Megan writes about investing for Which?, cutting out the confusing jargon and calling out bad value to help you get the most out of your money.
Bitcoin and other cryptocurrencies (often referred to as simply 'crypto' or sometimes 'cryptoassets') are a way of storing value electronically, beyond the control of any centralised government.
The most common form of cryptocurrency is intended as a form of payment, though it is rarely accepted as such. Crypto is usually bought and held as an investment asset, in the hope that its value will rise and it can be sold for a profit.
There are several types of crypto – bitcoin is just the most well known – and they all have variations in value and purpose.
Please note: the content contained in this article is for information purposes only and does not constitute financial or investment advice.
All cryptocurrencies are a risky investment and you should only consider investing if you can afford to lose all the money you put into it.
It is true that where there's higher risk, there's potential for higher returns. But remember there's also more potential for losses.
Investing directly in shares or through investment funds is usually a less volatile way to take on investment risk.
If you're thinking about investing in crypto, there are a few risks to consider first:
The value of cryptocurrencies can change significantly. It's common to see the price of a cryptocurrency fluctuate by around 10% or more daily.
If consumers lose interest in bitcoin and move to a new type of crypto (or vice versa), it will also lose value. The same goes for other types of cryptocurrency.
Governments could also crack down on firms involved in crypto, or make them impossible for businesses to accept as payment.
If you're investing with a specific goal in mind – buying a property, for instance – price swings could put your plans in jeopardy.
Given the risks, if you're going to invest in cryptocurrency, you should also invest in other assets, like stocks and shares and bonds, that can help to balance out variations in price.
Crypto, crypto exchanges and crypto wallets aren't regulated by the FCA in the same way as investment platforms or banks.
Cryptocurrencies aren't protected by the Financial Services Compensation Scheme (FSCS), and you won't access to the Financial Ombudsman Service if you have a dispute with a provider.
Ordinarily, the FSCS would compensate you up to £85,000 worth of investments if you receive inappropriate investment advice, or if a regulated investment firm goes out of business and cannot return your money.
Crypto firms are however required to register with the FCA, to comply with anti-money laundering and terrorist financing regulations. They may also carry out regulated activities.
There are plans to regulate these firms in the future but whether crypto investors will be able to appeal to the Financial Ombudsman Service, or be covered by the Financial Services Compensation Scheme, is far from clear.
Be highly sceptical of companies that tell you they are fully regulated: check for yourself on the FCA Firm Checker tool.
Scammers usually advertise on social media or search engines - often using celebrity images and slick websites to promote these types of investments.
The Financial Conduct Authority (FCA) says scam firms can:
You should also watch out for initial coin offerings (ICOs), a digital way of raising funds from the public using a virtual currency like bitcoin. Some issuers might not have the intention to use the funds raised in the way set out when the project was marketed.
You can find a list of unregistered cryptoasset businesses on the Financial Services Register. It shows UK businesses that appear to be carrying on cryptoasset activity without being registered with the FCA, and should hence be avoided.
If you suspect you've clicked on a fraudulent link or have been targeted by scammers it's important to contact Report Fraud as soon as possible.
You can also subscribe to Which?'s free email service revealing the latest scams.
Cryptocurrencies can be bought through online cryptocurrency exchanges.
A cryptocurrency exchange is a service for people to buy or sell their cryptocurrency.
These function in a similar way to investment platforms, and allow you to monitor how the cryptocurrencies in your 'wallet' are performing.
There are a number of exchanges available including long-established firms Coinbase, CoinCorner and Kraken. Some trading apps also offer cryptocurrency investing.
Always check a firm appears on the Financial Conduct Authority (FCA) Firm Checker tool, and that the contact details match.
Although cryptocurrency exchanges are not currently fully regulated, they have to be registered for anti-money laundering purposes. Not doing so is a strong indication a firm is fraudulent.
Unlike regulated investment platforms, if an exchange goes out of business, you're not protected by the Financial Services Compensation Scheme.
You'll need to pay capital gains tax (CGT) if you sell crypto, or give it away or exchange it.
You'll need to keep a record of your cryptoassets and disposals, such as the number of tokens you’ve disposed of and the number of tokens you have left. The full list of records you need to keep is available on the HMRC website.
If you're receive crypto through employment or mining directly, you may also need to pay income tax and pay National Insurance contributions.
You can't directly hold cryptocurrencies in an Isa or pension.
This is unlike many other types of investments, for which a stocks and shares Isa or pension can stop you paying capital gains and dividend tax.
However, crypto exchange-traded notes (ETNs) can be held in an innovative finance Isa or pension, including self-invested personal pensions (Sipps).
Our money guidance team can’t tell you what to invest in – but they can explain how to get started and make your own well-informed decisions. Unlimited access to them via phone is included in the Which? Money subscription.
Find out moreInvestors can invest in cryptocurrency through 'exchange-traded notes' (ETNs) which, similarly to an exchange-traded fund (ETF), attempt to track asset price changes in one or more cryptocurrencies. For example, if the price of bitcoin goes up, then your bitcoin ETN could be sold for more than you bought it (minus fees charged by the ETN provider).
But an ETN is more like a bond, in that it's issued by a company that promises to pay you back when you sell, or hold the ETN to maturity. It also means you don't actually own the underlying cryptocurrency: you just own a debt note from a company.
If the ETN issuer goes bankrupt, you will lose all of the money you put in.
You can't invest in crypto ETNs through a stocks and shares Isa, though you can still invest tax-free through an innovative finance Isa. You'll need to be able to pass an appropriateness to prove you are knowledgeable enough and fully understand the risks you're taking on.
Bitcoin works using a system called 'blockchain', as do many (but not all) other cryptocurrencies.
Blockchain is a network of computers that all have access to every transaction that takes place.
Each time a bitcoin or other cryptocurrency transaction is completed, the entire network is updated with this information so it can be validated by users on the network to prevent counterfeiting or double spending.
The transaction information on the network is encoded using cryptography, which keeps the transaction data secure and prevents anyone from tracking who it belongs to.
Once validated, the transaction information is added to a chain of previously approved transactions.
Cryptocurrencies require large amounts of energy. This is because 'mining' for cryptocurrency involves heavy computer calculations to verify transactions.
Research from the University of Cambridge Bitcoin Electricity Consumption Index suggests bitcoin alone uses more electricity than many countries including Poland and Egypt.
However, not all cryptocurrencies have significant environmental impacts. For example, some may use an alternative to blockchain which removes the need for miners.
Stablecoins are an alternative type of cryptocurrency that are tied to another asset, for example gold or a major global currency like the US dollar.
The company behind the stablecoin holds a reserve of the other asset to support its value.
This can make stablecoins less volatile than other types of cryptocurrency which have no intrinsic value – meaning their worth only comes from how valuable investors think they are. As a result, stablecoins are more likely to be used for payments.
However, if investors lose confidence in the company behind a stablecoin - for instance, because they believe it doesn't hold enough of the related asset – the stablecoin's price can collapse.
And if the related asset's price is volatile, then the stablecoin's price is also likely to be volatile.