Cryptocurrencies are speculative and investing in them involves significant risks - they're highly volatile, vulnerable to hacking and sensitive to secondary activity. The value of investments can fall as well as rise and you may get back less than you invested. Past performance is no guarantee of future results. This content shouldn't be interpreted as a recommendation to invest. Before you invest, you should get advice and decide whether the potential return outweighs the risks. Finder, or the author, may have holdings in the cryptocurrencies discussed.
Estimated reading time: 2 min
Due to the potential for losses, the Financial Conduct Authority (FCA) considers this investment to be high risk.
What are the key risks?
1. You could lose all the money you invest
- The performance of most cryptoassets can be highly volatile, with their value dropping as quickly as it can rise. You should be prepared to lose all the money you invest in cryptoassets.
- The cryptoasset market is largely unregulated. There is a risk of losing money or any cryptoassets you purchase due to risks such as cyber-attacks, financial crime and firm failure.
2. You should not expect to be protected if something goes wrong
- The Financial Services Compensation Scheme (FSCS) doesn't protect this type of investment because it's not a 'specified investment' under the UK regulatory regime – in other words, this type of investment isn't recognised as the sort of investment that the FSCS can protect. Learn more by using the FSCS investment protection checker.
- The Financial Ombudsman Service (FOS) will not be able to consider complaints related to this firm or Protection from the Financial Ombudsman Service (FOS) does not cover poor investment performance. If you have a complaint against an FCA regulated firm, FOS may be able to consider it. Learn more about FOS protection here.
3. You may not be able to sell your investment when you want to
- There is no guarantee that investments in cryptoassets can be easily sold at any given time. The ability to sell a cryptoasset depends on various factors, including the supply and demand in the market at that time.
- Operational failings such as technology outages, cyber-attacks and comingling of funds could cause unwanted delay and you may be unable to sell your cryptoassets at the time you want.
4. Cryptoasset investments can be complex
- Investments in cryptoassets can be complex, making it difficult to understand the risks associated with the investment.
- You should do your own research before investing. If something sounds too good to be true, it probably is.
5. Don't put all your eggs in one basket
- Putting all your money into a single type of investment is risky. Spreading your money across different investments makes you less dependent on any one to do well.
- A good rule of thumb is not to invest more than 10% of your money in high-risk investments.
If you are interested in learning more about how to protect yourself, visit the FCA's website here.
For further information about cryptoassets, visit the FCA's website here.
From the countless ways to buy cryptocurrency to the difficulty of managing it, crypto can be pretty overwhelming. Especially if you’re a crypto newbie. However, this guide breaks it down so you can start buying crypto in no time.
What is cryptocurrency?
There are many misconceptions about what cryptocurrency is and what it isn’t. In its simplest terms, cryptocurrency is a digital asset stored on a blockchain that can be transferred between participants.
There is a range of uses for cryptocurrencies, including as a means of payment, to vote on the direction of a blockchain project, to serve a specific purpose (such as paying transaction fees), or to make holders a part of a community.
How to buy cryptocurrency
When it comes to buying crypto, there are a couple of routes you can take. For most beginner users, using a centralised exchange (CEX) is the easiest way to get started.
- Choose your cryptocurrency exchange. Compare an exchange’s fees, features, number of coins and customer support – and when you’re happy create an account.
- Verify your identity. Most exchanges require you to verify your identity to comply with anti-money laundering regulations.
- Add fiat to your account. You can connect your bank account to the exchange and add funds in a fiat currency like pounds sterling.
- Purchase cryptocurrency. You’re ready to go. Now you can exchange fiat for crypto on your exchange.
How much do I need to buy cryptocurrency?
The minimum amount needed to invest differs between exchanges. It can range from as little as £1 up to £10.
The amount you should invest depends on your risk tolerance and timeline. Since cryptocurrencies are volatile, you should only invest what you can afford to lose.
That said, the longer your timeline, the less you could invest and still see notable returns. While a coin might increase 10-50% within 12 months, the same asset could climb multiple hundred percents in a couple of years. However, past performance is no guarantee of future returns.
Where can I buy cryptocurrencies?
Most crypto users purchase crypto from either a centralised or decentralised exchange. Both options have pros and cons.
Centralised exchanges (CEX) provide a seamless user experience that’s much better suited to beginner investors. Users will likely find centralised exchanges easier to use and similar to a traditional online broker. However, when you purchase crypto on a centralised exchange, the platform stores it in its exchange wallet. This comes with a degree of risk.
- Easy to use
- Lower transaction fees
- Ideal for beginners
- Trusting a third party with your crypto
- Know You Customer (KYC) requirements can prevent users from getting started straight away
Decentralised exchanges (DEX) offer an opposing experience to centralised exchanges. Firstly, they provide a complicated user experience.
To begin using them, users must have a solid grasp of crypto terminology and a good idea of how blockchains work. For example, different cryptos are only compatible with specific blockchains.
This means users must understand which blockchain a specific coin is on and then create a compatible wallet to buy it. Users will also face many other complexities, from managing gas fees to adding networks to their wallets.
That said, they also provide a range of benefits not accessible to CEX users. Unlike CEXs, DEXs are hosted on the distributed blockchain, meaning one entity does not have control over it.
Therefore, DEXs enable peer-to-peer transactions, where users always keep custody of their crypto without an intermediary 3rd party.
- Offers the core benefits of blockchain.
- Users don’t need to hand over custody of their crypto to trade.
- Access to a broader range of coins.
- Complicated user experience.
- Transaction fees can become unaffordable.
- Users may need to manage wallets for different blockchains.
How to choose what cryptocurrency to buy
There are thousands of different cryptos you could buy, so how can you choose the best one? We have come up with some key considerations that will help you decide which crypto is right for you.
Firstly, you must identify your risk tolerance. While it is essential only to invest what you can afford to lose, you might have a better chance at protecting against losses by investing in “blue chip” coins like Bitcoin and Ethereum.
However, these coins already have much of their value priced in, so many investors turn to lesser-known coins to maximise their gains. Typically, the smaller the coin’s market cap, the more risky the investment.
Finally, coins that can solve a real-world issue generally have more long-term potential. Take Bitcoin, for example; while its origins are still disputed, we know that it was created to enable secure peer-to-peer payments, sighting issues within the traditional banking and finance sector.
Platforms to buy cryptocurrency
When learning how to buy crypto, one of the primary considerations is where will you buy it. Since each decentralised exchange is specific to one or a couple of blockchains, we’ll stick to explaining the best centralised exchange platforms to buy cryptocurrency.
As a starting point, we’ve pulled together our picks for the best crypto exchanges in the UK for you to look at.
How do I buy cryptocurrency in the UK?
A centralised crypto exchange is the easiest way to purchase crypto in the UK.
Once you decide on the right exchange, follow the 4 steps in our “How to buy cryptocurrency” section to complete your purchase.
Tips on how to buy cryptocurrency
We’ve listed our top 3 tips to remember when buying crypto below.
- Know your fees. It’s important to understand the fees involved in buying crypto. For example, if you use a centralised exchange, you’ll be charged transaction fees as well as deposit and withdrawal fees. When it comes to fees, we recommend shopping around so you get the most Bitcoin for your buck!
- Not your keys, not your crypto. We recommend moving your crypto off centralised exchanges as soon as you know how. Learn about cold storage and think about sending your long-term investments there as quickly as possible. However, as discussed, using blockchain applications and managing wallets can be complicated, so if you are brand new to crypto, it is best to remain on centralised exchanges at first.
- Set it and forget it. Crypto is volatile. It’s not uncommon to see large price fluctuations in a single day. However, try to stick to your strategy. If you’re a long-term investor, avoid panic selling. It can be easy to throw your strategy out the window each time the markets move, but as Warren Buffet says, “time in the market is better than timing the market”.
Mistakes to avoid when buying cryptocurrency
Cryptocurrency is the industry where finance, cryptography and computing intersect. Therefore, things can get pretty tricky. We’ve listed some of the most common mistakes we often see beginners fall victim to below.
- Fear of missing out. You’ll likely see brand new trending coins you missed out on continue to climb daily. However, don’t purchase just because of hype and fear of missing out (FOMO); many of these coins fall as quickly as they go up. This is one of the quickest ways to see your crypto portfolio evaporate.
- Not accounting for gas fees. As mentioned earlier, when the Ethereum chain is in high demand, transaction fees can reach over £100. It’s important to consider this when purchasing coins, as the gas fees could make it impractical to sell them later.
- Sending coins to the wrong blockchain. Before moving coins off exchanges, it’s important to understand the different blockchains and which tokens they accept. Before you send the coin, be sure you know which network it’s on, and only send it to a wallet address compatible with that network.
Pros and cons of buying cryptocurrency
- Diversification. If you’ve invested in other asset classes like equities, bonds or commodities, cryptocurrency provides an alternative asset class to boost your portfolio diversification.
- Invest in a forward-thinking industry. The crypto industry is constantly growing and innovating.
- Own your assets. Unlike traditional investing, buying cryptocurrency and storing it in a hardware wallet means you (and only you) can manage and control your assets without needing a third party.
- Price volatility. Cryptocurrencies are highly volatile, and thousands of coins have lost all their value or discontinued in the past.
- Steep learning curve. Considering all the technical jargon required to use blockchain, new investors face a steep learning curve.
- High risk. Not only is there a risk from price volatility, there’s also a security risk from hacking, phishing or bad actors in the sector.
Overall, there are several ways how to buy cryptocurrency. The one that’s right for you depends on your experience and personal preferences. That said, while centralised exchanges offer an excellent user experience, it’s best to consider moving your crypto to a hardware wallet in order to protect your assets.
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