What crypto actually is

General information, not financial advice. Crypto is high risk. You could lose all the money you put in.

Fiat money and cryptocurrency

Fiat money is currency that a government has declared to be legal tender, but which isn't backed by a physical commodity. Its value comes from supply and demand rather than from the material it's made of. (Wikipedia: fiat money)

Cryptocurrency is digital money that isn't issued or controlled by any one government or organisation. Transactions are checked by a network of computers and recorded in a public ledger called a blockchain. Bitcoin's supply is capped at 21 million coins.

"Altcoins" is a loose term. Some people use it for coins designed to work like Bitcoin; others use it for any cryptocurrency other than Bitcoin.

What is a blockchain?

A blockchain is the shared record of every transaction on a network.

• Only transactions the network has verified are written to it.
• Records can't be changed without changing every later block and getting the agreement of the network.
• Copies are held on many computers (called nodes), not in one place.
• Anyone can view it. It shows wallet addresses and amounts, not names, but activity can often be traced back to people.

Mining is one way transactions are validated: miners use computing power to process transactions and receive new coins as a reward. (Wikipedia: cryptocurrency)

Wallets and private keys

A crypto wallet is where you hold the keys to your crypto.

• Hot wallets are connected to the internet: a website, or an app on your phone or computer.
• Cold storage isn't directly connected to the internet, such as a hardware wallet.

A private key is what lets you move crypto out of a wallet. Anyone who has it can take everything in that wallet, so never share it. When you set up a wallet you're usually shown 12 or 24 words, a recovery phrase. It's a human-readable version of your key and can restore the wallet if you lose the device.

If your crypto sits on an exchange website, the exchange holds the keys, not you. Keep only what you need there. See Storing it safely.

Exchanges, leverage and liquidity

Exchanges are where you swap pounds for crypto, or one crypto for another. Centralised exchanges hold your crypto for you; decentralised exchanges let you trade from your own wallet. See Buying your first crypto.

Leverage means borrowing to make a bigger trade. If the price moves against you and you can't cover the required margin, the position is liquidated and you lose that margin.

Liquidity is how easily you can buy or sell at the price you want. With less popular coins there may not be enough buyers or sellers, so you might only fill part of an order.

A first walk-through

This is the order the rest of the Start here path follows:

1. Check the firm. Before signing up anywhere, check it's on the FCA register.
2. Buy a small amount. You don't have to buy a whole coin; you can buy a fraction, such as 0.001 BTC. See Buying your first crypto.
3. Move it somewhere you control. A phone wallet or a hardware wallet, with the recovery phrase written down and kept offline. See Storing it safely.
4. Secure your accounts. Turn on two-factor authentication. See Security basics.
5. Keep records for tax. See Crypto tax in the UK.

Sending crypto between wallets, even between an exchange and its own app, usually costs a network fee.

Further learning

• Andreas M. Antonopoulos, Bitcoin for Beginners (YouTube playlist of his talks) and his podcast interview Bitcoin's true potential with Kevin Rose.
• Investopedia covers money and investing terms.
• StockCharts ChartSchool teaches technical-analysis terminology.
• How I store and use crypto day to day, on Medium.

Next: Buying your first crypto in the UK →