In focus: A beginner’s guide to cryptocurrency

Bitcoin, Ethereum, Litecoin, Cardano…there are now thousands of different cryptocurrencies out there, and more and more people seem to be talking about them as part of the future. But what on earth are they, and are they safe to use and invest in? This article will help give you a head-start in understanding all things crypto.

First up: what IS a cryptocurrency?

Let’s step back a bit and clear up something else first. What, exactly, is MONEY?

In the UK – where we have a stable currency and access to modern banking – we take what money is for granted, even if we often wish we had more of it! Money is just the way we save up value, buy things, and measure what things are worth.

Who decides "this pair of trainers is worth £50”? It’s an agreement that we all reach and accept, via something called network effects – if everyone else agrees, so do we, and it just is. And that value is backed by state institutions, like the Bank of England, in the case of sterling.

Cryptocurrencies are simply money that is completely digital in form. Their value comes from the same network effects, and they are secured by complex mathematical algorithms (calculations and codes).

Their breakthrough came from the combination of blockchain technology and cryptography (find the definitions of key terms in the yellow panel), back with the launch of Bitcoin in 2009. Since then, thousands more cryptocurrencies have been created.

Ok… so you can’t hold them or see them?

No – at least, you can only see them in your digital wallet, or on blockchain, which is something like a spreadsheet that the whole world can collaborate on and see who has spent what.

It’s difficult to wrap your head around, but what blockchain technology enabled was a way to prove something digital was unique. This was a massive breakthrough, because think about any digital item like a photo – if you send that to someone, you make an instant duplicate of it, so you have a copy and so does your friend, or a hundred friends. It’d be no good if you could duplicate a bitcoin like that, as it would be worthless.

What blockchain brought to the table was the maths to make that cryptocurrency unalterable. This was then combined with cryptography, which makes it impossibly hard to tamper with or access someone else’s stuff on the blockchain, but very easy to see that stuff exists and has an owner.

Why does this matter?

It’s important to understand that cryptos are actual currency, rather than electronic payments.

If you buy something with a debit card, then sure, it’s totally digital – but it’s actually the same money, moving in a digital transaction from your existing bank account to someone else’s. The cash doesn’t physically move, at that point, from your account to someone else’s – it’s a promise between your bank and the seller to settle it up later. In that moment, though, it’s just numbers – and you might even have buyer protection if you get ripped off or change your mind.

With a cryptocurrency, it’s like paying cash for something direct to the seller – once it leaves your digital wallet and settles in the other person’s, that’s a done deal. You can’t change your mind or cancel it, and there’s no ‘middle-man’ like a bank involved.

Because they’re a totally separate kind of money, the value of cryptocurrencies vary – often massively – against other currencies, in the same way that foreign currencies’ values change (meaning you don’t always get the same amount of euros for your pounds when you go on holiday). And the network effects? They vary hugely across the thousands of different cryptocurrencies as well, so think about that when you hear about the next new hot coin on the market. If no one is using it, where does its value come from?

Separating money from government and bank control is appealing to many people politically, who see independent (non-state) money like Bitcoin as a solution to problems of generational wealth inequality, and things like inflation (when things cost more, as time goes by, so the pound in your pocket is worth less and less). But banks are also looking into creating their own digital currencies, using the same technology, to enjoy the speed and simplicity of cryptocurrencies.

Today there’s an explosion of technological development going on, making it easier to use different cryptos for everyday payments, and new trends like non-fungible tokens (NFTs) and decentralised finance (DeFi). So, it’s highly likely that cryptocurrencies will play a significant role in your future financial life, one way or another.

“It might sound like a harmless way to make a quick buck, to allow your account to be used,” he explained. “But the impact on your financial record can affect the rest of your life. There are consequences, in terms of potentially not getting loans, mortgages, even future employment opportunities.”

Jonathan understands why the idea of cryptocurrencies are attractive to young investors. “Stocks and shares aren’t particularly exciting. Crypto is the new kid on the block and has built a following in younger audiences, in part thanks to its promotion at major events like the F1, football matches and even The Grammys.” And the scammers know exactly how to get under people’s skin, creating a sense of FOMO, often using celebrities, and going after people who might finally have a bit of cash, like a student loan.

The chance to double your money might sound very attractive, but it’s essential to give yourself a reality check. What are you really being asked to hand over? Identity documents, virtual access to your device? What are they using to appeal to you in particular – is someone exploiting an influencer (who may not even be knowingly involved), or playing on feelings of generational divide?

Follow the money and turn your lie detectors up to max before you hand over anything – even your name.