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Despite being around for roughly 13 years and currently in the midst of a market crash, crypto feels like it’s still in a goldrush phase.
As hopeful investors pile in with dreams of making big money, many still lack any real knowledge about what they’re getting into. A survey by software developer Oxford Risk last year found more than a third of investors had little or no understanding of the sector when they first got involved.
And, with more than 2 million UK adults now holding crypto, according to figures from the Financial Conduct Authority (FCA), there could be significant gaps in the nation’s collective crypto knowledge.
To that end (and assuming you understand what cryptocurrency is) we’ve put together some must-know basics about cryptocurrency investing if you’re new or thinking of getting involved.
Speculate on crypto and you probably won’t sit back and watch your investment skyrocket.
Bitcoin (BTC) alone has seen at least eight significant crashes – or market corrections, depending on your perspective – over the last decade or so.
In June 2011, after surging in value from $2 to more than $32, Bitcoin lost 99% of its value in a single day. If the average property lost as much value, it’d go from around £286,000 to £2,860.
Comparisons aside, BTC holders found that every £100 worth of the coins they owned fell to just £1.
It crashed again in August the following year (down 56%), then the following April (down 83%) followed by December in the same year (down 50%).
Five years later, between 2017 and 2018, Bitcoin’s value dropped by more than 80%. As the pandemic began in March 2020, BTC fell by 50%, followed by another 53% in May 2021 and, finally, the asset lost around another 50% in value between November 2021 and May 2022.
There were, of course, rises in value in between these tumbles, but it’s clear that the bellwether of the crypto flock has seen many dramatic fluctuations over time.
Cryptocurrency earnings and profits are subject to either Capital Gains Tax (CGT) or Income Tax, depending on the circumstances.
If you ‘earn’ crypto by selling goods or services in exchange for crypto, you’ll have to pay income tax. If you make money from trading crypto, you’ll pay CGT.
There’s no GCT to pay on the first £12,300 you make in any financial year (running from 6 April until 5 April 12 months later), and the tax you’ll pay on anything above that depends on your income and the tax band you fall into.
Basic rate taxpayers will pay 10% CGT, higher rate taxpayers and additional rate taxpayers will pay 20% CGT.
If you’re liable for income tax, your earnings are added to your regular income and you’ll pay the usual income tax rates. For example, if you have regular earnings of £30,000 per year and someone pays you £1,000 worth of Bitcoin (BTC), your total taxable earnings, minus the personal allowance of £12,570, would be £18,430 and you’d pay the basic rate of Income Tax on the whole amount.
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Mining is the process through which cryptocurrency transactions are validated and new cryptoassets are minted (read more here).
There was a time when the average person could ‘mine’ crypto from their home computers, and be in with a chance of earning free cryptocurrency in return. But since the computer processing power required to validate transactions increases over time, it’s now the preserve of professional mining outfits and companies – a home PC simply isn’t up to the task.
The cost of buying the hardware needed to compete with these organisations is now prohibitive and you probably wouldn’t see a good return on investment.
Mining Bitcoin requires lots of powerful computer hardware and consumes tremendous amounts of electricity. Cambridge University researchers estimate Bitcoin’s total consumption of energy via the Cambridge Bitcoin Electricity Consumption Index.
At the time of writing, the index estimates Bitcoin uses 119 terawatt hours (TWh) per year. That’s just under the amount used by the entire nation of Norway.
Not all cryptocurrencies require such vast amounts of energy. Bitcoin relies on ‘proof of work’ to validate transactions. Proof of work means having the computing power to correctly guess a 64-character alphanumeric code called a hash (out of trillions of possible combinations) before anyone else.
The more powerful your gear, the more guesses you can get through per second and the greater your chances of a correct guess, which will earn you some valuable Bitcoin. The more powerful your equipment, the more energy you’ll use.
As miners compete to outguess each other, the crypto arms race means more energy is consumed overall.
Some cryptocurrencies use a different system that uses far less energy. Ethereum uses ‘proof of stake’ in place of proof of work, asking miners to stake their own tokens for the chance to validate a block on the blockchain and earn their reward. There are penalties imposed on anyone attempting to add false information, which is intended to keep everyone honest.
The more assets you have to ‘stake’, the greater your chances of becoming a validator and earning the rewards – giving you yet more assets to stake in future. This stacks the deck in favour of those with more cash.
Last year, a Newport man was seeking permission to search a council landfill site for a laptop he threw out eight years prior that potentially contained more than £300 million worth of Bitcoin.
Once you’ve bought or earned cryptocurrencies, they need to be stored in a crypto wallet. Crypto wallets are either ‘hot’ or ‘cold’. Hot wallets are online and provided by either a crypto exchange or wallet provider. Cold wallets are offline storage devices like hard drives, flash drives and solid state drives.
Hot wallets are targets for hackers. If a hacker were to steal your wallet’s private keys from the exchange that provides it, they could clean out your account, leaving you with no recourse. This isn’t theoretical, it can and does happen.
Cold wallets are more secure because there’s an ‘air gap’ between your computer or phone and the storage device housing your assets. You can buy cold wallet. from companies who generate corresponding public and private keys for it.
The idea is to print off your keys and keep them safe. If you were to lose your keys, however, you may find your crypto locked away forever.
Most financial products and services in the UK are regulated by the Financial Conduct Authority(FCA), but not so dealings in cryptocurrency.
In fact, the FCA has repeatedly warned people about the risks inherent in the world of crypto, saying there are absolutely no guarantees of making a profit, and that anyone getting involved should be prepared to lose all their money.
Crypto firms are also not covered by the Financial Services Compensation Scheme – a government backed arrangement which sees individuals provided with compensation up to £85,000 if a bank, building society or other financial firm they are using goes bust.
In other words, if you use a crypto firm that goes out of business, you’ll be left high and dry.
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Staff writer Mark Hooson has been a journalist within the personal finance, consumer affairs and fraud sectors for more than 10 years. He is also Forbes Advisor UK’s resident tech expert. Mark says he thrives on making ‘complicated and dry topics easier to digest’.
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