Bitcoin basics: essential guide to trading crypto and how it works

Bitcoin is one of the most popular crypto assets nowadays and a market leader. Some compare it with gold, considering it a safe haven. In this article, we will explain key concepts around Bitcoin and what you should know if you want to invest in Bitcoin safely.

What is Bitcoin?

Bitcoin is the oldest cryptocurrency that exists. It was created in 2008 by Satoshi Nakamoto, the pseudonym of someone whose real identity is unknown. The goal was to create an alternative payment system to fiat or traditional currency, completely decentralised, that is, not dependent on any central bank.

This cryptocurrency is characterised by being a finite asset, of which over 90% of the total supply has already been mined. The fact that it is a limited asset is what gives it value.

This cryptocurrency uses blockchain technology, which functions as a digital ledger in which all Bitcoin transactions are recorded. When a specific number of transactions is reached, they are combined to form a block, which is then linked to the subsequent one.

How to invest in Bitcoin?

Unfortunately, in the UK, there are limited options to invest in Bitcoin. We’ll explore these in detail below, and here are some products that are not available for UK citizens:

• Bitcoin CFDs, Bitcoin futures, and other derivatives are banned in the UK, hence retail traders cannot use them.
• There are no Bitcoin ETFs on the domestic market or other basket-type of Bitcoin assets.

Despite these, there are still two methods to invest in Bitcoin in the UK:

Mine Bitcoin

One of the ways to invest in Bitcoin is to mine the cryptocurrency, that is, generating new Bitcoin in exchange for a reward.

Mining Bitcoin requires powerful computers known as miners. These miners are responsible for validating Bitcoin transactions by solving complex mathematical problems.

The total supply of Bitcoin is limited to 21 million units, and once this limit is reached, mining will cease.

The computers used for Bitcoin mining are commonly referred to as “nodes.” These nodes support the Bitcoin network, ensuring its stability and resilience against potential issues such as power outages.

Buy Bitcoin directly

The process of mining is becoming increasingly resource-intensive and complex, so it may not be a viable option if you lack technical knowledge, or you simply want to trade or invest in this crypto asset.

In this case, you can buy Bitcoin directly via an exchange or a broker. As mentioned, brokers do not offer Bitcoin derivatives in the UK, so the options are quite limited. If you are interested in buying Bitcoin directly, check out the best crypto brokers and exchanges in the UK. Some examples include:

• eToro
• Bux
• Coinbase
• Kraken
• Bitpanda

How to buy Bitcoins safely in 5 steps?

Here is the typical process of buying Bitcoins directly. Keep in mind that you may need a third-party wallet to keep your crypto assets safe.

Step 1: Open an account

The first step is to do your due diligence and choose a broker or an exchange. Opening an account ultimately depends on which service provider you opt for. In general, you should look for a fully regulated broker or exchange and follow the prompts to create a new account.

Usually, this consists of providing your email address, a password, and completing the Know-Your-Customer procedure (i.e., uploading a valid ID and proof of address).

Step 2: Deposit your funds

Once you have opened your account, deposit the amount of money you want to invest or trade with. Generally, it is possible to do so with a bank transfer or a credit/debit card. Other platforms offer alternatives such as PayPal.

Step 3: Buy Bitcoin

Once you have funds in your account, simply search for the digital currency from the platform (normally there is a search option where the asset will appear as BTC). Then, indicate the amount of Bitcoins you want to buy and then send the order.

Step 4: Store your bitcoins in a safe place

Some brokers like eToro may allow you to keep your BTC on the platform, but it may be best to store them in a third-party cold or hot wallet for extra security.

Step 5: Monitor your investment

If your intention is to invest in the long term, you may not need to check on your positions daily. However, portfolio monitoring and management are key to staying up to date with the latest market news and adjusting your positions when needed.

How to invest in Bitcoin in the UK?

As mentioned, you cannot trade derivatives like CFDs on Bitcoin and other cryptocurrencies in the UK. Here are the top three brokers that allow you to buy cryptocurrencies:

Buy Bitcoin on eToro

With eToro, users can buy bitcoins easily and with no commissions. In addition to the basic buy and sell functionality of Bitcoin, eToro also offers special features, such as the ability to copy the trades of other successful investors on the platform or invest in ready-made portfolios of assets. This allows investors to take advantage of collective wisdom and learn from other experienced Bitcoin traders.

These are the features of eToro in relation to the cryptocurrency market:

• Regulation: FCA
• Costs: 1% of trade value
• Other cryptocurrencies: Yes.

Advantages
✅ The most popular social trading platform in the world
✅ Easy to place orders thanks to the user-friendly platform
✅ Easy to diversify your portfolio with many other assets (including CFDs on stocks, forex, and more)
✅ Commission-free broker

Disadvantages
❌  Account available only in USD

Bitcoin on Bux

Bux is another broker that offers real Bitcoins in the UK. You can also invest in stocks and ETFs (both as real assets, no derivatives). Here are some of this broker’s main features:

• Regulation: FCA
• Costs: 0.5% of trade value
• Other cryptocurrencies: Yes

Advantages
✅ Crypto, stocks, and ETFs available, ideal for diversification benefits
✅ Safe, regulated broker
✅ Ideal for both real asset trading and long-term strategies
✅ Platform is very intuitive

Disadvantages
❌ Only mobile phone app is available.

Buy Bitcoin with TradeStation

Another option is buying Bitcoin via TradeStation, where users can take advantage of its intuitive platform and specialised tools to trade this cryptocurrency efficiently. However, unlike eToro and Bux, you can only trade BTC, ETH (Ethereum), and USDC. Here are some of its main features:

• Regulation: FCA
• Costs: Variable, max cost is $2 + 0.60% 
• Other cryptocurrencies: Only ETH and USDC

Advantages
✅ Varied asset offering, including ETFs, options, futures, stocks (real assets only)
✅ No minimum deposit and no withdrawal cost
✅ Unlimited account is available
✅ Excellent customer service

Disadvantages
❌ Crypto offering is limited to BTC, ETH, and USDC

How to safely store your Bitcoins?

When acquiring Bitcoin, it’s important to note that it is a digital currency stored in a digital wallet. These wallets can be categorised as either “cold” or “hot” depending on their offline or online nature.

Once again, we want to emphasise the significance of thoroughly researching the exchanges through which we choose to buy Bitcoin. As an illustration of the risks associated with operating on an exchange with opaque regulations, we need only look at the FTX bankruptcy incident.

To mitigate risks, there are two options for storing cryptocurrencies, as we mentioned earlier:

• Hot wallets: These are online storage systems accessed with a password. They offer the advantage of accessibility from any device, which is beneficial for frequent transactions. However, they are more vulnerable to hacking.
• Cold wallets or cold wallets: These wallets store cryptocurrencies offline, outside the realm of the internet. They can be desktop storage, USB devices, or even in the form of a QR code printed on paper. Cold wallets are less susceptible to hacking, although they tend to be more expensive than hot wallets.

Why invest in Bitcoin?

It may seem frivolous, but the truth is that there are compelling reasons to consider investing in Bitcoin this year. Let’s explore the key reasons:

• Scarcity: Bitcoin’s supply is limited, with a maximum cap of 21 million units. This scarcity contributes to its value growth over time.
• Durability: Bitcoin exists in a digital form, making it highly durable and resistant to physical wear and tear.
• Immunity to Inflation: Unlike traditional fiat currencies, Bitcoin is designed to be immune to inflationary pressures. Its decentralised nature safeguards it from government policies that can erode the value of traditional currencies.
• Counterfeit Resistance: Bitcoin’s cryptographic nature and decentralised network make it extremely difficult to counterfeit, providing security for users.
• Store of Value: Bitcoin can be stored securely in digital wallets, offering a means to preserve and grow wealth.
• Increasing Acceptance: Bitcoin is gaining acceptance as a means of payment, with numerous small businesses already embracing it.

Institutional adoption

Major companies and investment funds have shown increasing interest in Bitcoin. For example:

• Microstrategy, which owns approximately 0.54% of all Bitcoin, has reaped substantial profits and considers Bitcoin a long-term asset.
• Tesla, led by Elon Musk, has not only expressed positive views on Bitcoin but has also contemplated accepting it as payment for electric vehicles.
• Blackrock, the world’s largest fund manager, has partnered with Coinbase and included Bitcoin in its Global Allocation Fund.

Greater awareness and acceptance

A few years ago, it would have been unthinkable for any company to consider Bitcoin as a form of payment. However, social acceptance is increasing and many small businesses already accept it as payment.

Many influencers accept payments in Bitcoin since the transactions are recorded in the blockchain, which allows them to enjoy transparency and security.

Predefined supply

Bitcoin’s fixed supply and the eventual end of mining at 21 million units contribute to its value. The limited supply, coupled with high demand, is expected to maintain its price stability, similar to gold.

Expectations of lower interest rates

Anticipated rate cuts by the Fed could benefit Bitcoin. Easier access to liquidity might lead to increased capital for investors to allocate toward the cryptocurrency.

Volatility

While conservative investors may view volatility as a deterrent, those willing to take risks may find Bitcoin’s price volatility an opportunity for potential gains.

Have a look at our guide on crypto wallets to find out how to store your cryptocurrency and consider checking our Ethereum guide to diversify your crypto portfolio.

Alternatives to investing in Bitcoin

Is investing in Bitcoin not what you’re looking for? Have a look at these alternatives:

• Best brokers to trade CFDs
• Best brokers for options
• Best forex brokers
• Best brokers for beginners
• Best copytrading brokers

Bitcoin: summary

As with any asset, opinions on Bitcoin are diverse, often rooted in contrasting perspectives on cryptocurrencies and their long-term potential.

Critics of investing in this digital currency raise concerns such as crypto scams, the perceived insecurity of storage methods, or scepticism about its ability to establish itself as a safe haven asset like gold.

On the other hand, proponents of Bitcoin acknowledge that the cryptocurrency market has seen its share of excesses but believe in its potential as the pioneering digital currency. They take note of the increasing institutional interest in Bitcoin and trust that its price will continue to rise. Moreover, its true value lies in its potential to reintroduce a form of real money, free from manipulation by central banks and government entities.

Regarding security, it is true that vulnerabilities exist. However, secure alternatives such as cold and hot wallets have been designed to mitigate hacking risks.

Furthermore, as previously mentioned, Bitcoin’s finite nature and its demonstrated growth potential during times of market uncertainty position it as a digital alternative to gold.

Ultimately, opinions on Bitcoin vary, reflecting the ongoing debate between those who question its long-term development and those who recognise its significance as a disruptive force in the financial landscape.

Pros and cons of investing in Bitcoin

Finally, let’s take a look at the advantages and disadvantages of investing in Bitcoin:

Pros of buying Bitcoin:

✅ Decentralised

✅ Scarce

✅ Difficult to counterfeit

✅ Faster transactions

✅ International currency

And the cons:

❌ Can be used for criminal activities

❌ Not yet broadly accepted

❌ Complex technology

❌ Still subject to high episodes of volatility.

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