Getting started in investing in cryptocurrencies: tips for beginners

In order to buy and sell cryptocurrencies, usually you set up an account with a cryptocurrency exchange or broker and fund it with real money – then you can trade whichever cryptocurrencies that exchange offers.

You can buy less than one crypto coin; for example, you would currently pay about tens of thousands of pounds for a single bitcoin, but you could buy a fraction of one if you only had a small amount to invest.

What are the dangers of cryptocurrency?

Before you take the plunge, there are a few other important things to note about investing in cryptocurrencies.

1. It’s terrible for the environment

Investors are thinking more carefully about the environmental and social impact of where they put their money.

It takes a huge amount of computing power to “mine” or create virtual currencies, resulting in a big carbon footprint.

Bank of America found that bitcoin uses as much energy as a small country, while each $1bn inflow into the digital currency uses the same amount of power as 1.2 million cars.

As the price rises, so do the emissions produced.

2. Scams are rife

As cryptocurrency prices rise, they become more attractive to cyber-criminals. There are many different types of scam out there, such as:

• Fake celebrity endorsements on social media
• Bogus exchanges
• Phishing scams designed to steal keys to cryptocurrency digital wallets

So you will need to keep your wits about you if you want to invest in this part of the market.

You might want to read: Cryptocurrency scams and how to avoid them.

3. Crypto is not protected by the regulator

Cryptocurrencies are not regulated. In fact, UK consumers have been warned that they should be prepared to lose all their money in crypto assets.

How risky is cryptocurrency?

The UK watchdog the Financial Conduct Authority has repeatedly warned over the dangers of cryptocurrency.

In October 2020 banned the sale of certain high-risk types of cryptocurrency investments to retail investors.

Compensation schemes

• UK bank deposits are almost always covered by protective schemes such as the Financial Services Compensation Scheme, but this is not the case for cryptocurrency investments
• If a cryptocurrency exchange goes bust, you are unlikely to get your money back

Security

• Cryptocurrency itself is extremely difficult to hack and the public ledger almost impossible to alter, but this is not true for cryptocurrency exchanges. One of the biggest cryptocurrency exchanges, FTX, collapsed in November 2022 causing investors all over the world to suffer significant losses.
• As of 2021, more than 30 worldwide exchanges had been hacked or disappeared entirely; the most high profile of these include Tokyo’s Coincheck, which lost in excess of $500m in 2018.

Volatility

• Extreme volatility is a defining feature of cryptocurrency.
• The bitcoin price is currently down nearly 70% from its peak in November.

Double-spending

• This happens when a blockchain network is disrupted
• The cryptocurrency is, in essence, stolen
• The thief sends a copy of the transaction data to make it look legitimate, or might delete the transaction altogether
• It’s rare but it can happen

There are thousands of cryptocurrencies. To read more about the alternatives to bitcoin, check out our article on the other cryptocurrencies.

How to buy cryptocurrency safely

If you have decided you want to invest, here are some tips:

1. Hackers commonly target crypto exchanges, so choose one that is large and well-established, where you can hopefully expect a high level of security
2. Check the trading costs and commission that the platform charges on purchases and withdrawals
3. You can’t hold cryptocurrencies in an ISA, which means you will usually have to pay tax on any gains you make.

And, again, remember that the cryptocurrency sector is unregulated and not protected by compensation schemes. This means that you won’t get your money back if a crypto exchange collapses.

However, some exchanges offer their own insurance against hacks and security breaches.

What causes cryptocurrency price fluctuations?

Like all financial markets, cryptocurrency moves up and down. But the cryptocurrency market differs from the stock market in the degree of volatility in that it moves very fast.

These fluctuations can be scary, but for some investors they are the key to making money with cryptocurrency. This means it’s important to try to understand what makes prices move.

Here are some of the main catalysts for price changes:

• Media coverage: crypto traders are avid readers of press coverage of their coins. Either positive or negative news can cause them to buy or sell coins, causing the market to move very quickly.
• Integration: cryptocurrencies are becoming a more common medium of exchange for buying goods. And as they are accepted by more outlets and are integrated into more banking and payment systems, the prices tend to rise.
• Wider events: political events and government decisions relating to cryptocurrencies also move the market. For example, when China put in more stringent rules on bitcoin mining the price of the currency fell dramatically.

We have done some analysis on whether tougher times are looming for bitcoin.

Unlike the stock markets which only trade on weekdays during certain hours, bear in mind that cryptocurrency can be traded 24/7.

TIP: We always recommend taking a long-term view with investments, even with less traditional types of investments like cryptocurrency. If you’re new to investing read our simple guide.

What crypto trading strategies are there?

Investors who try to make money trading cryptocurrencies have many different strategies.

Some of the main ones are as follows:

1. Day trading

This is a fast-paced form of cryptocurrency trading where people buy and sell cryptocurrencies within a day to try to take advantage of short-term price movements.

However, this may not be an appropriate way of trading bitcoins for beginners. This is because there is a significant risk of loss when trying to time the market.

2. Hedging

Hedging is where one of your investments cancels out some or all of the risk of losses with another. It is a strategy used by some crypto traders who want to hold the coins while avoid being over-exposed to volatile movements.

You can hedge cryptocurrencies using financial instruments such as contracts for difference or futures. These effectively allow you to bet on the future price of the currencies.

This is a tricky strategy that should only be used if you understand exactly what you’re doing.

3. HODLing

Those who “hodl” a cryptocurrency keep hold of it through thick and thin.

If it sounds like a typo, that’s because it originally was – the term originates from a typing mistake on an early bitcoin forum. But it is often retrospectively explained as standing for Holding on for Dear Life.

With traditional investments it’s common for investors to adopt what’s known as a buy and hold strategy.

4. Trend trading

Trend trading is where crypto investors decide to buy or sell particular currencies based on whether their price is moving up or down.

There are many more complex theories on how to identify a trend, or when it is going to change. But the basic theory is that these cryptocurrency traders buy in a market that is going to rise and sell when it is going to fall.

The difficulty comes in identifying which is which.

Whichever strategy you employ, it is important to be aware of the large number of cryptocurrency scams that exist on the internet and elsewhere.

The Financial Conduct Authority, which regulates UK investments, recently warned on the high number of crypto scams and gave suggestions on how to avoid them.

Don’t invest unless you’re prepared to lose all the money you invest. Cryptocurrency is an extremely high-risk and complex investment, and you are unlikely to be protected if something goes wrong.

Times Money Mentor has provided this content for educational reasons only and not to help you decide whether or not to invest in cryptocurrency. Should you decide to invest in cryptocurrency or in any other investment, you should always consider obtaining appropriate financial advice and only invest what you can afford to lose

What is cryptocurrency lending?

Decentralised Finance, or DeFi, is another way to make money with cryptocurrency that has only appeared in the past couple of years.

There are a vast array of applications for DeFi, but the breakout star to date is cryptocurrency lending:

1. Users lend out their cryptocurrency for others to borrow
2. In return they receive an annual percentage yield, on top of their original stake being returned to them when the lending period is over
3. No third-party central authority is involved in backing or guaranteeing these transactions

According to industry data website DeFiPulse.com, the total value in these cryptocurrency financial contracts grew:

• From $800 million in April 2020
• To $54 billion in April 2021

What are the risks of cryptocurrency lending?

While DeFi is similar in principle to peer-to-peer transactions involving companies such as Zopa and Funding Circle, there are greater risks to consider.

Independent financial advisers often caution against people investing more in cryptocurrency than they can afford to lose.