Crypto is a digital form of value that uses strong encryption to secure transactions and control the creation of new units. It is not backed by tangible assets such as gold or cash. Instead, its value depends on the market and the willingness of others to buy it. This article explains the core features of crypto and highlights key points for anyone thinking about investing.
What is Crypto
Crypto represents digital assets that are secured by encryption. It utilises distributed ledger technology, which records data across many network participants. This approach keeps information secure and prevents one central authority from controlling the data. The system of shared records makes the crypto market unique like gambling sites not on Gamstop.
Understanding Distributed Ledger Technology
Distributed ledger technology (DLT) is the backbone of most cryptocurrencies. DLT means that data is stored across a network rather than in a single location. This networked approach makes it difficult for any single party to tamper with the information. It also allows transactions to be verified quickly and securely. Many experts believe that this technology could improve financial services by lowering costs and speeding up settlements.
Major Cryptocurrencies
Crypto markets have seen rapid growth with thousands of different coins available. However, only a handful have become widely recognised. The following table summarises key data for four popular cryptocurrencies. The data comes from CoinGecko.
| Crypto | Peak Trading Price (Nov/Jul 2021) | Value in December 2023 | Outcome on £300 Investment | Price Change (%) |
| Bitcoin | £51,032.02 | £35,116.86 | £206.44 | -31.19% |
| Ethereum | £3,610.11 | £1,888.25 | £156.91 | -47.70% |
| Tether | £1.01 | £0.80 | £237.62 | -20.79% |
| Cardano | £2.23 | £0.52 | £69.95 | -76.68% |
Bitcoin
Bitcoin was launched in 2009 following the publication of a whitepaper. It remains the longest-running and largest cryptocurrency in market capitalisation. Bitcoin has attracted interest for its pioneering status and the potential for high returns. However, its price has shown significant fluctuations over time.
Ethereum
Ethereum differs from Bitcoin by offering a platform for smart contracts. Smart contracts are self-executing pieces of code that run on the Ethereum network. This feature allows for automatic payments and other transactions once specific conditions are met. Many see Ethereum as having a broader range of applications than Bitcoin.
Tether
Tether is known as a stablecoin. Its value is linked to stable assets such as the US Dollar or gold. In theory, this link should make Tether less volatile than other cryptocurrencies. However, questions remain over the reserves that are supposed to support its value. Regulatory actions in the past have raised concerns about the transparency of Tether.
Cardano
Cardano has gained attention since its release in 2017. It aims to combine smart contract features with energy-saving validation methods. Cardano has seen significant price volatility. The cryptocurrency has drawn interest due to its focus on efficiency and sustainability.
Crypto as Payment
The use of crypto for everyday payments is still limited. Some companies in the IT and travel sectors accept crypto, but it is not common for routine transactions. The main issue is the high volatility that makes it hard to agree on a stable value from one day to the next.
Advantages and Disadvantages of Using Crypto
Advantages:
- Faster cross-border transactions
- Potentially lower transaction fees
- Reduced reliance on traditional banks
Disadvantages:
- High price volatility
- Limited merchant acceptance
- Uncertainty due to regulatory issues
Crypto may improve payment systems in the future, especially if stablecoins become more reliable. Some investors hope that digital currencies will eventually gain wider acceptance in everyday transactions.
Risks of Crypto Investments
Investing in crypto carries significant risks. The market is known for its unpredictability. Even experienced investors have seen their investments drop sharply. For example, if an investor placed £300 into Bitcoin at its peak, the value would have dropped to £206.44 by December 2023. Similar declines have affected other cryptocurrencies.
Common Investment Risks
- Market Volatility: Prices can change rapidly, often without warning.
- Unregulated Market: In the UK, crypto investments are not covered by the Financial Services Compensation Scheme.
- Operational Failures: Problems such as poor client fund segregation or firm collapse can lead to substantial losses.
- Cyberattacks: Security breaches remain a constant threat in the crypto market.
- Scam Activity: Fraudsters often target investors with offers that appear too good to be true.
One notable example of investment risk is the case of Celsius. In 2022, the crypto lender filed for bankruptcy and owed users billions of dollars. Many investors could not recover their funds after the collapse.
Regulatory and Safety Concerns
Crypto investments are not subject to the same regulations as traditional financial products. This lack of oversight means that investors must be extra cautious. The marketing of crypto products is strictly regulated, and warnings about the risk of losing money are often prominent. Investors should be wary of offers that include free gifts or referral bonuses. Such incentives may signal that the company is not following established rules.
Steps to Protect Investment
Investors can take several steps to protect themselves:
- Research: Ensure that all information is sourced from reputable outlets.
- Verify: Confirm the legitimacy of any crypto product or service before investing.
- Avoid Incentives: Steer clear of offers that promise rewards for joining or referring others.
- Stay Informed: Keep up to date with regulatory developments and market trends.
The risks and rewards of crypto investment are clear. While the potential for profit exists, so does the possibility of substantial loss. Investors are advised to proceed with caution and only invest money they are prepared to lose.
