Bitcoin - the largest and best-known cryptocurrency - was born from a rising distrust of government and financial institutions after the global financial crisis of 2008.
Using Bitcoin, people could send money directly to someone without using intermediaries such as banks or Paypal.
In recent years, Bitcoin has been a roller-coaster ride for investors. It hit a record record-high of over £54,000 in November 2021 before plunging to lessthan £14,000 at the end of last year. Now it is trading around the £23,921 mark, although the number can change dramatically from one day to the next.
It can also be highly volatile over the short-term, with some intra-day high-low fluctuations of 20-40% over the last few years, according to data from Cointelegraph.
Each Bitcoin is ‘mined’ by the use of high-technology computer hardware to solve complex maths problems. However, Satoshi Nakamoto, often cited as the original creator of Bitcoin, put a cap of 21 million on the total number of Bitcoins to preserve their value by limiting supply.
Around 19 million Bitcoins have already been mined, with experts predicting the remaining two million may be mined by 2140.
Bitcoin remains the most-popular global crypto-currency and is becoming more widely accepted. El Salvador was the first country to adopt Bitcoin as legal tender in 2021, followed by ProShares’ launch of the first Bitcoin-based exchange-traded fund (ticker: BITO).
Several major US retailers now accept payment in Bitcoin, including Microsoft, Home Depot and Starbucks, although, to date, few UK retailers have followed suit.
Investment giant Fidelity is reportedly planning to enable employees in the United States to include Bitcoin in their pension plans.
However, investing in Bitcoin is inherently risky. As with traditional so-called ‘fiat’ currencies (such as sterling), Bitcoin has no intrinsic value other than the trust of other parties in accepting it as a form of tender.
Bitcoin’s price is therefore a function of supply and demand and, as such, could plummet if it’s no longer accepted as a means of payment. As a result, Elon Musk’s announcement that Tesla would stop accepting Bitcoin as a form of payment for its cars led to a 17% fall in the Bitcoin price in May 2021.
Here we look at the process of buying Bitcoin, together with alternative ways of investing in cryptocurrency.
Please note that investing in cryptocurrencies is a high-risk proposition and you may 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, issues regular warnings about the risk associated with the crypto sector.
Crypto assets are unregulated. The FCA says those buying cryptocurrency are “very unlikely to have any protection if things go wrong, so people should be prepared to lose all their money if they choose to invest in them”.
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 in order to trade cryptocurrencies.
With some exchanges, you can buy crypto using normal currency, such as sterling. Others require you to use one form of crypto to buy another. Here, you’d need to find a second exchange to buy coins that your chosen exchange uses, before you could start trading.
With brokers, check the rules regarding moving your cryptocurrencies away from a given platform. Some brokers stop customers transferring crypto holdings away from their account. This could become an issue if you decided to lodge your cryptocurrencies in a crypto wallet.
The FCA has a UK list ofregistered crypto asset firms.
2. Decide on a payment option
Having chosen an exchange or broker, you’ll need to add funds to your account before you’re able to start trading. Depending on your chosen provider, you can add money from your current account, via an electronic transfer, payment service or from a cryptocurrency wallet.
Remember, taking on debt to purchase highly-volatile assets is not recommended.
3. Place an order
Once you’ve transferred money into your account, you’re able to buy Bitcoins. You should enter the currency’s ticker symbol (BTC), select the appropriate button on your trading menu and enter the amount that you wish to invest.
4. Choose a safe storage option
It’s important to note that cryptocurrency exchanges are not covered under regulatory protection such as the Financial Services Compensation Scheme in the UK. Despite investment in cyber-security measures, providers remain at risk of theft or hacking.
You risk losing your Bitcoin investment if you mislay or forget the access codes to your account. It’s also vital to ensure that your Bitcoins are held in a secure storage place.
You may have little choice in the storage mechanism if you buy Bitcoins via a broker. However, if you’re using a crypto exchange and trading leading currencies, you will probably have access to an integrated wallet (or preferred partner) where you can securely hold your Bitcoins.
If you would rather not use the provider that your exchange is partnered with, you could 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 convenient but may have a greater risk of theft due to their internet connection.
- Cold wallets: external devices such as USBs or hard drives that aren’t connected to the internet and therefore potentially more secure. However, you will lose access to your Bitcoins if you lose or mislay the codes.
Transferring Bitcoins to a hot or cold wallet may incur a fee, depending on the exchange.
Alternative ways of buying cryptocurrency
If you would rather not buy Bitcoins via an exchange or broker, there are two indirect ways of gaining exposure to Bitcoin assets.
1) Investing in cryptocurrency-connected businesses
One option is to buy shares in companies that use, or own, Bitcoins and the blockchain that powers them. These may enable you to have some exposure to Bitcoins via tangible 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 designs and sells processing units specifically for mining currency such as Bitcoin.
- PayPal (PYPL): the global payments platform has expanded its offering to allow customers to buy and sell certain cryptocurrencies, including Bitcoin, with their PayPal and Venmo accounts.
- Square (SQ): the payment services provider for small businesses which has bought millions of dollars of Bitcoin since October 2020.
You will need anonline investing platform ortrading app to purchase shares in publicly-listed companies. Please note that the usual warnings about investments apply and that there is no guarantee that stock market investments will make money.
2) Investing in crypto exchange-traded funds
Another option is to invest in funds based on holding cryptocurrencies such as Bitcoins. Exchange-traded funds (ETFs) are ‘passive’ investments that typically track traditional stock market indices such as the FTSE 100 or S&P 500.
Crypto ETFs are relatively new products that are currently available only in certain jurisdictions such as the US. They are not yet available in the UK.
