If you’re thinking of making an investment in Bitcoin or another cryptocurrency, it’s important to avoid getting caught up in the hype. While digital money has quickly risen in popularity among top investors, analysts continue to warn buyers about the volatile nature and unpredictability of crypto.
In this guide, we discuss five things you should know moving forward. Let’s begin.
How Bitcoin Works
As you may be aware, Bitcoin is one of many cryptocurrencies that exist entirely online. It is not controlled by any single entity such as a bank or country and can be used to make transactions between parties that accept the currency as a payment method. This works over a system called the blockchain.
In short, the blockchain comprises a network of devices that oversee all the transactions taking place on it. Whenever a purchase is made, the network is updated to reflect the transaction, which gets validated by other users. In doing so, double spending and counterfeiting risk is reduced as every crypto payment is visible on the blockchain.
On the other hand, this doesn’t mean your Bitcoin payments are not safe. Each transaction is encoded by cryptography, which keeps the related data secure and makes it impossible to track who the money belongs to.
These are some of the key reasons why cryptocurrency has become so valuable. Its potential to serve as a replacement for traditional (fiat) currencies is regarded by many as revolutionary. For the sake of this guide, though, we’re just going to focus on crypto as an investment option.
So, where can you get your hands on some Bitcoin of your own? The standard method is to buy it through an exchange. There are countless cryptocurrency exchanges to choose from, with features and fees varying from one to another. Among the most popular platforms for Bitcoin are:
It’s up to you to determine which service best suits your preferences. A general rule of thumb is to stick with well-known options and be wary of exchanges whose offers seem abnormally generous. Keep in mind that you’ll also need a wallet to store your crypto. There are several types of Bitcoin wallets, which we’ll look into briefly below.
A crypto wallet contains a public key and a private key, which provide the information you need to spend, receive, and keep your funds. You can choose from several different wallet types, each with their own level of control, privacy and security over your investment. Here’s a short overview of each.
Web wallets are the most popular, enabling users to store and transact with their Bitcoin from a web browser. A provider manages the security aspect of your account and holds the private keys. Desktop wallets, which are downloaded to your computer, hand the responsibility of managing your keys (and thus the security of your account) to you.
Mobile wallets are what the name suggests, allowing you to access your Bitcoin through an app on your smartphone. Then there are paper wallets, which are an offline storage method that come in the form of a paper or plastic card that contains your keys in printed form.
While potentially safer from virtual threats, paper wallets come with the risk of losing your entire crypto investment in the event that you lose your physical wallet. The final option, hardware wallets, are somewhere in between, existing as digital devices that can be connected to your computer to transact with the Bitcoin they contain.
As much as crypto is meant to aid in moving away from traditional currency, your earnings on Bitcoin investments are still subject to tax. This usually comes in the form of capital gains tax or corporation tax. The former is based on your profits when selling an asset for more than you bought it.
Crypto tax UK can be a complicated matter, especially when you start dealing with larger amounts. So, enlist the help of a company like Hodge Bakshi, who are accountants specialising in Crypto tax issues. They will help you stay on top of your legal obligations and ensure you stay compliant. Their tax planning services will also oversee the management of your taxes as efficiently as possible to avoid overpaying.
Remember that you only have to pay capital gains tax at the moment you sell your crypto. There is no tax on the asset when it simply increases in value. There is also an annual tax-free allowance, which for perspective was £12,300 in the 2020-2021 financial year. At the end of the day, it’s best to consult an expert here.
As with any investment, it’s always wise to only put in as much money as you’re willing to lose. Bitcoin prices experience far more volatility than, say, traditional stocks. And while higher risk does mean higher potential for rewards, it also means greater potential for losses. Here are a few key considerations when investing in Bitcoin:
It’s not uncommon to see the price of Bitcoin fluctuate by 10% or more in a single day. So, if you’re buying crypto with a specific goal in mind, such as saving up for a property, these large price swings could prove troublesome. Therefore, be sure that your reason for investing aligns with the nature of cryptocurrency.
Another aspect of Bitcoin that’s a double-edged sword is its lack of regulation. Like all cryptocurrencies, it isn’t regulated by the FCA (Financial Conduct Authority) the same way banks or other investment options are. This has several implications on how Bitcoin investments work.
For example, you might not be able to access the Financial Ombudsman Service in the event that you have a dispute with a provider. On the other hand, established cryptocurrency platforms are still obliged to be registered with the FCA and to comply with anti-money laundering and terrorist financing regulations accordingly.
The Financial Services Compensation Scheme (FSCS) doesn’t protect Bitcoin and other cryptocurrencies the same way as traditional investment options, either. This means that you won’t be eligible for compensation from the FSCS if the company that provided your crypto wallet goes out of business.
While the blockchain is an extremely secure system, it’s not invulnerable to threats. Your transactions could be linked to personal details such as your email or mobile number.
If a hacker, for instance, was able to determine this information, they might be able to use it to gain access to your digital wallet. This is why it’s crucial that you follow the highest data security standards and practices moving forward. As long as you do that, your money and details should be safe.
The final risk to consider with crypto is that its value depends largely on consumers being interested in it. If people lose interest in Bitcoin, its value will fall. While unlikely, it’s also possible for governments to crack down on crypto firms.
There are clearly a lot of factors that make crypto a less appealing investment than some traditional options. However, there is significant potential, and you can leverage it with the right know-how and some persistence.