B
itcoin – the largest and most well-known cryptocurrency – was born out of a growing distrust of governments and financial institutions after the global financial crisis of 2008.
Bitcoin allowed people to send money directly to someone without using intermediaries like banks or PayPal.
In recent years, Bitcoin has been a rollercoaster ride for investors. It hit a record high of over £54,000 in November 2021 before plunging to around £14,000 earlier this year. It’s now trading around the £19,000 mark, although the number can change dramatically from one day to the next.
According to data from Cointelegraph, it can also be very volatile in the short term, with some intraday high-low swings of 20-40% in recent years.
Each bitcoin is “mined” using high-tech computer hardware to solve complex mathematical problems. However, Satoshi Nakamoto, often credited as the original creator of Bitcoin, capped the total number of Bitcoins at 21 million to preserve their value by limiting supply.
Around 19 million bitcoins have already been mined, with experts predicting that the remaining two million could be mined by 2140.
Bitcoin remains the most popular global cryptocurrency and is increasingly accepted. El Salvador became the first country to adopt bitcoin as legal tender in 2021, followed by the launch of the first bitcoin-based exchange-traded fund by ProShares (ticker: BITO).
Several major US retailers are now accepting payments in Bitcoin, including Microsoft, Home Depot and Starbucks, although few UK retailers have followed suit so far.
Investment giant Fidelity is reportedly planning to allow employees in the United States to add bitcoin to their pension plans.
However, investing in Bitcoin is inherently risky. As with traditional so-called “fiat” currencies (like the pound sterling), bitcoin has no intrinsic value other than the trust of other parties to accept it as a means of payment.
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Cryptoassets are highly volatile and unregulated in the UK. No consumer protection. Income taxes may apply.
The price of bitcoin is therefore a function of supply and demand and could therefore fall if it is no longer accepted as a form of payment. As a result, in May 2021, Elon Musk’s announcement that Tesla would no longer accept Bitcoin as payment for its cars caused the price of Bitcoin to drop by 17%.
Here we look at the process of buying bitcoin along with alternative ways to invest in cryptocurrency.
Please note that investing in cryptocurrencies is a risky endeavor and you could lose some or all of your money. There is no guarantee that you will make a profit.
The Financial Conduct Authority (FCA), the UK’s financial regulator, regularly warns about the risks associated with the crypto sector.
Crypto assets are not regulated. The FCA says that those who buy cryptocurrency are “very unlikely to have any protection if something goes wrong, so people should be prepared to lose all their money if they decide to invest in it.” “.
How to buy bitcoin in 4 steps
1. Find an exchange or broker
The first step is to choose a broker or crypto exchange.
A cryptocurrency broker provides an online mechanism to facilitate your contact with a cryptocurrency exchange.
A cryptocurrency exchange is an online platform that brings together buyers and sellers to trade cryptocurrencies.
Some exchanges allow you to buy crypto with regular currency like pounds sterling. Others require you to use one form of crypto to buy another. Here you would need to find a second exchange to buy coins that your chosen exchange uses before you can start trading.
For brokers, check the rules for moving your cryptocurrencies from a specific platform. Some brokers prevent clients from transferring crypto holdings from their account. This could become an issue if you have decided to deposit your cryptocurrencies in a crypto wallet.
The FCA has a UK list of registered crypto asset firms.
2. Decide on a payment option
After choosing an exchange or broker, you need to add funds to your account before you can start trading. Depending on the provider you choose, you can add funds from your checking account, electronic transfer, payment service, or from a cryptocurrency wallet.
Keep in mind that it is not recommended to take on debt to buy highly volatile assets.
3. Place an order
Once you have deposited funds into your account, you can buy bitcoins. You should enter the currency tick symbol (BTC), select the corresponding button in your trading menu and enter the amount you want to invest.
4. Choose a secure storage option
It is important to note that cryptocurrency exchanges do not fall under regulatory protections like the Financial Services Compensation Scheme in the UK. Despite investing in cybersecurity measures, providers remain at risk of theft or hacking.
You risk losing your bitcoin investment if you misplace or forget your account access codes. It is also important to ensure that your bitcoins are kept in a safe place.
When buying bitcoins through a broker, you may have little choice in storage mechanism. However, if you use a crypto exchange and trade major currencies, chances are you have access to an integrated wallet (or preferred partner) to keep your bitcoins safe.
If you’d rather not use the provider your exchange partners with, you can transfer your bitcoins from an exchange to a separate “hot” or “cold” wallet:
- Hot Wallets: Crypto wallets stored online that work on internet-connected devices such as tablets, computers, and phones. They are practical but may have a higher risk of theft due to their internet connection.
- Cold wallets: External devices such as USBs or hard drives that are not connected to the internet and are therefore potentially more secure. However, you lose access to your bitcoins if you lose or misplace the codes.
There may be a fee for transferring bitcoins to a hot or cold wallet, depending on the exchange.
Alternative ways to buy cryptocurrency
If you’d rather not buy bitcoins through an exchange or broker, there are two indirect ways to gain exposure to bitcoin assets.
1) Investments in cryptocurrency related companies
One way is to buy shares in companies that use or own bitcoins and the blockchain that powers them. These may allow you to have some exposure to bitcoins through specific products or services that are subject to regulatory oversight.
Here are some indicative examples of companies, although these are not recommendations:
- Nvidia (NVDA): a technology company that develops and sells processing units specifically for mining currencies like Bitcoin.
- PayPal (PYPL): The global payments platform has expanded its offerings to allow customers to buy and sell certain cryptocurrencies, including Bitcoin, using their PayPal and Venmo accounts.
- Square (SQ): the small business payments processor that has bought millions of dollars in Bitcoin since October 2020.
You need an online investment platform or trading app to buy shares in public companies. Please note that the usual cautionary tales about investing apply and there is no guarantee that stock market investing will yield a return.
2) Investing in crypto exchange-traded funds
Another option is to invest in funds based on holding cryptocurrencies like bitcoins. Exchange Traded Funds (ETFs) are “passive” investments that typically track traditional stock market indices such as the FTSE 100 or the S&P 500.
Crypto ETFs are relatively new products that are currently only available in certain jurisdictions such as the US. They are not yet available in the UK.
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Cryptoassets are highly volatile and unregulated in the UK. No consumer protection. A profit tax may apply.
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