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This article is for informational purposes only and is not a financial promotion. It does not recommend any provider, product or strategy. For more information visit the FCA’s guide.
Even if you know nothing about cryptocurrency, it’s not too late to learn more about it. We’ve put this page together to explain how it all works.
But we need to be clear: cryptocurrency is incredibly risky. The market is volatile and unpredictable. Profit is not guaranteed, and anyone who invests should be prepared to lose every penny they put in.
With that said, we’ll help you to understand the risks so that you can make an informed decision about whether to invest, as well as what to invest in, and how.
We’ll start at the beginning by answering the fundamental question: What is cryptocurrency?
What is cryptocurrency
Cryptocurrency is digital money that’s not issued by the state and not stored in banks. It can be sent directly from one person to another without a middleman.
You can spend cryptocurrency on goods and services, trade it for other cryptocurrencies, or just sit on it and hope it goes up in value.
The idea is simple on the surface, but the details are where it can be daunting. The best way to understand it is to compare cryptocurrency to real money.
You probably know roughly how much money you have in the bank, but that money isn’t locked in a vault. The bank invests and lends our deposits for a profit.
The bank keeps track of everything with a ledger. It tells them how much money they are obliged to give each customer. The bank holds the ledger and only the bank can make changes to the ledger. The ledger is, in this sense, ‘centralised’.
When someone such as your employer pays into your account, the bank updates the ledger. When you spend, it also updates the ledger.
The idea behind cryptocurrency is that anyone can hold a copy of the ledger, and anyone can make updates to the ledger. The ledger can’t be changed retrospectively, so it’s a definitive record of transactions since the beginning. The ledger in this case is ‘decentralised’.
Decentralisation is meant to take the power away from big banks, but it can also mean faster transactions, lower costs and relative anonymity. There are a few challenges with this idea, however.
Firstly, how do you make sure people are honest about what they put in the ledger? Also, how do you stop one person’s updates from overwriting someone else’s? Finally: why would anyone volunteer to update the ledger?
The answer is that you give people a chance to earn free, valuable cryptocurrency for taking part, and you use technology to prevent fraud.
The incentive part is easy. For example, anyone who has their copy of the Bitcoin ledger added to the official record earns 3.125BTC, for free. At the time of writing, that’s worth around £200,000.
The fraud prevention part works by forcing people to use either a massive amount of expensive computing power or pledge large amounts of their own cryptocurrency to cheat the system, making it practically impossible for any one individual.
Crypto in action
Countless crypto transactions happen every second. Participants known as “miners” record them all using specialist software. They then compete for the chance to have their records made official and earn a reward.
With Bitcoin, miners compete to guess a long string of letters and numbers, or get as close as possible, within 10-minute windows. There are trillions of possible combinations, so guessing the combination is futile. Instead, they generate guesses with a computer.
The more powerful their computer, the more guesses they can make per second, improving their odds of a winning guess. If they win, their copy of the ledger becomes official and is added to the blockchain, earning them free Bitcoin in the process.
With cryptocurrencies like Ethereum and Solana, participants stake their own crypto holdings for a chance to earn free Ether. The more a user stakes, the better their odds of winning a reward and adding their copy of the ledger to the blockchain.
In action, it looks like this:
* Crypto users make trades and transactions with their holdings.
* Crypto miners record these transactions on their ledgers using specialised software.
* Miners either stake their own crypto or use their computers to compete for the chance to make their copy of the ledger official.
* A winner is chosen, their ledger is added to the blockchain and they are rewarded with free crypto.
Where is cryptocurrency held?
Cryptocurrency does not physically exist anywhere. There are no coins or notes that represent cryptocurrencies (despite the images you see of crypto coinage).
And though you may hear about crypto storage, cryptocurrencies aren’t exactly stored anywhere either – not as digital files, folders, etc.
Crypto only exists as lines in decentralised ledgers. So if someone has 10BTC, it’s because there’s an entry on the blockchain that says 10BTC is associated with a crypto wallet belonging to that user.
What’s stored in that crypto wallet is a pair of encryption keys: these are two alphanumeric strings that authorise trades and transactions associated with the wallet. One key is public and must be shared to receive funds; think of it like an email address for crypto transactions.
The other key is private and must be kept secret. Anyone who has both of your keys can authorise transactions with your crypto holdings, whether that’s selling it off, transferring it to another wallet, trading it or even destroying it in some cases.
There’s an adage in crypto: Not your keys, not your crypto. This means whoever controls your keys has your cryptocurrency holdings.
There are several storage options, but we’ll get to that later.
What is Bitcoin?
Even those with only a cursory awareness of crypto will have heard of Bitcoin. It’s the world’s first and biggest cryptocurrency.
Its inventor is anonymous, since they used the pseudonym Satoshi Nakamoto when authoring the “white paper” setting out the project in 2008. Today, Bitcoin trades at around £64,000, but in 2010 it sold for less than £0.01.
Bitcoin has a market capitalisation of £1.2 trillion, which is the sum of all the BTC in circulation multiplied by its market value.
Bitcoin uses a “proof of work” consensus mechanism, which is a jargony way of saying that miners use their computers to guess a long string of numbers and letters in 10-minute intervals for the chance to add their copy of the ledger to the blockchain and earn free Bitcoin.
Unlike real money, the amount of Bitcoin that will ever exist is capped at 21 million. The fact that Bitcoin’s supply is finite, like gold, creates a situation where demand can outstrip supply, pushing prices up.
Bitcoin is the most mainstream cryptocurrency. It’s owned by corporations and institutions as well as individuals. It’s even a legal tender in El Salvador.
Beyond Bitcoin: Different types of crypto
Bitcoin is just one cryptocurrency, there are thousands more in existence.
From major alternatives (altcoins) like Ethereum and XRP to meme-coins like Dogecoin, and from stablecoins like Tether to Artificial Intelligence coins like Render, there’s a whole ecosystem of crypto assets with different uses, values, underlying systems and even environmental impacts.
Altcoins are simply any cryptocurrency that isn’t Bitcoin. Ethereum is the big one (market cap of £255 billion), and the only one remotely close to Bitcoin in size and significance. XRP (market cap of £83 billion) is another big player, though not really in the same league size-wise.
Stablecoins are meant for their utility only, since their value is pegged to a fiat currency. Tether, for example, maintains parity with $US1. They’re not bought to speculate on their value, but rather to be spent on goods and services.
Meme-coins are basically altcoins, but they’re essentially low-value coins based on internet jokes. The biggest is Dogecoin, which was started as a parody of Bitcoin, but has ended up with a market capitalisation of £14 billion. This makes it one of the top 10 biggest cryptocurrencies by market cap.
AI cryptocurrencies are crypto assets that users spend to consume the service of artificial intelligence-related crypto projects. Render (RNDR), for example, pools the computing power of its users for cloud-based graphics rendering. Using the service costs RNDR, which currently trades at £1.32 and has a market cap of £686 million.
Investing in cryptocurrency
When it was a niche thing, investing in cryptocurrency was very technical and rife with scams. Now it’s as simple as downloading an app and following some simple steps – although scams are still a feature of crypto, unfortunately.
The easiest way to buy crypto is through a crypto exchange – a website or app used by crypto traders to buy, sell and swap crypto assets. They often have tools for users to monitor as they strategise their next trade. There are different kinds of exchanges, but more on that soon.
When you find an exchange you like, follow the account creation process. This will probably involve uploading a photo of official identification and could necessitate following a series of prompts in front of a camera. This is because exchanges are obliged to carry out money-laundering checks.
As of 1 January 2026, you’ll also need to provide your National Insurance number for tax purposes (profits made on crypto investments are liable to capital gains tax).
After that you’ll be able to credit your account with pounds sterling using your preferred payment method, and then start executing trades.
Exchanges will typically look after your private and public keys for you. This is convenient because the only credentials you’ll have to remember are the ones for your exchange. The risk is that these exchanges are prime targets for hackers.
Exchange Traded Funds (ETFs) allow you to invest in crypto without having to hold crypto yourself.
Crypto ETFs track the values of different crypto assets, but it’s the fund you’re buying into, not the underlying crypto asset.
This kind of investment vehicle may involve management fees, which is worth bearing in mind given that you can easily lose money on crypto investments.
What types of crypto exchange are there?
Crypto exchanges exist as websites and apps, and can be either centralised or decentralised.
Centralised exchanges are more common. They’re operated by the platform owners, who take care of things like security and customer support.
A decentralised exchange, also known as a DEX, has no central authority. Instead, self-executing programs called smart contracts trigger under certain conditions, making the exchange effectively run itself. They’re more private as a result, but less user-friendly.
Are exchanges safe?
Crypto exchanges that look after their users’ private and public keys are a potential goldmine for hackers if they can beat their security. They can and have been hacked, exposing the holdings of thousands of customers. Dubai-based exchange Bybit was targeted in February 2025, for example, and criminals made off with $US1.5 billion worth of Ether.
Exchanges have also collapsed. FTX was the third-biggest exchange when it folded in 2022. In that case, it was internal fraud that led to its bankruptcy. Customers reportedly lost $US8 billion worth of crypto.
None of this is to say that all exchanges are unsafe, and the industry has doubled down on security and insurance over the years in response to hacks.
Some of the onus is on you as the customer to keep your account and/or keys safe by practising good security hygiene. Using two-factor authentication (2FA) to log in to your exchange, for example, is a basic countermeasure against hackers.
You can also choose to store your crypto keys off the exchange, putting some distance between where you trade and where you secure your holdings.
Crypto storage explained
It can’t be stressed enough that you don’t store your cryptocurrency anywhere. Crypto doesn’t exist physically, or even as a digital facsimile. If you have 3BTC it’s because there’s an entry in the Bitcoin blockchain that says you own 3BTC.
What you need to store are the cryptographic keys required to use your crypto. Think about it this way: You park your car in public places, but you lock it and keep your car keys secure so that you retain control of the vehicle.
Crypto keys are just long, random strings of 64 letters and numbers. Given their length and the number of possible combinations, they are practically impossible to guess.
As an example, a crypto key looks like this:
9774890a381bc39a8e9b35a9dda7be7f8fe368bbb7f7862ecfc295f564d2fb70
Whoever holds your keys can do what they want with your assets, so you must keep them safe. To do so, there are two routes: custodial and non-custodial.
Custodial storage means relying on someone else to keep your keys safe. This can be either the exchange where you trade in cryptocurrency, or a third-party wallet provider. This is the most convenient and user-friendly option, with support on hand if you forget your credentials.
Non-custodial or self-custody storage means keeping your own keys secure. This can be done with either software wallets or hardware wallets.
Software wallets are computer or smartphone applications, while hardware wallets are physical storage devices resembling flash drives that plug into a computer or smartphone.
Each can be secured with various security methods like PIN and biometrics, but they also employ a ‘seed phrase’ failsafe, which is a random string of either 12, 15, 18, 21 or 24 words generated by the wallet. An example of a seed phrase might be:
enrich whale scheme army airport humour wreck very enough eyebrow bring solar
Users who forget their PIN may be able to regain access by using their seed phrase. If you were to lose both PIN and seed phrase, however, you may be locked out from your keys and, in effect, your crypto holdings.
Self-custody is less convenient, and there’s less customer support, but it can be more secure. In the case of a hardware wallet, there’s an “air gap” between online criminals and the hardware wallet device.
Hacking a hardware wallet involves finding a technical loophole in the way the device was designed and exploiting it when the device is plugged into a connected device, or else tricking the user into willingly handing over their device and/or security credentials.
Be aware that there’s also a cost associated with self-custody. Hardware wallets can cost anywhere from £30 to £200, but many consider this a small price to pay for peace of mind.
Why the fuss about cryptocurrency?
The honest answer is that recent years have been a goldrush of people buying into the hype and expecting to get rich quick. Speculation is a massive part of the crypto market, regardless of the varying degree of usefulness offered by various coins.
There are arguments for why cryptocurrency might be useful, or even necessary. However, the extent to which you buy any of these arguments depends on your outlook.
People were left reeling from the 2008 banking crisis. Increasing distrust in traditional financial institutions coupled with emerging technology and evolving web use perhaps made cryptocurrency inevitable.
Crypto, the forerunners said, would take power away from banks and democratise finance. Crypto could make payments faster and cheaper by cutting out middlemen. It could make digital payments as anonymous as cash payments.
Crypto would also be borderless, allowing the unbanked and underbanked in developing nations to access the system as easily as people in developed nations.
Decentralisation and smart contracts could also go beyond finance, with new applications and organisations free of centralised control and governance.
Some of these arguments have yet to prove themselves either way. Regulation and cybercrime remain challenges for the sector, and cryptocurrency is still difficult to understand for the average person. We still don’t know if crypto will stick around for the long term, or prove itself a fad that never managed serious, mainstream adoption.
What makes crypto volatile?
There are many reasons why you can’t predict what’s going to happen with crypto prices. Hype has a massive effect on prices, and bad faith actors have been known to “pump and dump” coins by hyping them up as the next big thing before dumping their holdings when prices rise.
The market is relatively small, at least compared to traditional finance, which means the market is more easily moved by individual or modest trades.
Also, literally anyone can create a cryptocurrency. You don’t need the legitimacy of a state central bank or even big investment behind you to create the next big thing — prime conditions for scammers. If you can make a project sound innovative and useful, or perhaps get the endorsement of a celebrity or influencer, all the better.
Regulation is still catching up with the technology. Many countries recognise the need for regulation, but many are also still in the early stages of setting out regulatory frameworks, including the UK, leaving consumers with little or no recourse if things go wrong.
Frequently Asked Questions (FAQs)
How to start investing in cryptocurrency for beginners?
Reading this page is a good starting point, followed by researching which crypto exchange might be best for you.
You might also consider keeping abreast of the latest crypto news, but be careful not to buy into hype around a particular cryptocurrency or strategy. There are many people offering what amounts to get-rich-quick schemes, so take everything with a pinch of salt.
Finally, think very carefully about how much you can afford to lose. You should not put more money into crypto than you can afford to lose, and you shouldn’t take on debt to finance crypto purchases.
Can you make £100 a day with crypto?
Yes, but it’s equally likely that you make £0 trading crypto, or that you lose £100 in a day. Investing over longer periods of time makes it easier to ride out volatility in traditional markets, but less so in crypto. You shouldn’t go into crypto trading expecting to get rich quick, and you should be prepared to lose everything.
Is crypto a good investment for beginners?
There are certainly safer, more predictable ways to invest than putting your money into crypto, but provided you’re clear about how much you can afford to lose and you understand the risks of crypto investment, there’s no reason why a new investor shouldn’t look into crypto.
What is the best crypto to invest in as a beginner?
This really depends on your investment goals, how much you want to spend, how much you can afford to lose, and your appetite for risk.
Big coins like Bitcoin and Ethereum have proved themselves to have staying power, and you’d be joining millions of other investors who’ve already taken the plunge, including corporations and institutions. Be wary of anything sold as “the next big thing” in crypto, as pump-and-dump schemes are rife. Such schemes rely on naivety and inexperience, and beginners can easily be exploited.
