Bitcoin’s booming price has prompted a surging interest in cryptocurrencies, with growing numbers tempted to join what is being called the ‘digital goldrush’.

The most popular cryptocurrency, Bitcoin, has had a storming year so far and is up 128 per cent. Its main rival Ethereum is up 56 per cent and challenger Solana is flying 121 per cent higher this year.

However, getting started is easier said than done. Cryptocurrency trading is rife with danger. While some traders are making extraordinary gains, there is also a serious risk that you could lose most or even all your money.

Scammers abound, ready to take advantage of those lacking experience in crypto trading. Furthermore, you cannot buy and sell cryptocurrencies on the traditional investment platforms such as Hargreaves Lansdown or AJ Bell.

Here, Money Mail looks at everything you need to know to get started and talks you through the process step by step.

Remember that buying and selling cryptocurrencies is not investing – it is risky and you should only use money that you can afford to lose.

Just what are cryptocurrencies?

They are essentially digital money, an alternative to traditional currencies such as the pound or dollar.

As with real-world currencies, their value is determined by what people in the market are willing to buy and sell them for.

Transactions are logged on a secure decentralised digital ledger called blockchain, so they are not controlled by states, banks or other financial institutions, unlike traditional currencies. 

However, unlike traditional currencies, they are very rarely used to purchase goods and services – at the moment.

Bitcoin is occasionally accepted – for example, at some hipster cafes – but in general cryptocurrencies are simply bought, sold and traded.

Also unlike traditional currencies, anyone can create a cryptocurrency – but whether or not it catches on as something that other people will want to buy is another matter.

Launched in 2009, Bitcoin is the oldest, most established and most mainstream. However, it is just one of an estimated 9,000 active cryptocurrencies that are being traded.

Where do I get started?

You buy and sell on a cryptocurrency trading platform, in the same way that you might buy shares or funds on a conventional DIY investing platform. There are a number of cryptocurrency trading platforms operating in the UK.

Glen Goodman, author of bestselling book The Crypto Trader, recommends picking a platform that is based in the US or UK, as they are more likely to be trustworthy. 

He suggests Coinbase and Kraken as both are based in the US. They are also partially regulated by the Financial Conduct Authority.

However, this does not mean that users benefit from full protection on their cryptocurrency trading in the same way that they would with traditional investments such as shares and funds. 

‘Both are based in the US, which has some regulations and protections,’ says Goodman. ‘Coinbase itself is also floated on the New York stock exchange, which gives some degree of comfort.’

Trading platform eToro and digital bank Revolut also allow their users to trade in cryptocurrencies. While this service is not regulated, both carry out other activities that are regulated by the FCA.

How do I open an account?

Once you’ve picked a platform, you will need to sign up as a user. This is not as simple as picking a username and password and away you go.

We’ve used the example of signing up through Coinbase. However, Kraken, eToro and Revolut will bear many similarities.

First, you set up a username and password, which creates your account. Next, you are asked to fill in personal details, such as your date of birth, National Insurance number, nationality, employment status and how you intend to fund your account (eg. from your salary, savings or an inheritance).

Then the questions get even more detailed. For example, you are asked how much you expect to transfer to your account each year, what industry you work in and your annual income.

The next set of questions are designed to ascertain whether or not you understand the risks of trading in cryptocurrencies.

For example, you are asked whether you intend to invest less than 10 per cent of your assets in cryptocurrencies or whether you are a high-net-worth investor – in other words, you have money you may be able to afford to lose. If you fit neither category, you may not be well suited to cryptocurrency trading.

If you get through these stages, you will be asked to upload proof of ID – photographs of your passport or driving licence, for example. And you will be asked to use the camera on your smartphone to take a selfie and upload it.

You will also be asked to link a payment method to your account so that you can transfer funds with which to buy cryptocurrencies. You can do this by inputting your debit or credit card details.

After that, Coinbase presents its users with a ‘knowledge quiz’ to check whether you fully understand how trading works and the risks. The questions are in-depth and if you are completely new to cryptocurrency trading you may have to do some research to answer correctly.

Finally, you’re ready to go. However, in the case of Coinbase you are put into a 24-hour ‘cooling off period’ to ‘consider whether you wish to continue with this investment’.

At this point, you can continue to use the platform to browse prices and learn about cryptocurrency, but you cannot trade until the 24 hours is up.

What money can I use to trade?

Once signed up, you’ll have to fund your account, for example using debit cards or credit cards.

If you use your debit card, then when you buy cryptocurrencies on the platform the money will be taken directly from the current account that your debit card is linked to.

However, because of the risks of cryptocurrencies, many banks restrict how their customers can buy it. 

Some will not allow you to use a credit card to buy it and some trading platforms do not permit this method of payment either.

For example, HSBC sets a £2,500 limit for a single transaction to a cryptocurrency platform and £10,000 over 30 days for transfers to crypto-exchanges with a debit card. 

It blocks any attempt to use a credit card to fund crypto purchases. But it will allow customers to transfer money from their crypto-exchange wallets to their bank accounts.

Santander takes a stricter approach, limiting customers to £1,000 per transaction and £3,000 for any rolling 30-day period. 

Nationwide will allow people to spend up to £5,000 a day on cryptocurrencies, depending on the type of current account they have. Newer digital banks such as Monzo and Revolut have fewer restrictions. 

While the latter will allow 100 transactions a day, they are subject to limits depending on what digital currency you buy or sell. While Monzo allows customers to use exchanges to buy and sell crypto, it will block transactions it regards as risky.

How do I buy and sell?

Once you have funds in your account, you can use them to buy the cryptocurrencies of your choice. 

On the homepage of the platform, hit the button that says ‘buy and sell’. You should be given the option either to buy cryptocurrency using cash, or to buy it using other cryptocurrency holdings you already own.

You can scroll through the list of cryptocurrencies available to find the one you want.

Click on that one and then input how much you wish to buy in pounds and pence. The platform should tell you what price you are paying at that moment. Prices are very volatile, so they will be constantly changing.

Selling is just as simple. You state which of your cryptocurrencies you would like to sell and how much of it – with the value measured in sterling.

When you hit ‘sell’, the money should be returned to your sterling account on the platform, which you can withdraw back into your current account when you choose.

If you’re using platforms such as eToro, Revolut or Coinbase, your money should be returned instantly. In some instances there may be a delay while security checks are carried out.

Platforms don’t tend to charge a membership fee. Instead they charge you a percentage or set fee when you buy or sell – and when you return money from the platform to your linked current account.

What should I buy?

This is the $100,000 question – though you can buy fractions of a cryptocurrency coin.

While some traders have precise trading strategies and theories about which cryptocurrencies are set to rocket – and which are about to plunge – much is reliant on luck and the changing sentiment of other traders.

When the price of a coin is going up, it indicates that other traders like you are willing to pay more for it. But the tide can turn and traders become willing to accept lower prices to offload their holdings – and then the price falls.

These movements can happen very quickly.

Danny Scott, chief executive of the CoinCorner dealer and payments group, suggests that for people new to the world of digital currencies, Bitcoin may be the best bet. This is because it has the longest track record, is the biggest market at $1.9trillion and is becoming an increasingly accepted part of the mainstream financial system.

‘I’d stick to Bitcoin,’ he says. ‘Any other cryptocurrencies are more akin to gambling as to which will perform well and which won’t.’

Bitcoin threatened to hit $100,000 (£78,946) a coin following Donald Trump’s presidential election victory in the US last month, but since then its performance has cooled.

However, with the pro-crypto Trump in the White House, IG Markets analyst Tony Sycamore says the market expects it to make a fresh move on the $100,000 level ‘in the coming weeks’. The second biggest cryptocurrency, Ethereum, is up 62 per cent over 12 months to $3,572 (£2,814).

Scott says that sentiment towards Bitcoin will ultimately determine its future performance. XRP is the third biggest of the digital currencies.

It currently trades at $2.56 (£2.02), but traders are optimistic about its prospects as the barriers it faces to adoption in the US could be cleared next year by the Trump administration.

Am I protected?

As cryptocurrencies are unregulated, you have no protection should anything go wrong and have no recourse to safety nets such as the Financial Services Compensation Scheme.

Matthew Long, FCA director of payments and digital assets, says: ‘If you buy crypto, you should be prepared to lose all your money.’

Since the FCA cracked down on crypto adverts, it has issued 1,702 alerts, taken down over 900 scam crypto websites and over 50 apps.

Be wary of adverts you find on social media, or anyone contacting you out of the blue with offers to help you trade cryptocurrencies.

Danny Scott, chief executive of the Coincorner dealer and payments group, says: ‘If somebody approaches you via phone, email or any other digital form talking you through buying cryptocurrencies of any kind, just stop!

‘Do not follow guidance from random companies you may have come across via Facebook ads or cold outreaches.

‘Some due diligence, such as a Google search about the company you are potentially dealing with, will also give you an overview of whether they are legitimate or not.’

If you are not confident trading your own money, you could consider a dummy trading account offered by platforms such as eToro. These allow you to play around with trading without using real money.

A spokesperson for Binance, the world’s biggest cryptocurrency exchange, says that while the market is maturing fast and is more stable than it was a few years ago, it is imperative that people still take the time to learn about it first and understand their limits, before making any investments.

The spokesperson added: ‘Investors should take time to understand market dynamics to make informed decisions and align their investment and trading strategies with their own risk appetite.’

Do i have to pay tax?

If you make a profit from cryptocurrencies and cash it in, you could face a tax bill.

Crypto profits are treated as capital gains.

All taxpayers have an annual capital gains tax-free allowance of £3,000 each tax year. Any profits on top of that are taxable. Go to gov.uk/capital-gains-tax/rates to see how much you could pay.

No taxes are due until you sell the cryptocurrency. Plus, if you sell your Bitcoin or other crypto assets at a loss, HMRC says that can be used against future capital gains.

Glen Goodman recommends that anyone buying or selling cryptoassets keep detailed records and regularly update the taxman.

‘People think crypto is outside of the system,’ he says. ‘It is not and never was.

‘The taxman always treated it like stocks, so if you go above the tax-free limit, you have to pay capital gains tax.’