Everything you wanted to know about crypto and but were afraid to ask

A look around at the ever-growing and sometimes the tricky-to-navigate world of cryptocurrencies.

Crypto, particularly Bitcoin, has been the topic on everyone’s minds lately. 

Following the rise and fall of the ‘Reddit Stocks’ attention has turned to cryptocurrency.

Now, crypto has been around for over a decade so it’s not exactly the new kid on the block, however, it is currently reaching levels that few people predicted it would back in its early days. 

Given just how popular cryptocurrency is at the moment, we here at AltFi thought that it might be worth having a dig around to ask all the difficult questions that you may be afraid to ask. 

What actually is cryptocurrency? 

How can something that isn’t backed by a central bank or gold and is as intangible as cryptocurrency hold any value I hear you ask? 

Well, David Stevenson, a strategic advisor for AltFi and author of the Adventurous Investor column in the Financial Times gave us the run-through.

“Cryptocurrencies are designed to create an alternative to fiat money or money created by a Central Bank,” Stevenson told AltFi, “Digital currencies are an attempt in a sense to go back to the gold standard in many respects.”

Bitcoin, the world’s first cryptocurrency, was founded in 2009 by a mysterious figure (or figures) dubbed Satoshi Nakamoto and is based on cryptography, or the method of protecting information through the use of codes. 

Iona Bain, investment author and founder of the Young Money Blog, told AltFi: “After the [2008] financial crash with the central bank's printing more money to buy assets in quantitative easing. We saw that there was this desire for maybe an alternative system.”

There are several thousand types of cryptocurrencies, with Bitcoin, Ethereum and Litecoin being the most valuable, worth around roughly £40,000, £1,300 and £151 per coin respectively.

What is blockchain?

Put simply, without blockchain, cryptocurrencies wouldn’t exist. 

Blockchain is an ever-evolving, ever-growing database that collects information in ‘blocks’ and then ‘chains’ them together every time someone creates a new cryptocurrency transaction.

These blocks that have been chained together are permanent and create a database full of transactions that can never be removed and the ledger that they create is a kind of digital contract that verify the legitimacy of a crypto transaction. 

“Blockchain is a way of authenticating money without a central bank. So, crypto miners are rewarded for keeping the authenticity and legitimacy of the money created within the system,” said Stevenson

Essentially cryptocurrencies, in particular Bitcoin, are completely unhackable thanks to blockchain technology. At least that’s what the adherents say.

How do I buy crypto?

Many inexperienced investors will jump right in and buy crypto right away without doing the proper research needed to find which cryptocurrencies are the best to invest in.

Joon Ian Wong, partner at consulting firm Amplified Event Strategy, told AltFi: “There are loads of platforms out there that can help new investors get crypto exposure. Revolut, for example, is a good place to start because you can trade cryptocurrency units inside Revolut.”

“I think platforms like eToro are a few more steps up the ladder because typically you’re placing more complicated orders. Normally you’d go from fintech apps like Revolut, up to brokerages like eToro and then onto cryptocurrency exchanges like Kraken, Binance and Coinbase.”

An important distinction to make between these platforms is that lower down the ladder you have exposure to fewer coins and, in Revolut’s case, cannot actually remove the cryptocurrency that you buy from the app, you can’t send it to an external wallet that you control, but more on that later...

What is a crypto wallet?

There are two types of wallet that you can keep your cryptocurrencies in: a custodial and a non-custodial wallet. 

Wong explained: “A custodial wallet, for instance with Kraken (a cryptocurrency exchange) is more like a bank account because Kraken holds the funds and they create a way for you to access those funds on your behalf.”

“And with a noncustodial wallet, you fully control the asset and if you lose that key, it’s gone forever.”

If you haven’t heard the horror stories of lost hard drives, forgotten passwords or missing keys, then I think it’s time to do some digging. 

As Stevenson says, “having a crypto wallet is doable, but not without its hassle.”

Why is Bitcoin so popular?

Unlike other currencies, there is also a limited amount of Bitcoin in the world, 21 million to be exact, and there are about two million Bitcoins still to be mined.

There also seems to be this complete mystification surrounding its origin. Who is this mysterious Satoshi Nakamoto? Could it be more than one person? Will we ever find out who it is? 

It’s also key to recognise that Bitcoin’s popularity is fed directly with its social media coverage.

“Bitcoin and other cryptocurrencies are entirely momentum-based,” Stevenson told AltFi, “It’s a classic example of supply and demand free-market economics.”

“Most people are just having a bit of fun, there’s a level of gamification to it and there’s nothing wrong with that.”

We also have to remember that not many people outside the ‘Cult of Crypto’ don’t hold it in as high regard as those in the crypto echo chamber, which in turn feeds its popularity. 

What are the downsides to buying crypto?

Investing should be more for long-term returns rather than short-term gains, however, many young investors are drawn into the sky-high returns of Bitcoin in particular (so far), without actually doing their due diligence before taking the plunge. 

The headline risk is that you lose all your money.

“Cryptocurrencies are rarely profitable for people, particularly individual investors. Even if you try to mine Bitcoin, it takes tens of thousands of dollars to procure the equipment, get someone to run it and then store it,” Wong said. 

There have been many horror stories of early Bitcoin investors losing the key to their crypto wallets. For instance, James Howells, a 35-year-old software engineer from Newport, Wales accidentally threw away his hard drive which has Bitcoins worth over $280 million stored on it. 

Bain echoed Wong’s wariness: “Buying and selling crypto can actually be more risky than a lot of platforms let on. Crypto is very unlikely to become a widely circulated currency and it is incredibly volatile.”

“Sometimes what’s driving demand could be as simple as Elon Musk putting out a tweet telling people to buy Bitcoin, and all of a sudden the price goes up. Then he puts out a tweet saying the price is too high and then it goes down.”

Despite the hesitancy more seasoned investors have towards cryptocurrency, it doesn’t look like it is going anywhere anytime soon. 

An AltFi investigation has discovered that Revolut could potentially be sitting on a pile of crypto worth around $1bn, not too bad for the lowest rung on the crypto investing ladder.