Recently, This is Money received an e-mail from a reader which started: ‘You need to have a section dedicated to crypto technology and currencies.
‘This is now a market exploding with ICOs, new currencies daily, technological advancements and a market worth over $550billion.
‘The technology is the biggest technological leap since the founding of the internet.’
Bitcoin bullet: Many may have been tempted into buying and selling cryptocurrencies – but may not know how to do it
It highlights just how quickly the cryptocurrency phenomenon has exploded in recent months and how much some investors believe in the technology. You can read our at-a-glance round-up of some of them here.
But, recent activity and price swings have shown just how volatile the world of bitcoin, ethereum, ripple and co are. Some coins fell by 25 per cent in one day – a huge whack for any investor, experienced or otherwise.
Nevertheless, many readers are asking how they can get their hands on bitcoin and other cryptocurrencies safely and securely, and importantly, how they can sell if they want to take profits.
However, it is the Wild West out there. So let’s start with the warnings. As mentioned above, digital currencies are volatile and not for the faint-hearted. You should read our bitcoin box below.
Yes, there are plenty of stories about how people have become rich investing in bitcoin at the start and some self-titled experts are saying this is the best new financial investment you can make.
But there have also been plenty of grumbles about it, including from stalwart US investor Warren Buffett – while the Financial Conduct Authority has also warned bout the dangers of investing in bitcoin.
WILD WEST WARNING
According to analysis by digital threat firm RiskIQ, the world’s top app stores are hosting more than 600 blacklisted bitcoin apps which leave users open to hackers.
It looked at 18,408 apps across 20 app stores, including Apple and Google Play. It found a staggering 661 to be blacklisted by official cyber security vendors – but still available for download by users.
Hackers behind the malicious apps, which have been blacklisted by one or more cyber security vendors, can trick users into handing over large sums of money or personal details for financial gain.
The rise in unofficial and potentially malicious apps across multiple app stores will alarm potential investors looking to buy into bitcoin – and highlights that you need to be on your guard.
Fabian Libeau, vice president of RiskIQ, says: ‘We are seeing threat actors around the world exploiting what is already a hostile currency in a lawless digital world.
‘Before handing over any cash or personal data investors should carry out thorough research into the exchange and wallet apps they intend to use.’
If you plan to buy cryptocurrency in 2018, you must arm yourself with as much knowledge as possible to avoid the conmen.
Wild West: Buying and selling digital currencies can be a minefield of cowboys and chancers
SET UP A WALLET
Search engine data shows that queries for ‘buy bitcoin’ outstripped ‘buy gold’ in the latter part of 2017.
This is Money data showed just how many people have been searching some of the most popular digital currencies.
The price of bitcoin surged from around $1,000 at the start of the year to near the $20,000 mark in December, bringing it to the attention of the British public.
To get a cryptocurrency, you need a wallet – this is where the digital currency lives.
Because it is a relatively new financial craze, it is hard to say which firms offering wallets are reputable while a number have disappeared or lost customers cash, including Mt.Gox in 2014.
Meanwhile, in 2016, a hack saw the Bitfinex exchange platform lose 120,000 bitcoin.
One of the biggest websites to deal in bitcoin is Coinbase – an online exchange, which also has a wallet option. It has a user friendly app and two-factor authentication.
Another is Blockchain.info which is similar to Coinbase. They are both backed with millions in venture capital funding. Visit coinbase.com/signup and blockchain.info to find out more.
However, it only deals with the most familiar digital currencies – if you want to invest in an obscure one, it is much harder (as we explain below).
Another popular wallet is Electrum, which is a wallet for desktop computer use.
BUY AT AN EXCHANGE
Once you have set up your wallet, you add cryptocurrency to it. You find an exchange and send them cash, either by bank transfer or credit/debit card to obtain digital currency. Bank transfer tends to be the cheaper method.
For example, Coinbase charges 3.99 per cent on debit and credit transactions, or 1.49 per cent for a standard buy/sell.
Many have strict requirements for ID purposes. A handy website is Bittybot, which lets you compare brokers and fees, alongside user ratings.
Two of the most popular brokers are Coinify and Coinbase, mentioned above.
Meanwhile, a firm called London Block Exchange, based in Canary Wharf, is soon to launch, allowing people to buy and spend five online currencies – bitcoin, ethereum, litecoin, monero and ripple – which will be linked to a Visa debit card.
If you buy bitcoin, for example, you will need to hand over your unique key. This is an identifier that represents your account and is different from your wallet log-in. It should be easy to find within the details of your account.
Brokers will ask for this address to make a transaction. When it comes to selling, there should be no issue selling a mainstream coin such as bitcoin.
You can use the same broker you bought it from and it will involve them giving you an other key to send your bitcoin too from your wallet. Once the transaction is confirmed, you should receive your cash.
Remember, some of these exchanges can crash unexpectedly. For instance, Kraken, the fifth largest cryptocurrency exchange, was out of service for two days earlier in the month after scheduled maintenance that was supposed to take two hours.
It left many nervy investors wondering if they’d be able to cash out, if they so wished.
Some websites offer investors the chance to take a punt on cryptocurrencies, but not actually own any of their own.
One popular website which advertises heavily is eToro. We’ve seen adverts on the London Underground and even on easyJet flight boarding passes.
Here, you buy ‘Contract For Difference’ agreements. This is where an investor and a broker agree to pay each other the difference between the price of an asset at the moment the contract is made and its later price when you decide to close it.
The Financial Conduct Authority warned against betting on the currency using CFDs in November.
They are complex financial instruments which allow novice investors to guess whether the price will go up or down.
Punters could lose up to 50 times their deposit if they get it wrong, meaning they could rapidly rack up huge debts.
The FCA said CFD traders are ‘at risk of suffering significant losses and potentially losing more than you have invested’.
OBSCURE COINS HARDER TO BUY
Many may believe bitcoin may have peaked – or reached a point in which they cannot make some of the astronomical gains made by early investors.
As such, they want to take a ‘punt’ on a lesser known coin. There is plenty of them.
This is Money recently signed up to New Zealand based website Cryptopia to see a list of what is available. It was huge.
Two that are being tipped to grow this year from a low level by a panel of four fintech leaders for price comparison website Finder in a cryptocurrency predictions survey are cardano (ADA) and stellar lumens (XLM).
They claim that cardano – a third generation digital currency – will rise by more than 8,000 per cent this year from $0.78 a coin to $68.
However, getting your mitts on the coin as a speculative punt is not as easy as it seems.
Hardly any of the aforementioned brokers or wallets cater for the smaller currencies, only the main players such as bitcoin.
You then find yourself on niche websites – or in our case, Cryptopia.
But to buy any currency on many of these types of website requires you to already own bitcoin or another major cryptocurrency.
Or in Alex’s case above, sending bank and passport details to Slovenia, which is a hurdle many – understandably – would not be comfortable with.
When we searched ‘how to buy cardano UK’ a step-by-step guide said we needed to download software for the wallet and own ethereum to get the coin.
We’re not sure how many people would be comfortable downloading software onto their computers or phones from sources they do not know. It is open to all sorts of fraudulent activity.
DO YOU DECLARE PROFITS TO THE TAXMAN?
Those who have made profits from buying and selling digital currencies may be left a little confused about whether or not they need to pay tax.
With the deadline for tax returns fast approaching, many may not know whether or not to declare it – and the HMRC guidelines are a little fuzzy.
The last time it issued guidance on the taxation of cryptocurrencies was March 2014, which feels like a lifetime ago in the world of fast moving digital currencies.
So is it an investment meaning Capital Gains Tax is payable on gains above £11,300? This is 18 per cent for basic-rate income tax payers and 28 per cent for higher-rate taxpayers.
Or should it be treated as gambling, which means profits are tax-free?
An HMRC spokesman says: ‘We don’t normally tax betting and gambling because it is usually not classed as trading income.
‘But there may be circumstances where factors such as the degree of skill and organisation would make the activity more likely to be taxable as trading income. Each case will depend on its own facts.’