As a (potential) investor in the 21st century, you'll inevitably want to know something about crypto. There's a lot of noise around it. But what actually is crypto, and what is there to know before getting involved in it?

What is crypto?

Cryptocurrencies, also called crypto, are a form of digital money. Unlike regular currency, they aren't issued by banks. Instead, they're created and managed through computer networks such as the blockchain.

Crypto is relatively new. The first cryptocurrency, bitcoin, launched in 2009. Since then, the number has exploded: there are now around 9,000 different cryptocurrencies in existence. Most of them are worth very little, but a handful have established themselves more durably.

Unlike most databases, there's no single central location where all transactions are stored. Instead, every computer in the network holds a copy. All of those computers must verify that the information in each block is correct before it can be added to the database. This means every participant in the network shares responsibility for its integrity and it becomes extremely difficult for anyone to manipulate the data.

A high-risk investment

Cryptocurrencies are widely regarded as very high-risk investments. They tend to be highly volatile: their value can swing sharply in the short term, which means the potential for high returns comes alongside the potential for significant losses. And because crypto hasn't been around for very long, we simply don't know for certain whether – and if so, which – cryptocurrencies will show sustained long-term growth.

There's also the practical security risk. Crypto must be stored in a digital crypto wallet, and these wallets have been hacked in the past, with large quantities of crypto stolen as a result.

For a long time, crypto also operated in a regulatory grey area: official authorities had little oversight or control. When things went wrong (such as a hack), investors had nowhere to turn.  It’s possible that further regulations for crypto issuers and service providers will be introduced in the future. This may alter this risk to some extent. 

The best-known cryptocurrencies

There are thousands of cryptocurrencies, and new ones are launched constantly. Even celebrities have launched their own tokens. Most of these spike briefly and then collapse. But some have proven more enduring, most notably bitcoin and ether.

Bitcoin

Bitcoin was the world's first cryptocurrency. Its foundations were laid in 2008, when the mysterious "Satoshi Nakamoto" published a document setting out the technology and ideas behind it. The first bitcoin was issued in 2009: not by a bank, but by a blockchain network. This is one of the defining features of bitcoin, and of crypto more broadly: there is no central institution behind it, just a decentralised network of computers.

Since its launch, Bitcoin has had a turbulent history: dramatic rises and sharp falls. Whether it will ever settle into a more stable pattern is uncertain. Broadly speaking, Bitcoin’s value has grown since 2009, but that is no guarantee of what comes next.

New bitcoins are created through a process called "mining," in which computers solve complex mathematical problems. This process that consumes a significant amount of energy. Bitcoin is therefore widely considered an unsustainable investment from an environmental perspective. You’ll learn more about what investments do qualify as sustainable in the next lesson.

Ether

After bitcoin, ether is the most widely used cryptocurrency. It's the native currency of the Ethereum blockchain network. Unlike Bitcoin, Ethereum has a straightforward origin story. Its creators are publicly known, including programmer Vitalik Buterin. The Ethereum network does more than just process ether transactions; it also supports the exchange of other digital assets. Ether is also produced in a more energy-efficient way than bitcoin, making it a more sustainable option.

Ether has existed since 2015 and has also seen major price swings. Its value has broadly grown since then, though again, past performance is no guarantee of future results.

Past performance does not indicate future results.

Crypto ETPs

Interested in crypto but don't want to navigate a crypto exchange or manage a wallet yourself? One option is to invest in crypto ETPs (Exchange Traded Products). Rather than buying crypto directly, you invest in a type of fund that tracks the price of a cryptocurrency such as bitcoin or ether. If the crypto price rises, the ETP price rises with it. If it falls, the ETP falls just as sharply.

A crypto ETP is essentially a certificate confirming that you hold a certain quantity of cryptocurrency. The ETP provider generally takes care of storing the underlying crypto securely.

Key takeaways

• Cryptocurrencies are a form of digital money with no central institution behind them
• Crypto is considered a very high-risk investment
• The most well-known cryptocurrencies are bitcoin and ether
• If you buy crypto directly, you'll need to store it in a digital wallet
• You can also gain indirect exposure to crypto through a crypto ETP