What is cryptocurrency?

A cryptocurrency is a digital or virtual currency designed to work as a medium of exchange. It uses cryptography to secure and verify transactions as well as to control the creation of new units of a particular cryptocurrency. Essentially, cryptocurrencies are limited entries in a database that no one can change unless specific conditions are fulfilled.

In essence, cryptocurrency is a digital currency the generation and transfer of which is regulated by encryption methods. It operates independently of a central bank.

How can you use it?

Alongside the popular bitcoin, there are many types of cryptocurrency to consider, including dogecoin, litecoin and ripple. The actual currency itself takes the form of a digital key with the address of the currency, which you can use to make transactions. Such keys are kept in your cryptocurrency wallet.

There are many different wallets and wallet types to choose from:

  • Online wallets allow you to store your keys online and access them from anywhere
  • Mobile wallets allow you to make payments using your phone through apps that store and encrypt your cryptocurrency keys
  • Desktop wallets let you send and store keys and track transactions
  • Paper wallets are less common. Paper wallet services allow you to generate a piece of paper with two QR codes on it; one is the public address at which you receive cryptocurrency, and the other your private address for spending it
  • Hardware wallets use a USB device to store cryptocurrency and your private address keys

The benefits

  • As cryptocurrency is digital, it cannot be counterfeited
  • Unlike credit cards, which give merchants access to your full credit line, cryptocurrency uses a 'push' mechanism to send exactly the amount you want to the recipient with no further information
  • Can be used by anyone with access to the internet
  • Normally no transaction fees for cryptocurrency exchanges

More about cryptocurrency

The risks

You need to understand the risks of this emerging market.

Cryptocurrency is still a relatively new thing that many frequently misunderstand, and it's easy to rip someone off.

Here are a few things you can do to help.

  • Carefully research the different cryptocurrency options out there (and the exchanges selling them) before you buy
  • Consider 'cold storage' to keep your cryptocurrency wallet offline when not in use (i.e. by using a paper wallet or hardware wallet); this can help protect against hacking
  • Keep your computer updated and protected

Get your free report

Want more information on UK investing?

Download your copy of our free guide. Featuring an analysis of UK investor trends, investment case studies and a four-page EIS cheat sheet.

Get your free guide