Blog post

The World of Cryptocurrency Explained

26th June 2022

If you haven’t explored the world of crypto yet, and are wondering exactly what cryptocurrency is, then here’s our attempt to simplify it for you!

Cryptocurrencies are a form of digital or virtual currency which use a blockchain to secure the system. A blockchain is a mechanism that enables the exchange of information or payments between people, without a middleman (i.e., a bank). Removing the middleman makes the blockchain decentralized.

Blockchain is essentially a ledger, like a mega spreadsheet, where every single purchase or sale transaction or transfer that has ever been made of cryptocurrency is stored on a network. This ledger (which anyone can access) keeps a record of who owns what, and who transacts what, anytime.

The word “crypto” comes from the way the Blockchain is secured - through cryptography. Cryptography essentially means that a message is encrypted. This encryption technique used by most cryptocurrencies is called hash functions, which turn the message into a random bunch of numbers and letters.

Every transaction is registered in a block which is then secured by these hash functions.

Each block uses the information from the previous block turning it into a connected chain of blocks. Or a “Blockchain”.

Just like shares are traded on the stock exchange, cryptocurrencies are traded on crypto exchanges. There are two ways to purchase cryptocurrency:

  • You can buy a cryptocurrency coin and become the owner of that particular crypto coin, or
  • You can buy cryptocurrency derivatives which invest in crypto indirectly meaning you don’t actually own the coins.

Security is a big deal with cryptocurrency and it’s important to keep your investments safe. Just like you keep your cash, debit and credit cards secure you also need to store your crypto somewhere safe.

When you buy crypto through an exchange, you may have the option to store it directly on the platform. Or you can choose to move them off the platform and into a personal crypto wallet. If the wallet is software connected to the Internet, it is called hot storage. If the wallet is stored in a completely offline device, then this is called cold storage - for example saving this information on a USB or external hard drive would be considered cold storage.

As you may have seen in recent news, investing in cryptocurrencies can be extremely volatile. Investors who purchase cryptocurrency must be prepared for fluctuations in the value as the price of the coins can move up and down, sometimes dramatically.

Many investors can find the volatility (price fluctuations) of cryptocurrency challenging and it can be hard to manage the roller coaster ride of price movements and accompanying emotions that arise. This uncertainty is what often leads to panic selling, which we have seen lately in crypto markets as investors sell or buy based on emotion.

Because of the highly volatile nature of cryptocurrency, many people view it as an opportunity to trade and choose to buy and sell their coins frequently. What many people don’t realise is that a trading strategy requires technical analysis and constant monitoring to buy when prices are low and sell when prices are high. This is a difficult task which requires a high level of skill, and experience. Many people are unable to time the market well and can make significant losses if they miss certain important time periods.

Trading in cryptocurrency increases the risk for this investment. Trading is different from investing in crypto for the longer term. If investing in crypto for the long term, investors choose to adopt a buy and hold strategy (usually because they believe in the future potential and increase of value in those cryptocurrencies). This strategy is like being a long-term investor in the stock market. However, investing for the long term in cryptocurrency is still considered riskier than most other investments.

Whether you trade or invest in crypto, it is high-risk and extremely volatile. It is important to keep in mind that it may not be a suitable investment for everyone and whether it’s appropriate for you will depend on your investment time frame, risk tolerance and investing goals and objectives. If you’re not sure, it can pay to seek professional financial advice.

Crypto is definitely not considered a savings strategy, nor is it considered to be a conservative investment. It’s a speculative investment that has a high risk and returns profile.

If you are investing, it’s important to remember some investing fundamentals, like never invest in something you don’t fully understand and don’t invest money in something, if you can’t afford to lose it.