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A beginner's guide to cryptocurrency – what you should know to stay safe

Cryptocurrency has been a hot topic of conversation in recent months, with low-interest rates on savings inspiring many people to buy Bitcoin instead of leaving their money in the bank.

But is this a smart decision? Read on to find out what cryptocurrency is and learn how to protect yourself from the dangers that come with this new technology.

What is cryptocurrency?

Cryptocurrency is a type of digital currency that can be used to buy or sell products and services online.

Many people treat it as an investment and buy cryptocurrencies hoping their value will increase over time.

Some investors have made thousands (or even millions) from cryptocurrency and believe these digital coins will become the default way of paying for things in the future.

But there are risks involved.

You might have heard of people who have lost large amounts of money after buying cryptocurrency, whether that’s due to a drop in value or they’ve fallen victim to a scam.

Pouring all your money into these digital coins can be extremely risky – so make sure you keep yoour emergency savings seperate

Where can I buy and store cryptocurrencies?

There are several platforms you can use to buy and sell cryptocurrencies.

Each platform has its pros and cons, so it’s worth doing some research and checking their credibility before deciding which is most suitable.

Make sure you’re aware of any fees involved as these could affect your investment profits.

You’ll also need a digital wallet. This is where you’ll store your coins, in the same way that a bank account would allow you to store money.

Cryptocurrencies can go down in value as well as up

As with any type of investment, it’s important to remember that the value of cryptocurrencies can go down as well as up.

If your savings aren’t earning much interest, you might be tempted to invest in cryptocurrencies in the hope of growing your savings faster. However, pouring all your money into these digital coins can be extremely risky.

Avoid buying coins using money you need in the next three to five years. Buying a house, getting married or going travelling soon? Keep that money in the bank.

It’s wise to only invest money you can afford to lose. If losing the money would have devastating consequences or a drop in value would cause you significant anxiety, this might not be the right option for you.

Scammers may talk about the highs without warning you of the lows.

Cryptocurrency fraud is on the rise

Thanks to lockdown boredom, job uncertainty and a rise in the need to make money from home, fraudsters have used the pandemic to take advantage of new investors.

Figures released by the City of London Police show that more than £63m was lost by victims of investment fraud during the pandemic.

Over a 12-month period, 5,039 reports of investment fraud referred to social media platforms. Some victims say they were approached directly by an investment fraudster while others saw adverts on social media.

So, what can you do to protect yourself?

Avoid making decisions on a whim

Scammers will often use aggressive sales tactics to pressure people into making a quick decision.

If you’re a cryptocurrency beginner, they might also use your lack of knowledge against you.

Fraudsters might even encourage you to part with your money that day, saying that you’ll miss out on an opportunity if you don’t act fast.

Big financial decisions should never be made on a whim, so don’t be afraid to say: “I just need to talk this through with my partner” or “I’m going to think about it for a few days before making a decision.”

If the person encouraging you to invest in cryptocurrency continues to pressure you, hang up the phone, close the browser or block their account on social media.

Talking about the interaction with a partner or friend could help you make sense of what happened and put your mind at ease.

Legitimate cryptocurrency platforms are unlikely to approach potential investors directly, so be wary of cold calls or unsolicited messages on social media.

For every overnight millionaire, there will be many people who have walked away with less than they put in

If it sounds too good to be true, it usually is

Scammers may talk about the highs without warning you of the lows.

They might share overnight success stories from people who bought a few coins and quickly became millionaires but they’re unlikely to tell you the horror stories of people who invested their life savings only to lose everything.

If it sounds too good to be true, it usually is.

For every overnight millionaire, there will be many people who have walked away with less than they put in.

Have a solid safety net

Make sure you have a solid emergency fund before buying any cryptocurrencies.

If your cryptocurrencies were to fall in value and you needed the money, a lack of savings could cause financial uncertainty and stress.

A three-to-six-month emergency fund can be a great starting point, but you might want to save more than this - particularly if you have kids, an unpredictable income or you work in an industry that’s been heavily affected by the pandemic.

Make cryptocurrency a very small part of your investment portfolio

If you’re a crypto newbie, it may be wise to focus on more traditional investments and spend just 1-5% of your designated investing money on crypto.

By approaching it with caution and spreading your money across several investments, you can dip your toes in the water without taking on too much risk while you’re still learning.

For some people, investing in the stock market by purchasing index funds and exchange-traded funds (ETFs) is likely to be a much safer alternative.

Seek professional advice

If you’re wondering whether cryptocurrency is a good investment and you’d like to learn about the alternatives, get independent advice from a financial adviser. They’ll look at your financial situation, your goals and your attitude to risk before helping you decide which investments are right for you.

The information in this article is not to be taken as financial advice. Before making any financial decisions always do your research or speak to a financial adviser.

3 things to do
right now

1

Seek financial advice before making large investments – If you’re planning on investing a large amount of money in a certain asset, it’s wise to seek independent financial advice first.

2

Save an emergency fund – An emergency fund can make you a better investor. You’ll protect yourself from financial uncertainty, reduce the likelihood of panic-selling at a loss and make it easier to grow your investments over the long term.

3

Be wary of those who approach you on social media – Whether you receive cold calls over the phone or messages from someone on social media promising you a ‘great investment opportunity’, take their advice with a pinch of salt. Scams are rife in this industry.

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