It uses decentralised technology where transactions between peers happen directly between them, instead of being run through a bank or government-appointed regulatory body, as with the traditional banking system we have become accustomed to.


Instead of government regulation or protection, the safety and security of cryptocurrencies are underpinned by something called a blockchain, which is a database of all the transactions carried out using a particular cryptocurrency.


Units of cryptocurrency are created through a process called cryptomining, in which computers solve complicated mathematical problems and equations in exchange for crypto coins. The first computer to solve each mathematical problem is rewarded with cryptocurrencies.


To own a cryptocurrency, you can either mine it or buy it off someone who owns that type of cryptocurrency. Buying or selling crypto is called a trade and can be carried out via crypto exchanges. The most common way to acquire crypto today is by buying it on a crypto exchange such as Coinbase or eToro. To buy crypto, you can use the cash in your bank account or exchange your existing crypto for another.


What is Blockchain?

A blockchain is a specific type of database containing a list of transactions that anyone can view and verify. In the case of bitcoin, the bitcoin blockchain is a record of every time someone buys or sells bitcoin.

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The blockchain stores data in units called blocks, which are chained together, forming an irreversible timeline of past transactions. When new data enters the system, it enters a block, and once that block has been filled, it is verified through a process known as cryptomining and then chained to the previous blocks.

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Each cryptocurrency has its own blockchain, which is an ongoing, constantly re-verified record of every single transaction ever made using that cryptocurrency.

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Cryptocurrency blockchains are used in a decentralised manner such that no single person or group has control, instead, all users collectively retain control. These decentralised blockchains are immutable, which means that the data entered is irreversible. For Bitcoin, this means that transactions are permanently recorded, and anyone can view them. No company, country or third party is in control of the blockchain, and anyone can participate.

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You might ask, how private is crypto if anyone can see your transaction? That's a valid question. Cryptocurrency payments do not require you to include your personal information, and this protects you from being hacked or having your identity stolen.

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The blockchain is a secure, transparent, private, and self-reconciling chain of transactions, and its use goes far beyond cryptocurrency and bitcoin. Blockchain is currently being used for securely sharing healthcare data, music royalties tracking, real estate processing, supply chain management, and so much more.

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The theory behind blockchain and bitcoin first appeared online in late 2007 in a whitepaper entitled "Bitcoin: A Peer-to-Peer Electronic Cash System" credited to Satoshi Nakamoto.

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What is Cryptocurrency Mining?

Cryptocurrency mining (or cryptomining for short) refers to solving complex mathematical equations with the goal of earning cryptocurrency. These equations validate a block of transactions and then, the block is added to the blockchain.

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The first computer to solve the complex equation or algorithm gets rewarded with some cryptocurrency, giving an incentive for cryptocurrency holders or people interested in owning cryptocurrency to use their computers to solve the mathematical problems.

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Once the block of transactions has been validated, it can then be added to the blockchain, and the process repeats itself.

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Anyone with a computer and internet connection can mine cryptocurrency. However, it is worth mentioning that mining is not always profitable. To mine competitively often means having to invest in expensive computing machines. The cost of these computers and electricity in your area might reduce the profit you earn from mining crypto as mining demands a huge amount of computing power. As a result, most mining today is done by companies that specialise in it or by groups of people who come together to contribute all their computing power.


How to Invest in Cryptocurrency

Investing in cryptocurrency is fairly straightforward, as the biggest challenge is simply deciding on what type of cryptocurrency you want to invest in and which platform to use. To learn about each cryptocurrency, you can visit a site like Coinbase, which shows you pricing and other information about cryptocurrencies like Bitcoin (BTC), Litecoin (LTC), Ethereum (ETH), Bitcoin Cash (BCH), Ethereum Classic (ETC) and much more.

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To get bitcoin, first, you need to sign up to a crypto exchange such as Coinbase, eToro or Revolut.

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After this, you will need to complete security checks, such as providing a mobile phone number and a passport, before you can supply a payment method. This payment method allows money to be transferred from your bank account and traded for bitcoins. Different currencies correspond to different amounts of bitcoins. A simple Google search of "bitcoin" or "bitcoin price" will show you the price in your local currency at any given time.

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When it comes to investing, we always recommend that you build a diversified investment portfolio. This means that instead of investing in just one cryptocurrency, for example, it might be more reasonable to invest in a few of them to avoid total loss if one of them crashes.

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If you decide to hold just one cryptocurrency, you can add it to your existing stock portfolio to make the portfolio even more diversified. Please keep in mind that your capital is at risk, and you could lose all the money you invested.

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How do you store cryptocurrency?

You can store your cryptocurrency online or offline. The most popular way to store cryptocurrency is online in a crypto exchange or wallet. Crypto exchanges and wallets allow you to securely store, send, receive and convert crypto using your computer, tablet or smartphone.


Tax on Cryptocurrency in the UK

Most people hold cryptocurrency as a personal investment, usually to make a profit. For this reason, HMRC requires you to pay Capital Gains Tax (CGT) when you make a gain on cryptoassets in the same way you pay CGT when you sell other assets like stocks.

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Therefore, anyone who makes a profit from selling cryptocurrencies will pay taxes on the portion of the profit above Β£12,300.

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This Β£12,300 is your annual CGT allowance, and any profit made above it is usually subject to Capital Gains Tax. For example, if you sold your bitcoin and made a profit of Β£14,000, you would have to pay tax on Β£1,700 (that is Β£14,000 - Β£12,300).

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It is also important to highlight that the CGT allowance of 12,300 also applies to investment gains from stocks and shares. So if you've already used up your CGT allowance on stocks, for example, you will have to pay tax on your crypto profits.

You will also be liable to pay Income Tax and National Insurance contributions on cryptoassets which you receive from:

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  • your employer as a form of non-cash payment
  • mining, transaction confirmation or airdrops

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For more information on taxes on cryptocurrency, please read the Government's guidance.


Risks of investing in Cryptocurrency

Scams, hacks, cryptojacking and volatility all add risks to investing in cryptocurrency.

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Scams involving cryptocurrency are becoming increasingly commonplace. According to the Financial Conduct Authority (FCA), "cryptoasset fraudsters tend to advertise on social media - often using the images of celebrities or well-known individuals to promote cryptocurrency investments. The ads then link to professional-looking websites. Consumers are then persuaded to make investments with the firm using cryptocurrencies or traditional currencies." If you believe that you have been scammed, use the FCA's reporting form to report the firm or scam.


Until recently, what was the biggest cryptocurrency hack occurred in 2018 and equated to US$532 million. However, on August the 10th, 2021, Poly Network was breached, and over US$610 million was taken by the hacker, making this the biggest cryptocurrency hack currently on record.

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Another risk is cryptojacking. Cryptojacking is where someone uses malware to mine bitcoin using an unsuspecting person's device, and the person using this malware receives the proceeds. There is both a year-to-year variance on the frequency of reported cryptojacking as well as significant variance across a given year. The Cyber Threat Alliance (CTA) has indicated that there was a 459% increase in the rate of cryptojacking between 2017 and 2018. However, between 2019 and 2020, Kaspersky Security found that cryptojacking attempts fell from 13 million to just under 9 million.

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Finally, one obvious risk is the high degree of volatility in the value of cryptocurrencies. On a single day in May 2021, the price of Bitcoin dropped by 30%. The volatility is partly caused by the ever changing demand for cryptocurrency. The volatility of cryptocurrency is quantified by the volatility index and can be used to compare different cryptocurrencies. A simple way to mitigate this volatility is to buy a stablecoin which is pegged 1:1 to the value of an external factor, typically a fiat currency like the US dollar or a commodity like gold. The value of stablecoins is easier to predict as they do not shift dramatically from day to day. An example of a stablecoin is the USD Coin or USDC, which is pegged 1:1 with the US dollar.


Where to buy Cryptocurrency in the UK

You can buy cryptocurrency from a crypto exchange.

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Below, we have compiled a list of some of the best apps and exchanges for buying cryptocurrency in the UK.

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Please remember that cryptoassets are a highly volatile unregulated investment product with no UK or EU investor protection. You could lose all the money you put in them.

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eToro - Live prices; Crypto wallet; Advanced crypto trading tools

eToro Logo
Minimum Deposit
US$50
Trading Fee
Red Cross Mark
Withdrawal Fee
Green Check Mark
FX Fees
Green Check Mark

eToro is a multi-asset platform that offers both investing in stocks and crypto assets, as well as trading CFDs. With eToro, you have over 115 cryptocurrencies to choose from, including popular coins like bitcoin, ethereum and litecoin. It is entirely free to open an account with eToro, and all registered users receive a US$100,000 demo account for free, which you can use to practice buying crypto and other assets before committing to them. eToro does not charge any deposit or trading fees other than spreads. Trading on the eToro platform occurs in USD, so a conversion fee will apply if you deposit or withdraw in a foreign currency other than USD. Withdrawals incur a fee of US$5, and the minimum withdrawal amount is $50. eToro offers other products, including 0% commission stocks.

Please note: Cryptoassets are a highly volatile unregulated investment product. No UK or EU investor protection. Your capital is at risk.

go to site

Coinbase - Live prices; Crypto wallet; Crypto card; Earn free crypto

Coinbase logo
Minimum Deposit
US$0
Trading Fee
Green Check Mark
Withdrawal Fee
Green Check Mark
FX Fees
Green Check Mark

Coinbase is a cryptocurrency exchange that allows you to buy, sell and earn popular digital currencies, and keep track of them in one place. With Coinbase, you have over 500 cryptocurrencies and other digital assets to choose from, including popular coins and tokens like bitcoin, ethereum, binance coin, dogecoin and cordano. You can set up recurring trades and invest in cryptocurrency slowly over time by scheduling buys daily, weekly, or monthly. You can also track your trades and monitor market movements via the web app or iOS and Android mobile apps. The Coinbase Wallet allows you to store all your crypto and NFTs in one place, trade 500+ assets on DEXes and earn interest.Β 
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There are multiple fees involved when trading crypto on Coinbase. Fees are calculated at the time you place your order and may be determined by a combination of factors, including the selected payment method, the size of the order, and market conditions such as volatility and liquidity.

Please note: Cryptoassets are a highly volatile unregulated investment product. No UK or EU investor protection. Your capital is at risk.

go to site

Revolut - Round ups; Automatic investing; Beginner-friendly

Revolut logo
Minimum Deposit
US$1
Trading Fee
Green Check Mark
Withdrawal Fee
Red Cross Mark
FX Fees
Green Check Mark

Revolut is a personal finance and money management app that allows you to invest in bitcoin, ethereum and other tokens with 30+ currencies from as little as US$1. with Revolut, you can stay on top of market movements, receive notifications when crypto hits your desired prices and enjoy the latest market news directly in-app. Revolut also allows you to round up your spare change and invest the difference in any cryptocurrency of your choice subject to availability on the platform. Revolut charges a single, fixed fee for crypto conversions. This fee is 2.5% for Standard and Plus users (and 1.5% for Premium and Metal users). Revolut does not charge you any other fees for this service. Click here to learn more about Revolut’s fees. Revolut also has other products, including savings accounts, investment accounts, currency exchange and international money transfers.

Please note: Cryptoassets are a highly volatile unregulated investment product. No UK or EU investor protection. Your capital is at risk.

go to site

Bitpanda - Automatic investing; Crypto card; Beginner-friendly

Bitpanda logo
Minimum Deposit
€25
Trading Fee
Green Check Mark
Withdrawal Fee
Red Cross Mark
FX Fees
Green Check Mark

Bitpanda is an easy-to-use multi-asset investment platform that allows you to invest or trade in stocks, crypto and metals. With Bitpanda, you have over 50 cryptocurrencies to choose from, including popular coins and tokens like bitcoin, ethereum and polkadot. It is entirely free to open an account with Bitpanda, but you need to deposit a minimum of €25 to start trading or investing. Once you start investing, you can choose to swap your cryptocurrencies with stocks, precious metals and other Bitpanda assets whenever you want. You can also set up automatic and recurring daily, weekly or monthly payments and invest in your favourite digital assets over time. Bitpanda allows you to deposit and withdraw in multiple currencies including, GBP, CHF, EUR, TRY and USD. You also get a free crypto card which you can use to spend your crypto like cash. You can upgrade to Bitpanda Pro for more advanced features, including professional trading solutions, price matching capabilities and fully automated clearing, settlement and netting processes.
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There are multiple fees involved when trading crypto on Bitpanda. All fees for buying and selling cryptocurrencies and digital assets are already included in the offered prices. This means you will always receive the exact amount of coins or fiat that is shown on the order confirmation page. Bitpanda currently has over 3 million users across multiple countries.

Please note: Cryptoassets are a highly volatile unregulated investment product. No UK or EU investor protection. Your capital is at risk.

go to site

Coinsmart - Beginner-friendly; Advanced crypto trading tools

Coinsmart logo
Minimum Deposit
US$0
Trading Fee
Green Check Mark
Withdrawal Fee
Green Check Mark
FX Fees
Green Check Mark

Coinsmart is an easy-to-use crypto exchange on a mission to make cryptocurrency accessible to everyone. It is designed to be a simple crypto-trading platform that anyone can use and understand. With Coinsmart, you can buy and sell bitcoin, ethereum, litecoin and other digital currencies quickly and easily on desktop and mobile. There are multiple fees involved when trading crypto on Coinsmart. Some of their fees include withdrawal fees (depending on your withdrawal method) and trading fees.
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Please note: Cryptoassets are a highly volatile unregulated investment product. No UK or EU investor protection. Your capital is at risk.

go to site

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Frequently Asked Questions

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1. How many cryptocurrencies are there and what are they worth?

There are many cryptocurrencies out there, each focusing on developing their usefulness and outreach in different ways. According to CoinMarketApp, there are approximately 7,812 cryptocurrencies, although bitcoin and ethereum are the two most well known. The cryptocurrencies all together have a market capitalisation, as of January 2021, of US$324.716 billion. For comparison, that is 80 times what Disney paid to acquire Lucasfilm (the film and television company responsible for Star Wars, among other things).

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2. Is it wise to invest in cryptocurrency?

Over a short period (a few months), the value of a given cryptocurrency coin can rise and fall sharply, making any return a big gamble. However, over a long period, these peaks and troughs are averaged out, and one can sometimes make a good return depending on the overall growth of the cryptocurrency.

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3. Are cryptocurrencies safe?

Cryptocurrencies are safe, provided you are careful and are aware of the risks. The most significant risks are scams since cryptocurrency is still new. Be careful when carrying out cryptocurrency transactions and keep your private key safe and, above all, private.

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4. Can the government track your cryptocurrency?

Although primers of cryptocurrency have said that bitcoin "can be used to buy merchandise anonymously", cryptocurrencies, despite their reputation, are not anonymous. They are pseudo-anonymous.

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Even though no banks or external authorities are involved, and the transaction only happens between a buyer and seller, by linking the transaction to the fixed wallet address and maintaining a public record on every transaction made on their blockchains, financial activity can be monitored.

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The USA has made matters even more complicated by proposing a rule which states that all transactions over US$10,000 involving self-hosted wallets must be reported to FinCEN. However, this rule only applies to the USA and will not affect the UK. This controversial rule is designed to deter people from making cryptocurrency using illegal schemes. However, such rules tarnish the idealised image of autonomy that cryptocurrencies are trying to bring into reality.

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5. What are the best crypto exchanges in the UK?

Here are some of the best crypto exchanges in the UK:

  • eToro - Live prices; Crypto wallet; Advanced crypto trading tools
  • Coinbase - Live prices; Crypto wallet; Crypto card; Earn free crypto
  • Revolut - Round ups; Automatic investing; Beginner-friendly
  • Bitpanda - Automatic investing; Crypto card; Beginner-friendly
  • Coinsmart - Beginner-friendly; Advanced crypto trading tools


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