Cryptocurrency in the UK part 1: The basics

Published on 28/10/2021 by Sukanya Awasthi

Bitcoin emerged as the first decentralised cryptocurrency (or ‘crypto’) in 2009. Since then, its value has fluctuated wildlyfrom less than a cent to more than US$60,000prompting millions to invest in crypto and spawning thousands of other currencies. By the mid-2010s, governments and banks were seriously considering the role cryptocurrencies could play in national and global economies. And today, bodies such as the Bank of England are even considering launching their own, centrally controlled digital currencies, known as central bank digital currencies (CBDCs).

Cryptocurrency in UK image

It seems as though digital money is trending, so businesses need to understand how people use it and how it might affect the way they invest and pay for products and services. In this article we explain what crypto is, why it’s so popular, and how people use crypto wallets to store cryptocurrency.

The data comes from a September 2021 survey we conducted of 1,000 people in the UK. This article is the first of a two-part series. You can read a full methodology for our survey at the bottom of this article.

What is cryptocurrency?

Cryptocurrencies are digital currencies that you can exchange for goods and services. Unlike regular (‘fiat’) currencies, like pound sterling or US dollars, cryptocurrencies are not backed by a central authority like the Bank of England or the US Federal Reserve. Cryptocurrencies, by contrast, are typically ‘backed’ by collective records of transactions and ownership and secured using cryptography.

Records are encoded cryptographically onto a distributed ledger —a database that cannot be changed and which is stored across multiple computers. Blockchain is a well-known example of a distributed ledger and is the basis for Bitcoin.

The cryptographic encryption, immutable record of transactions, and lack of central control has led to interest from investors over the past decade. This popularity was reflected in our survey. More than half the people we spoke to have an interest in cryptocurrencies: 21% use or have used them, and a further 34% plan to do so in the future.

How do you buy cryptocurrency?

There are two main ways to acquire cryptocurrency. You can ‘mine’ it by using your computer to verify transactions and be rewarded with currency or you can buy it using money you already have. Mining requires dedicated and often expensive equipment, as well as large amounts of power, so most people buy crypto via an exchange.

80% of the people in our survey who buy crypto themselves (i.e. not through a third party) use an exchange platform to buy, sell, or trade their currency. These platforms let you swap fiat money for crypto, trade between cryptocurrencies, and cash out your cryptocurrency for fiat currency as well. Some include features to help you learn about trading, and even help you pay tax on your profits. 

Just over one-quarter of respondents who buy their own crypto (28%) use other trading platforms, such as stock markets with cryptocurrency options. A similar number (25%) use online banking platforms, many of which now offer the ability to buy, sell, and trade crypto in addition to the services they provide for fiat currency.

How do people trade cryptocurrency in the UK? bar chart

Why are there so many kinds of cryptocurrency?

Just as there are many fiat currencies in the world, cryptocurrencies are not just restricted to Bitcoin.

The proliferation of different types began at the start of the 2010s as people looked to improve on early models. Developers wanted to lower the time for computers to process crypto transactions, for example, and add new functionalities aside from value exchange.

They also saw an opportunity to make money as the price of Bitcoin rocketed during the 2010s. Today, there are more than 6,500 cryptocurrencies. In our survey, Bitcoin was the most popular —favoured by 83% of respondents who buy or plan to buy crypto— and the next most popular are Ethereum (46%), Dogecoin, (27%), and Cardano (22%).

Which cryptocurrency do UK consumers buy? Bar chart

Why invest in cryptocurrency?

People invest in crypto for many reasons, the most obvious being profit. In its short history, the value of one bitcoin has varied between fractions of a cent and more than $60,000. Buying and selling at the right time has made many very wealthy. Similarly, there have been significant crashes —in 2018, for example— although the general trend has been upwards. The promise of profits, despite the risks, was the biggest draw for crypto users in our survey: 60% say this is the reason they like cryptocurrencies.

Just over half (53%) like ‘being part of something innovative and alternative’. As well as supporting cryptocurrencies, distributed ledger technologies have other potential applications. These include ‘smart contracts’ which fulfil themselves automatically and may be able to simplify a range of otherwise complex legal procedures. 

36% are attracted by the lack of central control. Unlike regular currencies, there is no guiding authority to adjust the value of a cryptocurrency by printing money or tweaking interest rates. Its value is entirely determined by market forces.

What do UK consumers like about cryptocurrency? Bar chart

What is a crypto wallet?

Just as we keep paper money in a wallet, crypto users need a way to keep their coins safe. This is an important additional security measure, as cryptocurrencies are attractive targets for hackers.

The coins themselves ‘live’ at addresses on the distributed ledger. To use the coins, you must prove that they’re yours. Any ownership of cryptocurrency comes with two passcodes, or ‘keys’ – a public one and a private one that grants the owner access to the address of the currency associated with it. If you lose a private key, you lose access to that currency. Therefore, many users keep their private keys in a wallet.

Cold wallets

A wallet can be as simple as writing the private keys on a piece of paper. This has the advantage of being essentially unhackable (at least remotely), but there is the risk of losing the paper. Some people use hardware wallets, which are usually USB-connectable storage devices, or software wallets, which run as apps on a mobile device or computer. As these are also not connected to the internet, they are relatively hard to hack. All forms of offline wallet fall into a category known as ‘cold’ wallets.

Hot wallets

Perhaps the most convenient form of crypto storage is an online or ‘hot’ wallet, where private keys are stored in an online account that is also protected with a password and other authentication methods. Often, crypto exchanges include these wallets as part of their service.

Hot wallets are the most popular with respondents to our survey: 63% of crypto users have one, compared with 32% who use a software-based cold wallet. 16% use hardware, while 7% use paper.

Type of wallet used to buy cryptocurrency; bar chart

In summary

  • Cryptocurrencies such as Bitcoin and Ethereum work similarly to regular money but only exist in the digital world.
  • Their value can fluctuate, but investing in them for profit is a major attraction.
  • Most people buy, sell, and trade cryptocurrency on an exchange.
  • Security of cryptocurrency is important, and there are various types of storage to choose from. The main trade-off between them is security versus convenience.

Next time…

Now that we understand the basics of cryptocurrency, we will explore attitudes to cryptocurrency in the UK. In part 2, we reveal more about why people do or don’t invest, how much they invest, and how much people trust cryptocurrencies.

Want to know more? Check out our catalogue of cryptocurrency wallets.

Methodology

To collect the data for this report, we conducted an online survey on Cryptocurrency in October 2021. Of the total respondents, we were able to identify 1,006 UK respondents that fit within our criteria:

  • UK resident
  • Over 18 years of age
  • Are either aware of or familiar with Cryptocurrency

NOTE: This article is intended to inform our readers about business-related concerns in the United Kingdom. It is in no way intended to provide financial advice or to endorse a specific course of action. For advice on your specific situation, consult your accountant or financial consultant.

This article may refer to products, programs or services that are not available in your country, or that may be restricted under the laws or regulations of your country. We suggest that you consult the software provider directly for information regarding product availability and compliance with local laws.

About the author

Content Analyst for the UK market. Committed to offering insights on technology, emerging trends, and software suggestions to SMBs. Plant lady, café hopper, and dog mom.

Content Analyst for the UK market. Committed to offering insights on technology, emerging trends, and software suggestions to SMBs. Plant lady, café hopper, and dog mom.

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