What is Cryptocurrency? A Beginner's Guide

Bitcoin and other new cryptocurrencies are now impossible to ignore. They have evolved from being a joke to viable investments. If your work is even remotely tied to emerging technologies or you simply use the internet daily, you had heard about cryptocurrency before.

What is Cryptocurrency?

Cryptocurrency is a digital payment system that eliminates the need for physical cash. It exists solely in digital form and is primarily used for online transactions, although some physical purchases are also possible. Unlike traditional currency, which is printed by governments, various companies issue cryptocurrencies.

Commonly referred to as "crypto," these digital currencies utilize cryptography, making them nearly impossible to counterfeit or double-spend. This security feature protects them from government manipulation or interference. Additionally, cryptocurrencies are fungible, meaning their value remains consistent whether bought, sold, or traded.

Unlike traditional currency, which can be stored in banks or financial institutions, cryptocurrencies are kept in digital wallets. Investors have the freedom to use, store, or transfer their crypto without needing a third party, unlike in traditional banking systems. However, while banks provide safeguards for money held in accounts, there is no similar protection for cryptocurrencies in the event of loss.

Bitcoin is the first widely accepted cryptocurrency, so well-known that its name often became synonymous with the entire category. However, potential investors should note that Bitcoin prices have become quite high. In 2021, one Bitcoin was valued at $68,000, while it traded at around $30,000 in mid-2023. The good news is that investors don’t need to purchase an entire Bitcoin; they can buy or trade smaller fractions.

Functions of cryptocurrencies

Cryptocurrencies were designed to operate without a central authority, benefiting from a decentralized and secure system. Here are some key advantages that attract novice users and investors to cryptocurrency.

1. Cryptography Secures Financial Data
Cryptocurrencies are often referred to as "crypto" due to the use of cryptography for securing information and communications. They utilize public key cryptography, where the public key can be shared to receive cryptocurrency. Investors also possess a private key, which is confidential and functions like a password, protecting their assets and enabling them to sign transactions or recover wallets from damaged devices.

2. Transparency of Transactions
Every cryptocurrency transaction is timestamped and recorded on the blockchain, creating a public ledger that chronicles ownership and custody. This transparent record is accessible to anyone and can be used to verify transactions. Additionally, the underlying code of these protocols is open-source, allowing for public review and modification.

3. Incentives for Supporters
Cryptocurrency protocols are structured to encourage users to maintain the system's integrity. For instance, Bitcoin miners utilize computational power to verify transactions and are rewarded with newly minted coins for their efforts after confirming a block transaction. This system incentivizes miners to continue verifying transactions and contribute to the network.

4. Investment Opportunities
Many people view cryptocurrencies as investment tools. The primary appeal lies in their potential as innovative digital assets. Some crypto assets attract investors due to the ethos of their developers and the specific use cases of the tokens, while others engage in speculation based on price history and volatility. While some traders focus on short-term gains, others see cryptocurrency as a means of diversifying their portfolios beyond traditional assets like stocks, bonds, or real estate.

How to Invest in Cryptocurrency

In recent years, interest in the cryptocurrency market has surged, particularly during bullish trends. However, the cryptocurrency landscape can be daunting for newcomers. Individuals can either buy and hold cryptocurrencies through exchanges or trade cryptocurrency CFDs through online brokers like CAPEX. Here are some common ways to gain crypto exposure in your portfolio:

Buy Cryptocurrency Directly: Investors can purchase and hold cryptocurrencies using various crypto exchanges. However, these platforms come with a steep learning curve, as users must familiarize themselves with the technology and interpret the data. Many exchanges impose limits on deposits, and maintaining an account can be costly.

Trade Cryptocurrency CFDs: With Contracts for Difference (CFDs), investors can speculate on the price movements of specific cryptocurrencies without needing to own the asset directly. CFDs are leveraged products, meaning you won’t have to commit the full value of the position. However, it's essential to note that leverage can amplify both gains and losses. Click here to open an CFD account.

Invest in Crypto Stocks: If you prefer indirect exposure to cryptocurrencies, you can invest in shares of companies that have a financial interest in digital tokens and blockchain technology. Options include cryptocurrency mining companies such as RIOT Blockchain (RIOT), exchanges like Coinbase (COIN), and tech companies like Square (SQ), PayPal (PYPL), Nvidia (NVDA), Tesla (TSLA), and MicroStrategy Incorporated (MSTR).

Crypto and Blockchain-Focused Funds: For those who want to avoid picking individual assets, thematic funds can be a good choice. Blockchain ETFs (exchange-traded funds) invest in stocks of companies that develop or utilize blockchain technology. These funds typically encompass a broader range of assets compared to Bitcoin ETFs or crypto ETFs, which focus on tracking the prices of specific cryptocurrencies.

When considering shares, indices, forex (foreign exchange) and commodities for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss.

Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice. Trading cryptocurrency CFDs and spread bets is restricted for all UK retail clients.