You've decided that Bitcoin is the right investment for you. Congrats! That means:
You're comfortable with the lack of legal protection you'll get with Bitcoin vs. other UK regulated investment classes.
You're open to holding for the long term, and aware of the large historical volatility in Bitcoin price.
You understand that Bitcoin's wild price swings often 'shake out' investors and convince them to sell at a loss.
You're open to the idea that Bitcoin could skyrocket in price, but could also crash 90% or more.
You understand that there are risks to holding Bitcoin. For example, getting hacked, or the exchange that holds your Bitcoin going bankrupt.
Despite all this, you're still willing to make space in your investment portfolio for Bitcoin.
Good - you're in a position to move on to the question of 'how'. So let's explore best (and worst) ways to get your hands on Bitcoin as an investment as a UK resident.
A trade tends to be a shorter term move, from hours to weeks or months. Traders may not believe in the fundamental value of something. Instead, they see the potential to buy and then sell at a profit. Investors meanwhile tend to take a longer term view, often years or more. They stick with their belief that an asset will grow and generate real value in the future.
Trading is not for the faint hearted. It takes a lot of skill and experience, and can play on your mind if you become consumed by every price change. Beginners often find that investing is more suited to their goals and lifestyle.
Four steps to investing in Bitcoin
In this guide we've broken things down into four areas. You'll need to get them all right for your investment in Bitcoin to have a chance of turning a profit.
Buy your Bitcoin
Store your Bitcoin
Protect your Bitcoin
Manage your psychology
Buy your Bitcoin
To call yourself a legitimate Bitcoin owner and investor, you'll need to get your hands on some.
All Bitcoin is bought from another party. This could be anyone. Another private investor like yourself; a trader; an investment bank; or a Bitcoin miner. This also means that for every bitcoin buyer, there is a seller.
Cryptocurrency exchanges pair up buyers and sellers who wish to trade bitcoin. This swap is for a specific currency at a given exchange rate. Exchanges are the best way for cryptocurrency beginners to buy Bitcoin.
You'd be forgiven for thinking that every platform promoting Bitcoin actually lets you buy it. Well, that's not quite true.
Some platforms actually sell you derivatives. That is, a financial product derived from the price of bitcoin. These products, namely contracts for differences (CFDs), can be complex and risky.
If you're investing in Bitcoin for the long haul, you'll want to actually own the tokens.
There are quite a few crypto exchanges to choose from. Given that Bitcoin is the godfather of cryptocurrency, you'll find it available at every one.
Some of the most popular exchanges include:
Binance
Coinbase
eToro
Kraken
Crypto.com
Bitstamp
There are plenty more too, offering more obscure crypto tokens and cutting-edge features.
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The process for buying bitcoin on any of these exchanges is similar:
Sign up for an account
Complete some form of identity check or 'Know Your Customer' verification process
Deposit money from your UK bank account
Place an order to buy Bitcoin
In some cases there may be a fee for depositing or withdrawing, so keep an eye out for that when comparing exchanges. Also, fees can be incorporated into the exchange rate you're offered - this is one of the main ways that exchanges generate revenue. It's usually a pretty small percentage, and if you're planning to buy and hold, won't make much of a difference.
Check your wallet - essentially your crypto bank account - at your exchange and you should see a certain amount of bitcoin. Congratulations, you're a bitcoin investor!
You don't need to buy whole bitcoins. You can buy pretty much any amount you want - at the time of writing, if you're investing under £20,000, you'll be getting a fraction of a bitcoin.
So in your crypto wallet, there's a fair chance you'll see something like 0.2847503 BTC. That's perfectly normal.
Store your Bitcoin
Coins in a jar, salary in your bank account - but where should you keep your Bitcoin? The annoyingly simple answer is in a wallet. The more interesting question is - what type?
Hot wallet
A hot wallet is any wallet connected to the internet. This could be at an exchange like the ones we listed above, or in a separate wallet app on your phone or computer. Hot wallets are quicker and easier, but can lack safety. If you're dabbling with bitcoin as a beginner, this tends to be the best approach, provided you're using a safe exchange and taking the right privacy measures.
Cold wallet
A cold wallet - also known as cold storage - is a wallet cut off from the internet. These wallets prevent malicious third parties from accessing your private keys. They are physical devices, with no internet connection. This could also be a phone or a computer, but more often is a dedicated hardware wallet with a USB, like a Trezor. If you hold larger amounts of bitcoin, this may be the route for you. But make sure you're clued up about how to use a cold wallet and the risks that come with it.
Protect your bitcoin
Cryptocurrencies are not regulated in the UK, so if your bitcoin is lost or stolen, there will be little recourse.
That's why it's essential to understand the ways in which your bitcoin could end up where it shouldn't be.
Hacking
If you hold your bitcoin in an exchange, then you'll have login details that allow you to access and manage your wallet. There are many ways that bad actors could try to get in and siphon off your bitcoin investment. Follow these best practices to minimise your risk of hacking:
Use a strong, unique password - numbers, letters, symbols, various cases, and long. Consider using 1Password to store this and other passwords.
Set up two-factor authentication - you'll have to enter a code when logging in. It's more secure to use an authenticator app than SMS if you have the choice.
Secure your email account - for many, email account details are the gateway to many other important accounts. Don't forget to make sure your email security is watertight.
Exchange risk
As a bitcoin investor, you should pay close attention to the exchange you're using. Various crypto exchanges have become insolvent and gone bankrupt, or been hacked themselves, separating thousands of bitcoins from their rightful owners. Mt Gox is the big original exchange failure, but as recently as November 2022 we saw FTX collapse. A healthy dose of paranoia may help you keep your bitcoin. Another reason why bitcoin investing is not for everyone.
Manage your investment psychology
Even if you get the previous three steps right, there is still a chance you end up falling victim to the pressures of investment psychology.
The key thing to remember is that it's impossible to time the market. You will never buy the bottom and sell the top. This means it's quite likely that at some point, your bitcoin investment will be 'underwater'. That is, worth less in pounds sterling than you paid for it.
Depending on your investment goals and circumstances, you may decide to suck it up. Hopefully the price will recover? On the other hand, you may decide to take a small loss and decide bitcoin wasn't for you this time.
Either way, it's important to consider these scenarios before you buy. Try to create some simple rules for how you plan to manage your investment in bitcoin. This will help stop you making rash decisions that you regret.
There's also a strong case to avoid checking the bitcoin price all the time. You can't affect it! If it's stressing you out, then you may have invested more than you could afford.
