How To Buy Bitcoin (BTC)

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How To Buy Bitcoin (BTC)

Of all crypto holders in the UK, more than 42% are Bitcoin holders, according to research. Here we explain more about the crypto currency, its associated risks, and how to buy it.

In May 2016 the cost of one Bitcoin was about £400. As of 11 March, Bitcoin’s price has increased to an all-time high of £55,674, which means it’s up 13,818% since 2016 and up by over 67% on where it was at the end of January this year (£33,147).

Some analysts believe the price of Bitcoin could rise in future as cryptocurrency and blockchain technology may become a bigger part of people’s daily lives.

But of course, there are no guarantees. Bitcoin remains a highly volatile asset. For those who still want to buy Bitcoin, experts recommend investing no more than a small percentage of net worth in the leading cryptocurrency. Plus investors should only invest money they are prepared to lose. The regulator the FCA continuously warns investors about the high risks involved with cryptocurrency.

What is Bitcoin?

Bitcoin is the original cryptocurrency. Invented in 2008, it was proposed as a ‘decentralised digital currency’. That means it is not issued by any state, government or authority. Instead, it’s issued and distributed among users by the Bitcoin network itself.

And, while a fiat currency such as Sterling depends on payment providers, banks or other third parties to transfer money from one account to another, Bitcoin is truly peer to peer.

Bitcoin holders can send funds to the digital wallets of others in return for goods, services or other currencies. There are online and offline retailers that accept Bitcoin payments and one country, El Salvador, even adopted it as its official currency.

Fiat currencies, like Sterling, operate using ledgers held by financial institutions like banks, building societies, payment platforms and so on. These ledgers record how much money people are owed. They are trusted because they have to meet regulatory obligations and, often, have been around for a long time.

Cryptocurrencies eschew these trusted institutions and instead place trust in users to hold, maintain and update their ledgers, and to do it honestly.

How does a new currency work?

Imagine someone started a new currency with a group of friends, trusting that everyone would be honest about how much of the currency they and others held.

Let’s say everyone starts with 1 coin of the new currency. We’ll call our imaginary currency Forbescoin. Let’s then imagine someone in the group gives someone else in the group 0.5 Forbescoin in exchange for a lift to work.

Each group member would update their ledger (records) to show that the sender now has 0.5 Forbescoin remaining, and the recipient has 1.5 Forbescoin.

Let’s then imagine that as a reward for their honest record-keeping, each group member has the opportunity to make their copy of the ledger the ‘official’ version and, in doing so, earn more Forbescoin.

To do so, all they have to do is correctly guess a number from 1-100 within 10 seconds. If nobody guesses correctly, the closest guess wins. The clock starts and everyone makes their guesses. A winner is declared.

Everyone checks the winner’s copy of the ledger and, so long as 51% of the group agree the winner’s ledger is accurate, the record is made official and the winner is rewarded with 1 Forbescoin. Everyone updates their ledgers to show that the winner holds an extra Forbescoin.

Everyone can trust the ledger is accurate because there was consensus agreement. The requirement for consensus acts as a disincentive against cheating, while the chance to earn a reward for honestly updating a copy of the ledger incentivises participants.

This is effectively how Bitcoin operates, but on a global scale. Instead of guessing a number from 1-100 in 10 seconds, however, participants guess a long, random string of letters and numbers within 10 minutes.

This alphanumeric string has trillions of possible permutations, which makes guesses off the top of one’s head impossible. Instead, participants use computers to generate guesses.

The more computing power you have, however, the more guesses you can make within this window, and the greater your chances of winning.

When someone successfully guesses the string, they have the opportunity to add their version of the ledger to the blockchain, a 500-gigabyte-plus history of all transactions up to that point.

In doing so, they’ll earn an amount of Bitcoin as a reward, but only if 51% or more of all participants agree that the record is accurate, after having mathematically cross-referenced it against their own ledgers.

The mining processs

This ‘mining’ process is how new Bitcoins are minted. It is known as a ‘proof of work consensus mechanism’.

Proof of work secures the network against fraudsters by making participants work, using their computing power, to add their version of the ledger to the blockchain, and by requiring a consensus among the network to rubber stamp it.

It would be practically very difficult, if not impossible, to amass the computing power required to control 51% of the network, meaning the ledger can be considered a reliable, accurate and indelible record of Bitcoin transactions.

How to buy Bitcoin (BTC) in 4 steps

Step 1: Choosing a crypto exchange

To buy Bitcoin (BTC), or any cryptocurrency, a crypto exchange, where buyers and sellers meet to exchange their pounds sterling for the crypto coin of their choosing, is required.

There are hundreds of exchanges out there, but some beginners may want to opt for one that is intended to balance ease of use with low fees and high security. Investors can check out our top picks for best crypto exchanges, like eToro or Coinbase.

Investors should check if the exchange has a Bitcoin wallet built into its platform; if not, they’ll need to find one of their own. They may also choose to buy their crypto on a platform like Paypal, though buying crypto this way often means they cannot withdraw their coins and move them to another platform. If investors want to hold their crypto in a different wallet, they’ll need to sell their holdings and then re-buy them on a different exchange.

Step 2: Decide on a payment option

After choosing an exchange, investors will have to fund their account before they can begin investing in Bitcoin. Depending on the exchange, they can fund their account through bank transfers from a current or savings account, bank transfers, or a cryptocurrency wallet.

Because fees reduce how much money can be invested (and therefore also how much money investors potentially have to grow and compound), it tends to make sense to use electronic transfers from a bank account rather than other methods that may have higher fees involved.

Step 3: Place an order

Once the account is funded, the investor can place their first order to buy Bitcoin. Depending on the platform they’re using, they may be able to purchase it by tapping a button, or they may have to enter Bitcoin’s ticker symbol (BTC). They’ll then have to input the amount they want to invest.

When the transaction is complete, they will own a portion of a Bitcoin. That’s because it requires a large upfront investment to buy a single Bitcoin now. If Bitcoin’s current price was £30,000, for example, the investor would need to invest that much to buy one Bitcoin. If they invested less, say £1,000, they’d get a percentage, in this case 3.33%, of a Bitcoin.

Step 4: Select a safe storage option

Many crypto exchanges have an integrated Bitcoin wallet, or at least a preferred partner where investors can safely hold their Bitcoin. Some people, however, do not feel comfortable leaving their crypto connected to the internet, where it may be more easily stolen by hackers.

Most major exchanges have private insurance to reimburse clients if this happens, and increasingly, they’re also storing the majority of customer assets in offline so-called ‘cold storage’.

If investors want a potentially higher level of security, they can store their Bitcoin in an online or offline Bitcoin wallet of their own choosing.

But keep in mind that if crypto is moved from an exchange, an investor may have to pay a small withdrawal fee. In addition, if investors use a third-party crypto wallet custodian, they may also be permanently unable to access their coins if they lose the private key that serves as the wallet password.

The table below, from Statista (October 2023) shows the most popular methods investors use to store cryptocurrencies in the UK.

Most popular methods to store cryptocurrencies in the UK
I store at the exchange I bought it from 46%
I moved my cryptocurrency into another cryptocurrency wallet online 34%
I hold my cryptocurrency offline on hardware 24%
Prefer not to say 10%

Hot wallets vs. cold Wallets

Hot wallets involve storing an investor’s personal and private keys online in a password-protected account, usually with the crypto exchange. Hackers have targeted them because having someone’s personal and private keys gives them access to the owner’s assets, as they’re necessary to make trades.

Hot wallet providers have been hacked several times over the years and have responded by aiming to heighten their security, but hackers persevere, forcing wallet providers to work even harder on security.

They’re convenient, though, as investors can access them from anywhere and don’t have to worry too much about losing access, since the provider could always help someone get their keys back using identity verification if an investor forgot their log-in details.

Cold wallets aren’t automatically connected to the internet, and it’s this ‘air gap’ between the web and the investor’s personal and private keys that makes them arguably more secure than hot wallets.

They’re essentially thumb drives that plug into devices and require a ‘seed phrase’ to unlock. A seed phrase is a long string of randomly generated words that is very difficult to crack if someone doesn’t know it.

However, once a cold wallet is plugged into a web-connected device, the air gap and its security is effectively lost, making the wallet vulnerable to hackers. Also, if the user were to forget their seed phrase, it’d be much harder to recover it than if they were using a hot wallet.

Finally, cold wallets have to be bought, while hot wallets are often provided for free.

Selling Bitcoin

When an investor decides they’re ready to sell their Bitcoin, they can place a sell order through their exchange, much like they did when they originally purchased it. Most exchanges offer multiple order types, so an investor can decide to sell only when Bitcoin reaches a certain price, or they can place an order that goes through immediately.

An investor can choose to sell their entire holdings of Bitcoin or only a specified amount. Once the sale goes through, they can transfer the money to their bank account. Their exchange, however, may have a holding period before a transfer can be made back to their bank account. This should not be cause for concern; it simply takes some time to make sure the transactions clear.

When selling Bitcoin, an investor may make a profit. If those profits exceed a certain threshold, they may be on the hook for capital gains taxes so investors should make sure to keep track of their profits.

Should investors consider buying Bitcoin?

When Bitcoin’s price is skyrocketing, investing in the popular cryptocurrency can be tempting. But while it has the potential to be a lucrative investment, investors should be cautious. Even if an investor decides to go ahead, its volatility has led to many experts recommending that people don’t allocate a large percentage of their funds to buying it, and should only invest what they are prepared to lose.

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