What is cryptocurrency?

This article is part of
Guide to Cryptocurrencies

  1. The first thing would be to either set up a wallet or exchange account to allow the buyer to deposit the cryptocurrency when they eventually buy it. It is the equivalence of needing to have a handbag or purse that you can put money into. To create the wallet the buyer has to go into a bitcoin generator to create their own wallet, go to an exchange to to buy a segregated wallet just for themselves or a pooled wallet within the exchange.
  2. Next; is buying the cryptocurrency. A person can either be sat in a pub where they get someone to pay for the beers in cryptocurrency or a person can go on to the exchange to buy it. If you take bitcoin as an example, you have the option to transfer that, out of the exchange into the wallet, which can also be accessible on a mobile phone.
  3. Once invested, you can keep it in for however long you like. To cash out, the main routes include spending it in shops that accept bitcoin, switching between exchanges, or sending coins from your personal wallet to coinbase to do a transaction against Sterling. The Sterling is accredited to your account by the exchange then you send that to your bank account.

The transaction may sound straight-forward, but the main debate raging now, is about how safe it really is as an investment tool.

Their spectacular returns and volatility mean cryptocurrencies are not really viewed as viable currencies by many advisers.

Laura Suter, personal finance analyst at investment platform AJ Bell describes cryptocurrency is a "scammers’ paradise" because many people ‘investing’ in these assets do little research and are sucked in by the promise of supersized returns in an impossibly short space of time. 

Ms Suter adds: “Using social media and the lure of expensive products to draw people in, scammers have made a fortune off their victims.

“Research from the FCA earlier this year found that people went into cryptocurrencies for all the wrong reasons, and getting rich quick was one of the main motivations for buyers – so it’s not surprising that scammers are capitalising on this. 

“Anyone handing over their hard-earned cash should make sure they understand what they’re getting into, they’ve checked it’s a legitimate investment, and not rely on hype and excitement from friends or social media. Investing isn’t a get rich quick scheme – and anything that uses fear of missing out or requires you to invest before thinking is best to be avoided.”

Scott Gallacher financial planner at Rowley Turton Private Wealth Management says that he would only be interested in investing in cryptocurrencies if he sees they can deliver returns.

Mr Gallacher adds: “If you consider other investments, they typically deliver returns to the client. Shares offer dividends and growth, due to a better and more profitable business, not just because the shares are more popular, cash offers interest payments, property offers rent and capital growth. Cryptocurrencies only offer growth, and only because someone else might pay you more for it than you paid.

“I’m very skeptical on cryptocurrencies entirely. I see them at best as a speculation rather than an investment. Currencies need stability and trust to be viable.”

“Their spectacular returns and volatility mean that cryptocurrencies are not really viable as a currency. The risks are simply too high.”