An intro to cryptocurrencyAn intro to cryptocurrency

Cryptocurrency (or crypto) is a form of digital token based on a decentralised structure. Bitcoin, Ethereum, and thousands of others are cryptocurrencies. Instead of being issued by governments and existing within the traditional banking system, the record of transactions is held on a ‘distributed ledger’ which is constantly verified by a network of computers.

For some, buying crypto is a way of supporting and participating in a world of finance that’s far more decentralised. Despite crypto’s popularity, it does come with risk.

Considerations when buying crypto

As with all investments, there are many things to consider when it comes to buying crypto, and investors will have different views. Some things you might consider: 

• Volatility—Crypto tends to be a highly volatile and speculative investment (i.e. the price of crypto tends to change frequently, and sometimes by large amounts).

• Risk—With crypto, the potential for rewards is mixed in with risk (of losing some, or all, of the money you’ve put in). It’s worth digging into the risks and considering these in relation to your risk appetite, time horizon, and how diversified your wider portfolio is, among other things.

• Environmental concerns—Crypto can rely on very large amounts of computing power to operate, resulting in high energy consumption and increased carbon emissions.

• Regulation—Limited regulation can make the process of buying and selling crypto more vulnerable to fraud, exchanges collapsing (and taking peoples’ money with them), and other security issues.

• Security—If you’re buying crypto directly and relying on ‘private keys’ for security, it’s worth keeping in mind that if your private key gets lost or stolen, your crypto will be inaccessible forever!

How you can hold crypto

You can hold crypto in different ways, including in a personal wallet, on an exchange, and through another investment.

In a personal wallet 

If you want to invest directly in crypto, using a personal wallet is generally the lowest-cost way to hold it. This wallet is accessed using your own private key—it’s your responsibility to hang on to your private key and make sure it isn’t lost or stolen. 

On an exchange

You can buy, sell, and hold crypto on an exchange. The exchange handles the admin for you, including managing your private key. However, exchanges will generally charge a fee for this service, and you face the risk of them collapsing and taking your crypto with them, or being hacked.

Via another investment

Alternatively, you can get exposure to crypto indirectly, through investments that hold crypto. Many investors find this the easiest option, as they don’t have to deal directly with issues such as setting up crypto wallets, managing security, or tax on crypto assets.

There are several ways that you can do this through Sharesies:

• exchange-traded funds (ETF) that aim to track the price of a cryptocurrency by investing in the cryptocurrency (e.g. iShares Bitcoin Trust)

• ETFs that aim to track the price of a cryptocurrency by investing in crypto-related investments (e.g. Proshares Bitcoin Strategy ETF)

• ETFs that invest in cryptocurrency-related companies (e.g. BetaShares Crypto Innovators ETF)

• companies that operate in the crypto industry (e.g. Coinbase, Riot Blockchain)

• companies that own crypto themselves (e.g. Microstrategy, Tesla, Square).

It’s worth noting that even if you hold crypto via another investment, the risks inherent in crypto don’t disappear—they’re just managed by someone else. So make sure you’re confident in how the company or fund manager is handling those risks. 

Wrapping up

When it comes to deciding whether crypto is right for you, there are lots of different things to consider—so make sure you understand the risks and implications of getting involved, determine which considerations are important to you, and do your due diligence.